Paddy Power set for more growth this year.(News: Betting & gaming)

Morgan Stanley has upgraded its growth forecast for Paddy Power, moving the stock to 'equal weight' with a target price of 28 [euro], and its 2008-09 earnings per share raised by 7%-8%.

In a research note, the firm said "Paddy Power shares are down 20% since Ladbrokes' November profits warning, despite continued strong trading, leading us to raise forecasts by 7%-8%. We see further upside risks to forecasts, and with the shares one standard deviation cheaper than their average since listing (15x 12-month forward P/E), we see the shares as attractively valued."

The brokers identified four key areas that matter to investors, led by the fact that the Irish retail market remains resilient. "Despite the slowing economy and high supply growth in betting shops, the business continues to perform ahead of market expectations. With a strong brand and well located and high-spec estate, we see downside risk as limited ... from any slowdown in Ireland," it said.

Additionally, sports margins have stabilised. Morgan Stanley suggests that investors remain nervous about the volatility of sports margins, and potential structural declines, however, its analysis suggests that these should remain stable. It added: "There has also been high growth on the internet. As a late starter in 2001, Paddy Power's performance has been excellent, and it continues to outperform Ladbrokes, and William Hill's growth rates. Furthermore, the firm's expansion into Spain and spread betting could drive faster than expected growth.

"And not least, Paddy Power is benefitting from an attractive valuation. While headline P/E multiples look relatively high at 14x 2009e, the P/E is distorted by the cash position. A like-for-like balance sheet structure (3.5x debt/ebitda) would leave the shares at a discount to Ladbrokes, at under 11 x P/E in 2009e."

Paddy Power is also adding some 60 units over the next three years, doubling its UK estate. Its large-plan, bonus-led offer is proving attractive to customers, and JP Morgan sees strong growth prospects within this mature market. Although the firm's analysts believe the market is nervous about the economic sensitivity of the retail business ... "betting and gaming has historically been a resilient industry in a downturn, and we do not expect this to materially change in the current slowdown. Recent updates from Paddy Power, William Hill, Ladbrokes and a host of online gaming companies have confirmed that trading trends remain robust.

"Our analysis of historical betting patterns in the UK, US and Australia suggests that betting spend is resilient in a downturn, although not completely recession proof."