Australia | Apr 30 2013
-Strong underlying wagering growth
-Intense competition in wagering
-Plenty of risks keep most brokers cautious
-Potential of mobile online confirmed
By Eva Brocklehurst
Wagering and gaming operator, Tabcorp ((TAH)), posted third quarter results that were stronger than many expected. The devil (or is it the angel?) may be in the detail.
JP Morgan notes underlying wagering revenue growth is tracking at 7.2%, revealing strength in market share and a rebound in the Victorian totalisator, where revenue increased 8.2%. Total revenue rose by 2.6% in the quarter. Headline wagering revenue fell 4.7%, but this was affected by the company's share of the Victorian joint venture falling to 50% from 75%. The broker considers operating trends as healthy and has no problem with a Buy recommendation, believing the market will become more comfortable in time with the defensive growth on offer.
Deutsche Bank finds a modest acceleration in revenue growth from the first half. Keno revenue growth accelerated to 16% but media softened to 7.6% growth on the prior quarter. Revenue trends in the key area of wagering were stronger than the broker expected and earnings forecasts have been upgraded by 1-3% for FY13-14. There's just so many risks for Tabcorp and Deutsche Bank is cautious, hence a Hold rating. The broker cites several of these risks, including changes to household disposable income, changes to the structure of the wagering industry, imposition of higher race field fees, enforceability of "retail exclusivity" and then there's the Sky Channel arrangements.
For BA-Merrill Lynch the wagering business is facing structural pressure. with intensified competition from new entrants who are aggressively advertising and promoting. This is expected to cap margins. The broker notes Tabcorp is also having to manage the structural decline of tote betting towards fixed odds. There is also the risk of increased costs for rights in media. Another worry the broker has is the balance sheet being stretched at over twice net debt to earnings. Moreover, the dividends yield is considered relatively anaemic. So, it all adds up to a Sell rating for Merrills.
One item, flagged by Citi, is the report from the Senate inquiry into gambling advertising is due next month. Citi thinks this may be a chance for further restrictions on media advertising, a potential positive outcome for Tabcorp. Of note, mobile turnover accounted for 42% of online turnover in the third quarter. The rapid growth implies mobile devices were the single largest source of incremental turnover for the wagering division in the quarter. This confirms Citi's belief that Tabcorp is well positioned to benefit from this market segment.
Macquarie finds one of the strong points in the update was the Victorian tote turnover. Going forward the cessation of Tote Tasmania pooling will start to be cycled during the fourth quarter, so the broker anticipates top-line trends in the Victorian tote business will soften across the remainder of the year. When the new arrangements of incorporating Tasmania into the SuperTAB pool are taken into account it all adds up to being neutral for earnings, in the broker's view. Macquarie notes Tabcorp now needs to pay rebates directly to the wholesale punters.
Credit Suisse thinks Tabcorp is a cheap stock. The broker is a little concerned about the product mix as Victorian retail wagering turnover dropped 7% and, given the Australian economy is likely to deteriorate further, this channel may not get a tail wind for at least 12 months. The broker takes the view that, if Tabcorp can sustain a price/earnings ratio of 17.5 times, in a stock market where bond proxies are in demand, apply that to FY15 earnings estimates and this equates to a valuation at $3.90. The broker's target price is $3.55, within a range on the FNArena database of $2.84 to $3.70.
Credit Suisse makes the observation that, while Tabcorp's retail wagering exclusivity in Victoria expires in 2024, the operation is perpetual because when the licence expires technology would likely have opened up the market such than an exclusivity payment in the next decade may not be worth that much.
On FNArena's database there is one Sell rating for Tabcorp – Merrills. There are five Hold and two Buy. The consensus target price is $3.41, suggesting 4.2% downside to the latest share price. On FY13 consensus earnings forecasts the dividend yield is 4.9% and on FY14 forecasts it's 4.5%.
See also, Wagering Gains Impetus From Mobile Online on April 24 2013.
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