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

Strong Performance in FY19: Tabcorp Holdings Limited (ASX: TAH) is a mid-to-large cap diversified gambling entertainment company with the market capitalisation of ~$9.38 Bn as of 6 February 2020. It released a strong set of numbers for the year ended 30 June 2019, wherein top-line, and bottom-line increased by 45.9% and 1,163.1% to $5,482.2 Mn and $362.5 Mn as compared to the prior year. It was primarily driven by (1) first full-year contribution from Tatts and ongoing business developments, (2) positive step-change in Lotteries and Keno performance, with record result from successful game portfolio initiatives, and (3) strong growth in digital and retail channel, and favorable jackpots. During the year, the company focused on driving sustainable growth through prudent investment in digital and retail channels, as well as game innovation. With respect to Wagering & Media, the focus in FY19 was an effective integration and transformation of the business. This program happens to be on track to have UBET fully aligned with superior TAB customer experience in 2H FY 2020.

The management is confident that the company owns a strong and resilient business, with a portfolio of high-quality assets and earnings, which is diversified throughout the businesses of Lotteries and Keno, Wagering and Media, and Gaming Services. Further, the complex Tabcorp/Tatts integration program is ahead of schedule and is delivering benefits for the shareholders.  In FY19, there was the delivery of $64 million in EBITDA synergies and business improvements, ahead of plan, and there has been upgradation of expectations for total operational expenditure synergies under the integration program. Moreover, TAH remains on track to deliver on the upgraded total target in the range of $130 million and $145 million in EBITDA from synergies and business improvements in FY 2021. With respect to the dividend, the company announced the final dividend of 11 cents per share, fully franked, which took full-year dividend to 22 cps, representing a dividend payout ratio of 100% of NPAT before significant items, amortisation of Victorian Wagering and Betting Licence, and PPA (or purchase price accounting), which is in-line with the stated policy.

The company added that disciplined execution of the integration program will be a priority in the coming year, with the program largely scheduled to be completed by the end of FY 2020. The company will continue to prioritise its deployment towards compliance, risk management as well as responsible gambling, while at the same time, it will continue to be disciplined with regards to operating expense, capital investment and balance sheet management. Considering the unique and attractive portfolio of businesses, significant future upside potential, and strong & sustainable foundation, we have valued the stock using a relative valuation method, i.e., EV/Sales multiple, and for that purpose, we have considered Aristocrat Leisure Ltd (ASX: ALL), Star Entertainment Group Ltd (ASX: SGR), Crown Resorts Ltd (ASX: CWN), Skycity Entertainment Group Ltd (ASX: SKC), as peer group which come under Casinos & Gaming category, and arrived at a target price of lower double-digit growth (in % terms). At CMP of A$4.57, TAH is trading at a PE multiple of 22.85x FY20E consensus EPS of $0.20.

Top 10 Shareholders: The following table provides a broader overview of the top 10 shareholders in TAH:


Top 10 Shareholders (Source: Thomson Reuters)

Overview of Key Margins: The company’s net margin stood at 6.8% in FY19 which reflects an increase from FY18 figure of 4% and, therefore, it can be said that TAH has improved its capabilities to convert its top-line into the bottom-line. Notably, its operating margin stood at 13.2% as compared to FY18 figure of 9.8%. RoE stood at 5.2% in FY19 which implies an improvement from FY18 figure of 3.5% and, therefore, it can be said that TAH has been providing decent returns to its shareholders. Debt/Equity ratio has fallen from 0.68x in FY15 to 0.52x in FY19. Generally, lower debt on the balance sheet reflects stability and, as a result, the company could focus on its long-term growth objectives. Notably, there has been a marginal improvement in the company’s current ratio as in FY19 the figure was 0.48x while in FY18 it was 0.47x.

 

Key Metrics (Source: Thomson Reuters)

Appointment of Non-Executive Director: Tabcorp Holdings Limited recently made an announcement that Anne Brennan would be joining the company’s Board as a Non-Executive Director. The company’s key personnel have stated that Anne happens to be a highly regarded and experienced public company director, and she possesses a broad industry experience, which includes gambling entertainment. It was also added that her strong commercial judgement and extensive professional experience in audit, corporate finance as well as transaction services would provide value to the company.

How Lotteries & Keno Business Performed: The company generated revenues from Lotteries & Keno of $2,864.9 million in FY19, reflecting a rise of 22.8% as compared to pro-forma pcp. During the same period, EBITDA amounted to $509.0 million, implying an increase of 28.9% on pro-forma pcp. The positive step-change in the performance was because of the continued game innovation, and upweighted investment towards technology as well as data-led capability.


Lotteries & Keno (Source: Company Reports)

Focus of Wagering and Media Business: TAH generated revenues amounting to $2,312.2 million from its Wagering and Media business while EBITDA amounted to $416.0 million in FY19. In Wagering and Media, the focus in FY19 was the transformation of the business and the integration program to bring together TAB and Tatts’ former wagering business, i.e., UBET. This business would continue to execute against the strategy for sustained profitable market leadership. The main initiatives which are to be delivered in FY 2020 are the implementation of a new data platform and further digitalisation of retail experience.


Wagering and Media (Source: Company Reports)

Overview of Gaming Services: The company’s Gaming Services business posted revenues of $304.0 million, while its EBITDA amounted to $139.7 million in FY19. The structure of gaming services was simplified into 2 units during FY19: 1) MAX Venue Services (venue solutions, gaming systems as well as support services), and 2) MAX Regulatory Services (monitoring and related services). As per the release, the initiatives during the year revolved around creating a sustainable base for the future.


Gaming Services (Source: Company Reports)

Rise in Full-Year Dividend: The company made an announcement of final dividend amounting to 11 cents per share fully franked. The interim and final dividends with respect to FY19 totalled 22 cps (fully franked) reflecting an increase of 4.8% on the YoY basis, equating to the dividend payout ratio of 100% of NPAT before significant items, amortisation of Victorian Wagering and Betting Licence, and PPA. The annual dividend yield of the company is about 5.0% on a five-year average basis (FY15-19). At CMP of $4.570, the annual dividend yield of the company stands at 4.75% which is higher than the industry median of 3.7%. Further, the company has been targeting a dividend pay-out ratio of 100% for FY 2020 of NPAT before significant items, amortization of Victorian Wagering and Betting Licence and purchase price accounting. Therefore, the stock might attract the attention of the investors seeking dividend income.


Key Numbers (Source: Company Reports)

What to Expect From TAH: With Tabcorp-Tatts combination, the company has created a robust and diversified portfolio of high-quality businesses throughout Lotteries & Keno, Wagering & Media and Gaming Services. The company’s businesses are having a clear set of priorities to build on competitive advantages and drive long-term profitable growth. The company is focused on generating attractive and sustainable returns for its shareholders over the long term and delivering benefits for the partners, customers and community.

The company’s Lotteries and Keno is possessing robust momentum, and it is well-placed to increase the share of the gambling entertainment market with the help of game portfolio innovation along with growth in digital. Also, Wagering and Media strategy are on track to integrate and transform the business via enhanced digital and data capability, which creates sustainable market leadership and opportunities for future expansion. Finally, Gaming Services has been creating a solid and sustainable base to pursue geographic as well as adjacent growth opportunities. Notably, the company is expected to announce its half-year results for the period ended December 31, 2019, on February 19, 2020.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/Sales Based Relative Valuation

EV/Sales Based Relative Valuation (Source: Thomson Reuters)


Historical PE band (Source: Thomson Reuters)

Stock Recommendation: TAH has been actively managing capital, and the Board has been regularly reviewing the alternatives to distribute value created to its shareholders. Because of reliable free cashflows generated by the company’s unique portfolio of businesses, it has consistently adopted the high payout ratio policy and returned franking credits to its shareholders. The company’s target dividend payout ratio in FY 2020 is 100% of NPAT before significant items, amortisation of Victorian Wagering and Betting Licence, and PPA. Considering the unique and attractive portfolio of businesses, significant future upside potential, and strong & sustainable foundation, we have valued the stock using a relative valuation method, i.e., EV/Sales multiple, and for that purpose, we have considered Aristocrat Leisure Ltd (ASX: ALL), Star Entertainment Group Ltd (ASX: SGR), Crown Resorts Ltd (ASX: CWN), Skycity Entertainment Group Ltd (ASX: SKC), as peer group which come under Casinos & Gaming category. As a result, we have arrived at a target price of lower double-digit growth (in % terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $4.570, down 1.296% on 6th February 2020.
 
 
TAH Daily Technical Chart (Source: Thomson Reuters)

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