Australia | Nov 12 2008
By Chris Shaw
For some time shares in Tatts Group ((TTS) have struggled as the market wonders how the company will replace earnings to be lost in future years from the changes to poker machine licence arrangements in Victoria. Finally, there appears to be an opportunity on offer.
The New South Wales Government announced it is considering the sale of its NSW Lotteries operations, which ABN Amro sees as a very good strategic fit for the company, as it would slide in nicely with the group’s existing lottery businesses in other states. As Macquarie notes, Tatts Group currently accounts for 50% of Australian lottery sales revenues, with the NSW business to lift this to 80% if it were successful in making the acquisition.
As ABN Amro points out, the company has a strong balance sheet and this leaves it well placed to consider acquisitions, meaning the size of the deal wouldn’t be a problem. Deutsche Bank agrees, estimating the company has around $700-$800 million in surplus balance sheet capacity, with a further $400-$500 million in undrawn facilities.
According to ABN Amro, there are two ways the deal would help the company. The first would be cost savings via both synergies between the NSW business and existing operations and from cost reductions in the NSW business itself. Secondly, the broker sees scope for upside to the revenues being generated by the NSW lottery operations, as in terms of sales per head of population, the business lags in this respect when compared to the lottery businesses in other states.
On Deutsche Bank’s numbers, the company could generate operating cost savings of around $37 million annually, which would make the deal up to 10% accretive in earnings per share terms. ABN Amro’s numbers are relatively similar, with the broker estimating the accretion to earnings would increase from 4.9% in FY10 to 11.4% by FY13.
Macquarie has taken a more conservative approach and estimates possible cost savings of around $10-$20 million annually, seeing some scope for the Government to impose restrictions on head counts and in other areas that will delay the achieving of available synergies.
ABN’s estimate of synergies is based on the company being acquired for around $500 million, though the broker suggests given the current environment there is scope for the final price to be somewhat lower than this. Deutsche Bank, in contrast, suggests a likely acquisition cost would be something around $550 million. The latter broker notes the deal would also go some way to filling the earnings hole left by the loss of the pokies earnings, estimating by 2013 as much as 45% of those lost earnings would be replaced by the NSW Lotteries acquisition.
Given 2013 is a long way in the future, the brokers have not adjusted their shorter-term earnings estimates. ABN Amro is forecasting earnings per share of 22.8c in FY09 and 25.4c in FY10, numbers similar to those of Deutsche Bank and Macquarie and in line with consensus forecasts according to the FNArena database of 22.1c and 24.6c respectively.
The database shows the company is rated as Buy five times, Accumulate once and Hold four times, with an average price target of $2.77. Credit Suisse is the most aggressive with a target of $3.10 and JP Morgan the lowest at $2.50.
Today, shares in Tatts Group are slightly weaker in line with the broader market and as at 11.30am the stock was 4c lower at $2.56. The shares have traded in a range of $2.15 to $4.11 over the past 12 months.