Peel Hunt: Fall in “undervalued” Flutter’s shares hard to quantify

UK investment banking specialist Peel Hunt has reaffirmed its belief that Flutter Entertainment shares have been “undervalued” historically, suggesting the FTSE 100 operator remains an attractive investment. In an analyst note, Peel Hunt analyst Ivor Jones suggested declines in the firm’s share price over the last three months were difficult to pin down, adding that it was “hard to identify” a catalyst for the declines. Flutter’s shares have plunged 35% from £169 in March to £109 today, 7 December, with city analysts pointing to concerns about regulatory changes arising from the review of the UK Gambling Act (2005). Rival operators Entain, 888, Kindred Group and Betsson have all experienced dramatic downturns in their share prices over the past year, with regulatory challenges in the UK and abroad contributing factors. Changes coming down the pipe include possible deposit caps for players, curbs on advertising, sponsorships and a general increase in regulatory headwinds affecting UK-licensed firms. For his part, Jones asserted his belief that the prospective regulatory changes would “turn out better” than implied by the current share prices of many of the UK’s biggest operators. This decline in UK stocks is mirrored in the demise of a number of US-facing gaming stocks, with DraftKings, Evolution, Genius Sports and Penn National Gaming all experiencing major declines. In the case of DraftKings, more than $16bn has been wiped off the Boston-based operator’s value since March. The firm’s share price has also been hit by allegations made in the now infamous Hindenburg Research report which call into question alleged black market activity of its SBTech subsidiary. More recently, DraftKings CEO Jason Robins took to Twitter to defend DraftKings from Kynikos Associates founder Jim Chanos, a US short seller who questioned the firm’s long-term business model. “You can believe in sports betting; you can bet on football and basketball to your heart’s content. But this business model is flawed,” said Chanos in comments reported by CNBC. These comments provoked a stinging rebuke from Robins, who questioned Chanos’ investment track record.

It appears Jim Chanos has forgotten how to do math. He claims we are trading at 30x revenue? Not even close Jim

— Jason Robins (@JasonDRobins) December 2, 2021

Ouch I had no idea who this guy even was before this week so didn’t know his record is this bad. This is why people like him shouldn’t be allowed to go on TV running their mouth and making up numbers. At least not without a warning disclaimer explaining his performance since 2008 https://t.co/ed4Sw9sFfB

— Jason Robins (@JasonDRobins) December 4, 2021

Independent of Robins comments, Peel Hunt has suggested the current travails affecting DraftKings were down to “company-specific” reasons rather than a general symptom of wider US market issues. Referencing Flutter, Jones suggested that the “remarkably successful businesses” it operates in the US, including market leader FanDuel, would continue to thrive in the long term. Qualifying these remarks, he drew on Peel Hunt’s recently rebuilt analysts model for the US igaming and sports betting market, a model which continued to show growth. Jones explained: “We have set out state-by-state (and province-by-province) forecasts for the US and Canada sports betting and online gambling markets, and for market shares and profitability by operator. “We wanted to test that our previous broad-brush forecasts were reasonably prudent and have concluded that they were. “However, it is clear that valuations in the US are changing, as tough questions are being asked about when profit will be achieved and what multiples to apply. “For Flutter in the US we lower our FY25E EBITDA multiple from 20x to 15x, which accounts for the majority of our target price change. “We reiterate our buy recommendation but acknowledge it will likely be hard for the share price to make progress in the near term against UK regulatory uncertainty and trading against tough comps,” Jones concluded.