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

Diversification Benefits Visible in 1H FY19 Performance: Tabcorp Holdings Limited (ASX: TAH) is a mid-to-large cap company with the market capitalization of $9.47 Bn as of March 07, 2019. There are three main business verticals, i.e., wagering & media, lotteries & keno, and gaming services which contributed around 50.6%, 43.8%, and 5.6%, respectively, of the total revenue during 1HFY19. One of its business segments, i.e., Sun Bets ceased trading in July 2018. Recently, the group posted solid 1HFY19 results with total revenue coming in 108.3% higher at $ 2,787.4 Mn as compared to the prior corresponding period (PCP) thanks to diversification benefits from combination with Tatts and robust performance from lotteries and keno and digital & retail business segment. EBITDA from continuing operations before significant items stood at $554.3 million in 1H FY 2019 reflecting the rise of 91.1% on PCP basis. The company’s gaming services made good progress with respect to contract renewals and new venue sign-ups. The reduction in operating expenses was on the back of synergy benefits. Moreover, the company’s integration program has been ramping up well and they have also upgraded their synergy targets. Tabcorp managed to deliver $24 million of EBITDA from the synergies and business improvements in 1H FY 2019 and they are targeting to deliver $55 million in FY 2019 which implies a rise from the previous target of $50 million.

In a nutshell, moving forward, the company is expected to be aided by the significant position in the core markets, national footprint, diversification with respect to geographies and products and by its capital structure. Also, the regulatory changes have been supporting a sustainable industry and positive growth outlook which might also act as a tailwind for the company moving forward. At CMP of A$4.79, TAH is trading at a PE multiple of 21.67x FY20E earnings. Valuation-wise, the stock looks in a decent position with a net margin of 6.9% and ROE of 2.7% in 1HFY19. Further, the company has a price-to-book value ratio of 1.3x, and this may look to be on a lower side while comparing with the industry average of 3.0x and represents an undervalued scenario at the current juncture. Over the last five years (FY14-FY18), the company’s revenue and EBITDA have grown at a CAGR of 17.0 percent and 12.6 percent, respectively. Keeping the view of decent outlook backed by integration with Tatts Group, synergistic capex in the digital business to ramp-up its online gaming business and continued focus on integration and business performance, we have valued the stock by using four-year average P/E of 22.4x for FY20E with consensus EPS of around $0.22 and have arrived at a target price upside of about single-digit growth (in %). Key risks related to rating include regulatory risk, changes in taxation policy, issue of new licenses, imposing of higher racefields’ product fees, intense competitions in the wagering industry, and highly dependent of discretionary spends, etc.

Key Financial Metrics:


(Source: Company Reports, Thomson Reuters)

Decent Standing from Margins’ Perspective: Tabcorp’s managed to maintain decent footing with respect to its key margins as its net margin, in 1H FY 2019, stood at 6.9% and the operating margin stood at 13.6% which can be considered at the decent levels. Moving forward, we expect that the company’s strategy to convert its top line into bottom line might support its net margins.

Analysing Lotteries & Keno Segment’s Performance: Tabcorp’s lotteries & keno segment posted revenues amounting to $1,409.2 million reflecting the rise of 18.1% while EBITDA rose 26.3% to $252.2 million in 1H FY 2019 as compared to pro-forma PCP. Out of the total segment’s revenues, lotteries generated $1,292.8 million implying a rise of 19.6% and was helped by game initiatives and ongoing deployment towards digital. However, the results also got aided by favourable jackpots. The digital share of turnover has witnessed a rise YoY and stood at 21.5% in 1H FY 2019 while, in 1H FY 2018, it was 15.6%. The keno revenues witnessed a rise of 3.7% as compared to pro-forma PCP and stood at $116.4 million in 1H FY 2019. We expect that the segment would primarily be supported by the increased deployments might continue to support digital growth and might place the company in a strong position to tap growth opportunities. Also, the company might also benefit from Tatts Group contribution.


Lotteries & Keno (Vs Pro-forma PCP) (Source: Company Reports)

Some Softness in Wagering & Media Revenues: Tabcorp’s wagering & media segment generated revenues amounting to $1,221.8 million which reflects the fall of 3.8% while its EBITDA witnessed 3.7% fall to $230.6 million as compared to pro-forma PCP. The Australia's leading multichannel wagering brand, “TAB”, increased customers and turnover amidst increased competitions during the first half of the year. The turnover of TAB was helped by robust digital growth. However, turnover and revenue of UBET witnessed the fall due to a legacy offering. The operating expenses witnessed a fall due to synergy benefits from the acquisitions, ceased Luxbet operation in December 2017, and the disciplined cost management approach. TAB also witnessed a growth of 6.7% in the active customer which demonstrates stronger brand positioning, digital and product offering.
 

Wagering & Media (Vs Pro-forma PCP) (Source: Company Reports)

Gaming Services’ Revenues witnessed a drop of 4%: Tabcorp’s gaming services segment posted revenues amounting to $155.8 million in 1H FY 2019 which reflects a fall of 4% on pro-forma PCP. The structure of gaming services was divided into two units i.e. regulatory services and venue services. The revenues from regulatory services witnessed the fall of 1.2% on pro-forma PCP to $48.6 million in 1H FY 2019 because of lower project work. The revenues from venue services stood at $107.2 million in 1H FY 2019 reflecting fall of 5.2% on pro-forma PCP primarily because of expiry of some Victorian EGM contracts. However, the progress continues to be made on long-term Tabcorp Gaming Solutions (TGS) contract extensions as 1/3rd of Victorian network has been contracted beyond 2022, though on lower margins. 
 
   
Gaming Services (Vs Pro-forma PCP) (Source: Company Reports)

Decent Dividend Yield Might Attract Investors: Tabcorp is possessing decent annual dividend yield of 4.47% which is higher than the industry median (hotels & entertainment services) of 3% reflecting that the company has been more efficient in managing capital as compared to broader industry. The company declared fully franked final dividend amounting to 10 cents per share with regards to the year ended June 30, 2018 and this was paid to shareholders on September 14, 2018. Tabcorp had made an announcement of interim dividend amounting to 11 cents per share with respect to present financial year which would be fully franked and would be paid on March 13, 2019 to the shareholders which are registered at February 19, 2019. The dividend reinvestment plan of Tabcorp would operate with respect to the above-mentioned interim dividend and no discount or underwriting would be applicable.  The company has been targeting a dividend pay-out ratio of 100% for the financial year 2019 of NPAT before significant items, amortization of Victorian Wagering and Betting Licence and purchase price accounting. In 1H FY19, the company had paid ordinary dividends amounting to $188.6 million which reflected the rise of 80.7% on the YoY basis. We expect that the target with respect to pay-out ratio and efficient capital management would bode well for the company moving forward and might prompt market players to deploy their investable capital.
 
 
TAH’s Historical Pay-out Ratio (Source: Company Reports)

Retirement of CFO: Recently, the company made an announcement that its chief financial officer, Mr. Damien Johnston, intends to retire in FY20. Mr. Johnston would remain with the company till the search process gets completed and till the appointment of a new chief financial officer. It would ensure an orderly succession and smooth transition.

What Might Drive TAH’s Future Performance: In 1H FY19, Tabcorp had managed to deliver $24 million EBITDA synergies and business improvements. During the same period, the company had delivered cost synergies amounting to $23 million which was on the back of organizational restructure, including corporate (almost complete), IT and fixed odds bookmaker consolidation. Also, the company has upgraded FY 2019 EBITDA synergies and business improvements to $55 million. For FY 2021, the company has been targeting $130 million-$145 million of EBITDA synergies and business improvements. For the same period, the company upgraded cost synergies target to $95 million from the earlier target of $80 million. In FY 2021, the company is expected to witness revenue benefits from yield alignment, market expansion, Trackside roll-out, and Keno initiatives while cost synergies are expected to come from technology integration, and operational and property rationalization. In FY 2021, there are expectations that total implementation costs would be $66 million (after tax) while integration capital expenditure is anticipated to be $70 million.
 

Integration: Synergies & Business Improvements (Source: Company Reports)

Stock Recommendation: On the daily chart of Tabcorp, Exponential Moving Average or EMA has been applied and default values were used for the purposes. After observation, it was noted that the stock price has crossed the EMA and moved upwards after the crossover reflecting a bullish momentum. Therefore, there are expectations that the company’s stock price might witness a rise moving forward.

Also, the company is expected to be benefited by synergies and business improvements, higher dividend yield than the industry median and efficient capital management. Additionally, we expect, that TAH would be strongly aided by its global business scale and by the opportunities which are present in the Australian market. Keeping the view of decent outlook backed by integration with Tatts Group, synergistic deployment in the digital business to ramp-up its online gaming business and continued focus on integration and business performance, we have valued the stock by using four-year average P/E of 22.4x for FY20E with consensus EPS of around $0.22 and have arrived at target price upside of about single-digit growth (in %). On the backdrop of aforesaid factors, we give a “Buy” recommendation on the stock at the current market price of A$4.790 per share (up 1.915% on 07 March 2019).

 
TAH Daily Chart (Source: Thomson Reuters)

 
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