Paddy Power Betfair shares worth £100

Donald Trump's surprise presidential election victory cost Paddy Power Betfair £5 million in the fourth quarter of 2016, with customer-friendly sports results burning a £40 million-shaped hole in the bookmaker's pocket.

Fast-approaching the first anniversary of the merger of Paddy Power and Betfair, momentum has clearly been lost, and the share price is down almost 4% Monday. However, full-year results on 7 March are still expected to shine, and one City analyst is betting the shares are worth £100, implying 20% upside from here.

Paddy Power lost big on football results in December, and it was among the hardest hit by a year of surprises. But there should be some benefit from customers recycling their winnings.

Although online sportsbook stakes jumped 10% at constant currency, a weaker gaming performance and those unlucky results wiped 8% off revenue at the online business in the fourth quarter. Revenue had surged 20% in the first nine months of the year.

The gaming business lost some of its momentum, with revenue up 3% at constant currency to £89 million, compared to an annual sales increase of 12% to £353 million.

At least geographical diversification is paying off: a 25% increase in local currency Australian stakes in the quarter underpinned an 18% rise in revenue from the region, partially offsetting poor gross win margins in Europe. As nearly a fifth of revenue comes from Australia, group sales rose 10% to £388 million in the final three months of the year - flat without including the benefit of the weak pound.

Annual performance is strong, too. Group revenue jumped 18% to £1.55 billion for the year - up 11% at constant currency - and underlying operating profit will come in at the middle of its previously guided range of £390-£405 million, helped by lower-than-expected marketing and staff costs.

Since the February 2016 tie-up, the combined group has prioritised four main channels: online, Australia, US and retail. Although the UK and Ireland generates 19% of revenue and the US 6%, we're not told any more about how the divisions are performing.

Management has also kept schtum on its outlook ahead of full-year results. Numis analyst Richard Stuber expects revenue to be a fifth higher at £1.58 billion, with a 42% increase in pre-tax profit to £322 million giving earnings per share (EPS) of 325p.

"Unlike Ladbrokes Coral or William Hill, Paddy Power Betfair's exposure to UK retail is limited (c.10%, of which gaming machines c.6%). Near-term we expect solid trading (gross win margins normalising) and continued EBITDA progression (operating leverage)," explains Stuber.

Revenue should jump by a further 12% to £1.73 billion in 2017, predicts the analyst, with operating leverage supporting a 20% jump in cash profit to £479 million - 1% ahead of City forecasts - and pre-tax profit of £396 million. Expect EPS of 395p.

In the red Monday morning, Paddy Power Betfair shares were struggling in a weak market, testing technical support. They currently trade on 21 times forward earnings, but Stuber rates them an 'add' and thinks they could be worth a tonne each - £100.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.