Treasure Chest: Rumours Of Tabcorp’s Demise Unfounded

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

By Greg Peel

The argument is a straightforward one. For decades Tabcorp ((TAH)) has dominated the betting market in its licenced regions with its once government-owned totalisator (“tote”) system of pooled bets placed at “the TAB” (totalisator agency betting). Even those whose gambling habit extends only to a fiver each way once a year on The Cup would appreciate that while the win/place odds are published at the time of betting, those odds will change by the time the final “dividend” for the win/place is declared.

For Tabcorp, the TAB is a no-risk, commission-based earnings generator. Tabcorp simply pays out winnings based on the weight of bets in the pool and takes its standard cut. The only “risk” is that the high cost of running the business is not sufficiently recouped through turnover, that is the size of the betting pools. And that’s where the competition comes in.

If on Cup Day you actually go to Flemington and place a bet with a bookie in the ring, you will be paid the odds the bookie gives you at the time you place the bet irrespective of what his or her odds might have changed to by the time the horses jump. This is “fixed odds” betting. If everyone went to the track and placed bets only with bookies and not the TAB, then Tabcorp would not make any money.

If we now expand the universe to include on-line and smart phone services, and to include betting on all sports anywhere in the world along with election results, Princes’ names, two flies up a wall etc, we introduce the flood of online betting services to arrive in this country over the past several years, as well as those established domestically. These are “fixed odd” services, just like bookies at the track, and offer all manner of incentives to rope in the mugs. Every bet placed with an online betting service is money not reaching Tabcorp, or its domestic rival Tatts ((TTS)).

The sheer number of such services identifying Australia as rivers of gold and the extent of the betting options they offer even within the one game/race/etc has made fixed odd betting a new growth industry in this country. The days of the bunch of sad old guys sitting in the corner of the pub with their form guides, eyes glued to the TAB odds, are numbered. On that basis, it is very difficult to see how the anachronistic concept of totalisator betting can do anything but wither and die. Tabcorp and Tatts can themselves offer fixed odd betting in competition, but fixed odd bookmaking is a risk business, not a commission business, and the space is already very crowded.

So goes the argument. Totalisator betting is destined to go the way of print media, land lines and cheap lamb. And hence so will go the once reliable earnings streams of Tabcorp and Tatts.

But CLSA disagrees.

“We believe the Tabcorp wagering customer base is stickier than anticipated,” say the CLSA analysts, “with only moderate market shares declines [apparent] in the past five years despite aggressive competitor advertising.”

CLSA further notes that any market share decline does not necessarily equate to an equivalent fall in earnings given “an expanding pie”, meaning a combination of the number of gamblers and the number of gambling options, and margin expansion. The analysts have also discovered that Tabcorp’s revenue decline in the December quarter was more results-driven than structural, and indeed revenues have recovered in the March quarter.

And there is more to Tabcorp’s gambling footprint than just the tote. CLSA believes earnings will grow for Tabcorp ahead of expectations not only because forecast declines in wagering are exaggerated but through growth provided by new initiatives in Keno and Tabcorp Gaming Services (TGS – pokies et al).

A further factor is licence amortisation. Traditionally Tabcorp has paid a hefty price for its exclusive regional licences and the amortisation of that cost has impacted on earnings each year. The impact on earnings is then translated into the dividend payout ratio. A year ago CLSA suggested Tabcorp earnings forecast should be “normalised” on the analysts’ view the company will pay nothing to renew its licences on expiry.

This view is beginning to gain traction in the market, but CLSA believes it will not reach wide acceptance until Tabcorp lifts its dividend payout ratio to 100% of profit. Given comfortable gearing, CLSA believes this can be achieved in FY15 to provide a dividend yield in excess of 6%.

CLSA is forecasting a compound annual earnings per share growth rate for Tabcorp of 9.2% over the next three years, implying a forecast dividend yield in FY16 of 7.1% (28% ahead of the consensus forecast). At a 12.6x PE, CLSA believes Tabcorp is currently inexpensive relative to both yield and growth. And there is a free option implied on $1bn of licence compensation.

CLSA has a Buy rating on Tabcorp with a 12-month price target of $4.24. The FNArena database shows four Buy or equivalent ratings, two Hold and two Sell for a consensus target of $3.49.
 

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