Wagering Gains Impetus From Mobile Online

This story features TABCORP HOLDINGS LIMITED. For more info SHARE ANALYSIS: TAH

-Mobile phone impetus to online gambling
-Wagering stands to benefit most
-Tabcorp best placed
-Gambling advertising grows strongly
 

By Eva Brocklehurst

There's an interesting aspect to the proliferation of mobile phones. They're having a dramatic impact on gambling habits. Mobile represented around 25% of online turnover for key Australian operators in in the first half of FY13, almost triple the penetration seen a year earlier. The use of mobile phones principally affects the wagering sector and the effects are set to escalate, in Citi's opinion.

Mobiles improve access and this is why wagering has been most affected, as opposed to casinos or gaming machines. Citi thinks the effect on turnover will be similar to the growth during the early stages of the internet. That lifted wagering's share of the gambling wallet to 15% by FY12, from 12% in FY01. Early evidence also points to higher win yields against the internet channel. Citi expects industry turnover growth will recover to 4% per annum from the 1% achieved in FY12. BA-Merrill Lynch attended a recent online gaming symposium and found trading anecdotes supported growth. Larger established vendors were seeing slower growth but still seemed to be generating double digit online wagering revenue growth.

So, which form of wagering suits mobile the most? It's sports. Mobile bet placers tend to be in a younger demographic. In Citi's view, this explains why over 50% of sports turnover is already on line against racing at 30%. Moreover, the potential in Australia for growth in sports betting on mobile is substantial. Turnover in Australia is still, per capita, 40% below the UK. BA-Merrill Lynch is looking for online wagering to continue to grow at around 14% through 2012 to 2015, driven by a push from operators and changing consumer preference for mobile and online commerce.

Of the listed stocks, Tabcorp ((TAH)) has the greatest advantage in this respect as 10% of its portfolio is already in sports. This compares with Tatts Group ((TTS)) at 5%. Citi cites studies in the UK which find that brand loyalty increase along with higher mobile penetration so Tabcorp is on first base given the size of is online account base. The broker also observes that the success of mobile combined with customer relation management may alleviate the pressure from aggressive advertising by corporate bookmakers.

On the strength of these observations, Citi has upgraded Tabcorp to Buy and joins JP Morgan on the FNArena database. These are the only Buy recommendations. There are five Hold and one Sell (BA-Merrill Lynch). Merrills admits Tabcorp has made the most progress in upgrading the online offering and is executing well, but the increased threat of competition amidst general muted growth makes the broker cool on the stock. Tabcorp has a consensus target price of $3.29, suggesting just 0.4% downside to the latest share price. The range is $2.86 to $3.70. The stock offers a dividend yield of 5.1% based on FY13 consensus forecasts and 4.7% based on FY14.

Risks around Tabcorp's retail exclusivity and TVN negotiations are well known and are expected to act as positive catalysts once they are overcome, in Citi's view. The broker thinks Tatts, on the other hand, has been slower to adapt to mobile potential. The broker retains a Hold rating on the FNArena database because of the stock's high valuation. Looking at the other recommendations on the database there are three others with Hold, three Sell and one Buy (BA-Merrill Lynch). Again, Merrills takes a slightly different tack, favouring Tatts, with its strong standing in lotteries and ability to migrate lottery consumers online to improve margin growth. The consensus target price is $3.11, but here it suggests 4.8% downside to the last share price. The range is $2.65 to $3.50. Tatts has a dividend yield of 4.6% based on FY13 consensus estimates and 5.3% for FY14. 

Citi expects online wagering should provide Tatts with upside from FY15, as the company needs to invest in IT and get cracking on marketing. On the marketing side, Goldman Sachs has found that gambling advertising was up 19.8% in the March quarter, making it one of the fastest growing advertising categories. This is made even more significant in the context of an overall agency ad market which declined 2.4% for the quarter. The rising spending on advertising signals a competitive market in Goldman's view. Sports betting and wagering companies are striving to grow share in a crowded space. Television dominates the growth in gambling advertising spending taking up 56%. Digital advertising, while only around 9%, has been growing quickly. Goldman notes it's grown 266% between 2008 and 2012.

Goldman also believes Tabcorp is the stock best placed to benefit. In 2013 the broker estimates 57% of Tabcorp's earnings will be generated form wagering/sports betting against 31% for Tatts. Nevertheless, Goldman's least preferred stock is Tabcorp as the broker suspects managing the business to contain costs will put pressure on the company's market share.
 

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