Company Overview: Tabcorp Holdings Limited is engaged in the provision of gambling and entertainment services. The Company operates through three segments: Wagering and Media, Keno and Gaming Services. It manages customer brands, including TAB, tab.com.au, Luxbet, Sky Racing, Sky Sports Radio, Tabcorp Gaming Solutions (TGS), Keno and Trackside animated racing game. It conducts wagering activities under the TAB brand in Victoria, New South Wales and the Australian Capital Territory through a network of agencies, hotels and clubs; provides on-course totalisators at thoroughbred, harness and greyhound metropolitan and country race meetings; and via the Internet, mobile devices, phone and pay television. Its Gaming services segment is engaged in the supply of electronic gaming machines and specialized services to licensed gaming venues. Its Keno segment includes Keno operations in licensed venues and TABs in Victoria, Queensland and Australian Capital Territory, and in licensed venues in New South Wales.


TAH Details

Integration with Tatts Group Will Support Growth Momentum: Tabcorp Holdings Limited (ASX: TAH) is a world-class, diversified gambling entertainment company and it has main objective of supporting a racing industry which is expected to be the pride of the nation. As per the management of Tabcorp, the integration with Tatts remains on track as they have already implemented cost initiatives as well as business improvements. The company garnered revenues amounting to $3,828.7 million in FY 2018 while its NPAT or net profit after tax stood at $28.7 million. Even when there has been substantial improvement in these financial metrics on the YoY basis, the company’s results were largely impacted by the significant items post tax which amounted to $217.5 million.

The significant items post tax which impacted Tabcorp’s FY 2018 results were costs which were related to the exit of the Sun Bets, Tatts Group combination as well as costs related to the Luxbet closure. The integration costs with Tatts Group amounted to $114.6 million while closure costs of Luxbet and exit costs of Sun Bets amounted to $12.4 million and $90.5 million, respectively. However, the management of Tabcorp has maintained its focus on delivering benefits to the shareholders, customers, venue partners as well as racing industry with the help of the integration. The management also stated that the combination is highly complementary and the integration of the two is well-positioned to innovate, invest as well as compete in changing dynamics of the gambling space. In our view, the group is well positioned for profitable growth and sustainable returns to its shareholders on the back of maintaining strong portfolio of robust brands spanning across media, wagering, Keno, lotteries as well as gaming services. Henceforth, we value the stock using PE multiple and arrived at an upside of mid-single digit momentum ascribing a valuation against four-year average PE of about 21.98x to FY20E EPS. Key risks include regulatory risk, changes in taxation policy, issue of new licenses, imposition of higher racefields’ product fees, intense competition in wagering industry, and high dependency on discretionary spends, etc.

Key Financial Metrics:



Digitalization, Expense Management Aided Tabcorp’s Wagering and Media Business in FY 2018: The wagering and media businesses of Tabcorp witnessed robust momentum in 2HFY18 with respect to the earnings thanks to the strong momentum in regard to variable contribution as well as disciplined cost management. In FY 2018, the company launched new products in the digitalization space. These fresh products were Multiplier (TAB) as well as Tappy (UBET). As per the management of Tabcorp, the wagering market in Australia has been significantly helped by the robust momentum in the digital space. Further, the strong developments with respect to the wagering industry regulations might help in the sustainable environment. In regard to the consumer protection, changes to the Australia’s gambling legislation plans to improve the level of consumer protection. Moreover, in regard to the advertising restrictions, from March 2018, fresh as well as new restrictions reflected that the gambling advertising at the live television, radio as well as online sports broadcasts are not allowed in the time frame of 5:00 am – 8:30 pm. However, live broadcasting with respect to the racing events as well as lotteries advertising have been exempted. In our view, the company has a positive outlook ahead at the back of digitization, recent regulatory reforms, new product launches, and implied cost optimization strategy.

 

Australian Wagering Market Revenue Growth by Channel (Source: Company Reports)

Key Insights into Lotteries and Keno business, Gaming services business: The Tatts Group contributions have significantly helped Lotteries and Keno business as the statutory revenues for this business amounted to $1.39 billion in FY 2018 while EBIT (Earnings before Interest and Taxes) amounted to $199.7 million. The strong momentum in the business unit earnings was witnessed on the back of variable contribution margin expansion because of the robust momentum in the digital space, business improvements, expense management as well as synergy benefits.


Lotteries and Keno Business and Gaming Services Business (Source: Company Reports)

In FY 2018, gaming services business generated pro-forma revenues amounting to $315 million. The company’s management is of the view that it has a diversified revenue base. According to them, Regulatory Services (Monitoring) operations are stable while Venue Solutions (TGS) does have some momentum amidst near-term challenges. Moreover, in gaming services business, the company’s management has maintained its focus towards achieving the long-term growth prospects.

Expecting Healthy Dividend Payout Ratio in Future: Tabcorp has a track record of consistent dividend payment with a dividend per share of CAGR of 7.0% with dividend yield of between 4.4% and 5.7% over the last five year. Tabcorp’s dividend payout ratio for FY18 is 98% with dividend yield of 4.7%. For FY19, it is expected that dividend payout ratio would be around 100% of NPAT before significant items, amortisation of the Victorian Wagering and Betting Licence, and purchase price accounting reinforced by improved profitability due to phasing of integration benefits. Hence, we expect Tabcorp will be able to maintain dividend yield of >4.5% in future.


Dividend and Dividend payout Ratio Trend (Source: Company Reports)

RoE and RoIC on Rise: Tabcorp has reported for turnaround positive return on equity (RoE) and RoIC of 0.7% and 0.4% in FY18 from negative RoE and RoIC of 1.3% and 0.8% of last year. In our view, the company had a successful year in FY18 and is now well positioned to deliver sustainable shareholder returns into the future.


RoE and RoIC on Rise (Source: Company Reports)

EBITDA and EBITDA Margin in Decent Zone: The Company has recorded EBITDA Y-o-Y growth of 51.5% in FY18 due to decent growth of its product mix. On CAGR basis, EBITDA has grown at 12.6% over the last five years while EBITDA margin came in at 22.96% on a 5-year average basis and the group is targeting to improve EBITDA growth in FY19 on the back of topline growth supported by new product innovation and acquisitions. However, for FY18, EBITDA margin was down by 270 bps to 20.4% on YoY basis due to the rise of operating cost. In our view, EBITDA margin will also improve on the back of topline growth and focus on cost optimization strategy in future.


EBITDA and EBITDA Margin at Decent Zone (Source: Company Reports)

Healthy Operating and Free Cash Flow (FCF): Free cash flow (FCF) has substantially grown by 520.7% to $155.8 Mn in FY18 over the prior year while operating cash flow increased by 101.1% during the same period against prior year. We believe that the company is likely to maintain its sales growth, expansion in margins and expecting to generate strong cash flows in the upcoming period. Cash flows are improving on the back of operational efficiencies and better management policy of the company.

Healthy Operating and Free Cash Flow (Source: Company Reports)
 
Driver for future: The management of Tabcorp is having an optimistic outlook and believes that they could deliver benefits in regard to the Tatts combination. They are also targeting robust growth opportunities in all the businesses with the help of significant digital capabilities. In the retail network, the company is planning to increase the penetration of the digital technology, and it also plans to roll out new products across the markets it serves. Finally, the company also plans to strengthen the capabilities of the CRM. Tabcorp plans to meet the high regulatory compliance standards, and the company would also be working towards the maintenance of disciplined cost management, balance sheet management as well as capital investment.


Historical PE Band (Source: Company Reports)

Stock Analysis and Recommendation: Year to date, the company has generated a negative return of 13.62% but is gaining positive momentum with 3.33% returns in the last three months. From technical standpoint, on the daily chart of Tabcorp, two technical indicators named Moving Average Convergence Divergence or MACD, and Exponential Moving Average have been applied by considering the default values. After careful observation, it was concluded that the MACD line has crossed the signal line and is moving upwards which means the bullish momentum is in making. Moreover, the stock price has also crossed the EMA and is moving upwards which implies that the stock price is expected to go northwards. On the back of strong fundamentals, plans of leveraging the digital initiatives as well as the expected benefits from the integration with Tatts remain bullish on the stock. Given healthy fundamentals as well as supporting technical indicators, we give a “Buy” recommendation on the stock at the current price of $ 4.68, with the target price that may see an upside momentum of the mid-single digit ascribing a valuation against four-year average PE of about 21.98x to FY20E EPS.


TAH Daily Chart (Source: Thomson Reuters)

 
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