Tabcorp Proving A Good Bet

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

– Tabcorp delivers strong March quarter revenue result
– Star City a good performer
– Brokers broadly see value leading into de-merger

By Chris Shaw

Tabcorp ((TAH)) delivered revenue for the third quarter of $1,061 million, the result a 5.4% improvement on the previous corresponding period. Best performer was Star City, which recorded revenue growth of 11.3% for the period.

The importance of the strong result at Star City was it came despite disruptions from refurbishments at the venue. JP Morgan expects the result will give the market greater confidence Tabcorp can execute a successful turnaround at the casino.

Goldman Sachs is a little more cautious, noting visitation at Star City needs to increase by around 30% and revenue per visitor by 20% if the casino is to achieve the broker's forecast of $360 in EBITDA (earnings before interest, tax, depreciation and amortisation) by 2015.

As BA Merrill Lynch notes, the overall result for the period was better than the market had been forecasting. This is despite some impact from the floods in Queensland during the period. With a weakening of these headwinds expected in the fourth quarter, BA-ML expects growth should accelerate in coming months.

Macquarie agrees, while pointing out there will be a partial offset to improved conditions from wagering cycling a tough comparable period given World Cup betting revenue in the June quarter of last year. 

Elsewhere, a recovery in gaming accelerated in the March quarter notes Goldman Sachs, helped in part by the introduction of a lower max bet. A strong recovery in the Victorian gaming market should also deliver benefits going forward. 

One benefit of the strong operational performance in the March quarter according to Macquarie is an improved balance sheet, as debt has been reduced. This suggests reduced risk of a future capital raising within the Casino business post the upcoming de-merger.

The other benefit stemming from the operational performance in the March quarter is increases to market earnings estimates. Macquarie has been among the more aggressive in lifting earnings per share (EPS) forecasts in FY11 by 5.6% and in FY12 by 5.8%. Macquarie's EPS estimates now stand at 75.2c this year and 71.8c in FY12.

Other changes to earnings estimates have been more modest, BA-ML lifting its profit forecasts by 1-2% through FY12 and JP Morgan making adjustments of a similar magnitude. Consensus EPS estimates according to the FNArena database now stand at 71.4c in FY11 and 74.1c in FY12. 

Along with changes to earnings estimates have come some changes in price targets for Tabcorp. The database now shows a consensus target of $7.91, up from $7.77 prior to the trading update.

There remains some important newsflow for Tabcorp in coming months, one being the announcement of the winner of the Victorian Wagering licence due in May. The other is the de-merger, and shareholders are expected to vote on the proposal in June.

JP Morgan expects as the de-merger comes closer the market will continue to consider the potential for corporate activity in the stock . Given this potential JP Morgan expects Tabcorp will trade at expensive levels relative to a sum-of-the-parts valuation.

Post the trading update only Macquarie has changed its recommendation, upgrading Tabcorp to Neutral from Underperform. Overall the FNArena database shows Tabcorp is rated as Buy and Hold four times each. RBS Australia is one to rate Tabcorp a Buy, seeing value given potential for M&A activity and an undemanding trading multiple at current levels. 

Citi agrees, pointing out Tabcorp trades at a valuation discount to both Crown ((CWN)) and Tatts ((TTS)) despite the near-term catalyst of the de-merger. Goldman Sachs is not in the FNArena database but rates Tabcorp as a Hold at present.

Shares in Tabcorp today are slightly higher and as at 11.10am the stock was up 8c at $7.49. Over the past year Tabcorp has traded in a range of $6.18 to $7.70, the current share rice implying upside of around 6% relative to the consensus price target in the FNArena database. 

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