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Media and gaming - valuations affected by private equity downturn, and economy Back  
Gavin Kelleher, Media and Gaming Analyst, looks at the fortunes and forward prospects of Independent News & Media and Paddy Power.
Last year represented a varied year for Independent News & Media and Paddy Power, the media and gaming stocks listed on the Irish exchange.

In terms of Independent News and Media, overall it saw its share price fall 21 per cent during 2007 after performing strongly in the first six months, up 25 per cent. The key driver of its first half performance was increased speculation that corporate activity was a possibility due to stake building in the group. However, during the second half the share price fell 36 per cent from its end of June price as the credit crisis reduced the likelihood of a leveraged buy-out and earnings risk increased for the group due to a slowdown in economic growth in Ireland and South Africa.

Based on current forecasts, the group is expected to deliver earnings growth of 8 per cent in the financial year (FY)07 and FY08. The group re-iterated FY07 guidance at the end of December, so the key issue we will be looking for in the results, due March 27th, will be guidance for FY08. Looking across its different geographies in FY08, it appears that operating performance will be somewhat more difficult given tough comparatives and more challenging economic backdrops in its key markets of Ireland, South Africa and the UK. While these issues increase risk to earnings, we believe the downside from current levels is somewhat limited by an attractive dividend yield, along with the possibility that continued stake building could increase speculation regarding corporate activity. In addition, we would note that our sum of the parts valuation, which assumes a nil value for the UK Independent, underpins the valuation at current levels.

Paddy Power
Paddy Power was one of the best performing stocks on the ISEQ in 2007, increasing by over 50 per cent. However, similarly to its two nearest peers, Ladbrokes and William Hill, the stock suffered a de-rating in November/December, as Ladbrokes released a cautious update and concerns over the outlook for consumers in Ireland and the UK increased.

Paddy Power’s results are due out on March 3rd, and we will be looking for earnings growth of 52 per cent. The key drivers of this growth will be the exceptional run of sporting results in 2007, the continued growth of its online business and a significant reduction in the losses of its UK retail estate. The key focus at its results will be guidance given for FY08, with investors concerned about a weaker consumer in Ireland and the UK, along with the difficult comparatives with FY07. While a weaker consumer is a potential headwind, we would note that there are still a number of areas which underpin our current growth forecasts. Firstly, the group is set to benefit from a tax saving of around €5 million in FY08 due to the moving of its non-retail operations off shore in the UK. Secondly, the turnaround in the performance of the group’s UK estate into a small profit removes what was previously a drag on group earnings. Finally, we would also note that the online division remains well placed for further profit growth due to the introduction of new products, strong growth in active users in 2007, continued growth in Irish broadband and improved liquidity in the poker platform it uses.

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