Four wickets down for just 86 runs and facing a Pakistan bowling attack including Shoaib Akhtar, Wasim Akram and Waqar Younis, the defending champions were in serious trouble when Andrew Symonds walked to the crease in Australia’s first game of the 2003 cricket World Cup. Symonds, with a deserved reputation for wasting his prodigious talent, proceeded to belt 143 runs off just 125 balls. He saved the day, and the Australian team went on to win the third of its four consecutive titles.
As far as we know, Breon Corcoran cannot swing a cricket bat like that. But he has played a similar cameo as CEO of London-listed Betfair Group plc.
The Fund has owned the stock for little more than a year, and we only outlined the investment case nine months ago in the December 2014 Quarterly Report. At the time of first purchase, the Fund was entering a spot of bother itself. The oil price was tumbling, and the value of our investment in oil services stocks was tumbling with it. That trend has continued over the course of the past year, but Betfair, with some help along the way, has come to the rescue.
We resist letting short-term share price movements dictate our decision making. But it is clear that the value of our oil services companies is less than our original estimate. Conversely, the value identified in Betfair appears accurate and has since become more obvious and widely appreciated. The company has grown revenue by 21%, clearly highlighting some of the latent earnings potential that was not being captured by previous management. That growth has been achieved without an increase in fixed overheads, confirming the scalability of the business model. And £200m of excess cash has been returned to shareholders, proving that the business is the cash machine we identified.
A highly successful year culminated with the announcement of a proposed merger with fellow gambling giant Paddy Power (ISE:PLSA). In the current world of frenzied deal making driven by fuzzy logic, this is one transaction that makes sense. Corcoran used to work for Paddy Power, and his family owns 3% of the company’s shares. He knows the business well. Paddy Power’s marketing prowess will feed Betfair’s unique exchange model, and the combination should eliminate duplicate expenses. In short, we could not be happier with how the company has progressed.
There is just one problem—the share price has more than tripled since August last year. The price today implies an earnings multiple for the combined entity of roughly 35 times net income. While Betfair is a high quality business, many of the risks that had investors concerned a year ago have not completely disappeared. In a world where governments are constantly looking to extract more money from gambling companies, Betfair still generates 20% of its revenue from markets where it does not have clear legislation or a licence to operate. And its nascent, loss-making operations in Italy are not showing the sort of progress we would like.
Reluctantly, we have decided to pull stumps on the remainder of the Fund’s stake in Betfair. It has been an extraordinarily successful investment and one we will monitor closely in the future, but it is time to find a new Andrew Symonds for the Fund.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.