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CONSUMER CYCLICALS: Flutter (Ba1/BBB- Pos/BBB) UK considering doubling taxes

CONSUMER CYCLICALS
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Guardian carriedheadlines late on Friday that UK Chancellor, Racheal Reeves, was considering taxing the gambling sector "up to £3b" extra (a near doubling). The stock fell -9% in US trade (only reversing ~a month worth of gains).

  • Reports are most of this would leave "lower harm" activities like lottery and bingo untouched and instead go after remote gaming duty (online operators). Profits are currently charged at 21% but research institutions like the IPPR have proposed a raise to 50%. Another thinktank quoted in the article has proposed increases to 42%.
  • Re. Flutter exposure; ~25% of revenue is from the UK but higher margins (32%) leaves it making up ~40% of group EBITDA. US is the growth area (FY guidance is for revenue +49%, EBITDA +219%) but outside there, UK is doing well (+17% growth in revenue and EBITDA over 2Q). Analyst net seearound a 0.5-0.6ppt hit on EBITDA for every 1ppt increase in excise taxes for Flutter.
  • Recent €2.3b acquisition of Snai was an Italian gaming operator (considered a mature market/less exposed to regulatory changes). It also spent $350m for a 56% stake in a Brazil (still a unregulated market) - both highlighting Flutters continued strategy to diversify out the UK and US exposure (5yrs ago UK made up 2/3 of revenue).

It's not a significant credit mover for us yet (based on above hit, looking at a HSD fall in FY group EBITDA or for YoY growth to move from current guidance for +34% to low 20-handle yoy). Worth noting changing regulation (US beneficial in recent years, UK now turning to headwind) is a risk of the sector Flutter operates in - success of the co determined by its agility to navigate those changes and recent history indicates co is not complacent on that front.

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Guardian carriedheadlines late on Friday that UK Chancellor, Racheal Reeves, was considering taxing the gambling sector "up to £3b" extra (a near doubling). The stock fell -9% in US trade (only reversing ~a month worth of gains).

  • Reports are most of this would leave "lower harm" activities like lottery and bingo untouched and instead go after remote gaming duty (online operators). Profits are currently charged at 21% but research institutions like the IPPR have proposed a raise to 50%. Another thinktank quoted in the article has proposed increases to 42%.
  • Re. Flutter exposure; ~25% of revenue is from the UK but higher margins (32%) leaves it making up ~40% of group EBITDA. US is the growth area (FY guidance is for revenue +49%, EBITDA +219%) but outside there, UK is doing well (+17% growth in revenue and EBITDA over 2Q). Analyst net seearound a 0.5-0.6ppt hit on EBITDA for every 1ppt increase in excise taxes for Flutter.
  • Recent €2.3b acquisition of Snai was an Italian gaming operator (considered a mature market/less exposed to regulatory changes). It also spent $350m for a 56% stake in a Brazil (still a unregulated market) - both highlighting Flutters continued strategy to diversify out the UK and US exposure (5yrs ago UK made up 2/3 of revenue).

It's not a significant credit mover for us yet (based on above hit, looking at a HSD fall in FY group EBITDA or for YoY growth to move from current guidance for +34% to low 20-handle yoy). Worth noting changing regulation (US beneficial in recent years, UK now turning to headwind) is a risk of the sector Flutter operates in - success of the co determined by its agility to navigate those changes and recent history indicates co is not complacent on that front.

Keep reading...Show less