FY17 Subdued, Merger Tops Tabcorp’s Agenda

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This story features TABCORP HOLDINGS LIMITED.
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The company is included in ASX200, ASX300 and ALL-ORDS

Brokers found little to excite in Tabcorp's FY17 results with the focus squarely on the upcoming merger plans with Tatts.

-Several months delay to merger plans with Tatts
-Sun Bets extends losses, indications agreement can be terminated in FY19
-Regulatory environment seen improving for traditional wagering operators
 

By Eva Brocklehurst

Tabcorp Holdings ((TAH)) provided a subdued FY17 result, albeit at the top end of recently lowered guidance. There was no trading update or outlook commentary, as is the norm. The main focus is to complete the proposed merger with Tatts ((TTS)), although this is been delayed several months.

Importantly, Deutsche Bank notes, the company has stepped away from its 14% return on invested capital target because of the uncertainty of both the proposed merger and the turnaround required in Sun Bets.

FY17 net profit was down -3.8% on declining growth in sports and the tote. This could be exacerbated by the Tatts result in August 17, Ord Minnett suggests. The two companies have delayed their merger plans for around three months.

Management expects the merger to be completed in the December quarter, with both agreeing to defer the release of the merger scheme booklet until after Tatts reports on August 17. The merger is also subject to the ACCC and CrownBet's ((CWN)) appeal against the Australian Competition Tribunal decision supporting the merge, which will be heard this month.

Citi envisages scope for value creation upon the merger on the back of synergies and the incorporation of Tatts' lotteries business. Still, the broker would prefer to wait for a more compelling entry point and retains a Sell rating.

Ord Minnett suggests the business is facing pressure from a declining tote industry and increased competition in sports betting and this is unlikely to abate. Increasing operating expenditure in FY18 is expected, as merger integration and challenging trading conditions drive de-leverage.

Credit Suisse continues to rate the stock Neutral but now concedes it is better value. The first half of FY18 is unlikely to be exciting and the broker downgrades FY18 forecasts for earnings per share because of the delay in the merger.

Credit Suisse assumes the company proceeds with the post-merger $500m share buy-back. Wagering operating earnings (EBITDA) fell -17% in the second half amid lower revenue, higher costs, wet weather, event outcomes and a myriad of other excuses, Credit Suisse asserts. Despite 10% growth in new customers, the company had about 10% growth in account base revenue and this suggests to the broker that the company is not stimulating existing customers.

Sun Bets

Sun Bets extended its run of losses in FY17, -$46.2m, and this is expected to continue. The company has indicated that if certain revenue payment obligations are not met in FY18-19 then it can terminate the agreement.

Credit Suisse upgrades FY20 estimates, now convinced the company can exit the loss-making Sun Bets operation if minimum performance hurdles are not met.

The results were reasonable, in Deutsche Bank's opinion, relative to recently lowered market expectations. The broker finds some encouraging trends within the core wagering business, with digital turnover up 14% in fixed odds revenue growth of 15%.

Operating earnings were in line with Citi's estimates although wagering and media missed expectations. This was because of lower-than-expected margins. Citi reduces FY18-19 operating earnings estimates by -2% and lowers FY20 forecast by -5%, largely reflecting revisions to Sun Bets forecasts. The broker takes on more conservative assumptions from FY20.

Deutsche Bank reduces earnings estimates by -3% to reflect the net impact of lower wagering & media earnings and higher net interest expense.

The broker notes Luxbet and Trackside dragged on the business in FY17. The company is reviewing Luxbet and will either divest or close it down within the next six months. A review of Trackside's product and marketing has been completed and new initiatives are planned for FY18.

Deutsche Bank estimates the proposed merger with Tatts could provide earnings upside of 13%, while the regulatory environment is improving for the traditional wagering operators. This is because of the ban on click-to-call in-play betting services, the proposed ban on credit betting and gambling advertising restrictions, as well as the potential for a point of consumption tax to be adopted nationally.

There is one Buy (Deutsche Bank), one Hold (Credit Suisse) and two Sell ratings on FNArena's database. The consensus target is $4.51, suggesting 4.7% upside to the last share price. The dividend yield on FY18 and FY19 forecasts is 5.9% and 6.3% respectively.
 

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