Australia | Aug 13 2012
– Tabcorp result meets expectations
– Increasing competition is lifting costs
– Earnings forecasts lowered and ratings downgraded
– Outperformance considered unlikely in earnings transition year
By Chris Shaw
Tabcorp ((TAH)) delivered a net profit for FY12 of $340 million, a result up 13% relative to the previous corresponding period and in line with the market's expectations. Outlook commentary attached to the result was also viewed as sound as continuing businesses are starting FY13 with solid momentum.
The news is not all good however, as BA Merrill Lynch notes the result highlighted increasing competitive pressures in Tabcorp's wagering operations. This stems from new entrants into the market, which is pushing up costs for promotional activities and so is likely to weigh on margins.
To reflect this BA-ML cut earnings forecasts for Tabcorp for FY13 by 6%, while JP Morgan lowered its forecasts by 5-7% through FY14 and UBS has lowered profit forecasts by more than 20% in both years. Consensus earnings per share (EPS) forecasts for Tabcorp according to the FNArena database now stand at 20c for FY13 and 19.6c for FY14.
The changes to forecasts also reflect new information with respect to the discontinuation of the Victorian gaming business that has allowed brokers to more accurately model this impact and new wagering arrangements.
In UBS's view earnings risk for Tabcorp is to the downside thanks to negative leverage to Victorian wagering turnover declines. This is due to a funding guarantee in place for the Victorian racing industry.
The other issue for Citi is Tabcorp faces an earnings hole from next week as the current gaming operator licence ends and earnings enter a transition period as the company shifts to being a service provider.
While the launch of Tabcorp Gaming Solutions (TGS) will provide some offset, Citi sees this as insufficient. This leads to the suggestion Tabcorp's share price is likely to remain range-bound at best over the next 12 months.
Citi's response is to downgrade Tabcorp to Neutral from Buy and others in the market have reacted similarly. Credit Suisse and UBS have also downgraded Tabcorp to Neutral from Buy, for UBS to account for the earnings risk in place over the next couple of years from Tabcorp's funding guarantee for Victorian racing and for Credit Suisse to reflect the view investors should look for a cheaper entry point into the stock. Macquarie has also downgraded to Neutral from Outperform.
BA-ML has gone further and downgraded Tabcorp to Underperform from Neutral. The change reflects not only the more competitive wagering landscape but a full valuation given a recent rally in the share price.
The changes mean Tabcorp is rated as Buy once, Hold six times and Sell once. The database shows a consensus price target for Tabcorp of $3.16, down from $3.35 prior to the result.
Price targets for Tabcorp range from BA-ML and RBS Australia at $3.00 to Citi at $3.50.
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