Heightened Risks For Tabcorp

This story features TABCORP HOLDINGS LIMITED. For more info SHARE ANALYSIS: TAH

Structural change in the wagering industry has met the coronavirus pandemic head on, resulting in heightened risks for Tabcorp.

-Risks building around extended venue closures in Victoria
-Lockdowns accelerating shift to online gambling
-Retail wagering unlikely to return to pre-pandemic levels
 

By Eva Brocklehurst

Challenges are mounting for Tabcorp ((TAH)), highlighted by tighter restrictions on clubs and pubs in Victoria, which come amid structural changes in the wagering industry.

The company has guided to FY20 operating earnings (EBITDA) of $995m and net profit of $270m. The transparency of the lotteries division implies the slight beat to UBS estimates has probably stemmed from wagering.

Potential changes could reshape the wagering division and the broker assesses this continues to overhang the shares. The upcoming result will be negatively affected by the closure of pubs and clubs and a difficult comparable period in lotteries, but the next 2-3 years should mean higher profit.

Ultimately, UBS does not believe the pandemic will have a substantial impact on Tabcorp's cash flow over the medium term and the stock is at an attractive entry point. On the other hand, Morgan Stanley remains cautious and believes the update underscores the structural and cyclical headwinds that are facing the company.

Citi notes no commentary was provided regarding trading in July but risks are building around extended venue closures in Victoria. First half wagering turnover and operating earnings are expected to decline by -5% and -11%, respectively.

The broker makes no changes to dividend forecasts, anticipating an 8c dividend with the FY21 results, and considers the stock fair value at current prices, although there are several risks that weigh. Citi does not rule out an equity raising, as the share price has rebounded from its lows of March.

Impairments

While guidance for earnings and net profit was slightly ahead of most expectations the company has announced significant impairments for the wagering, media & gaming divisions of -$990m to $1bn.

Generally, this reflects the pressures on retail wagering in addition to the macro effects of the pandemic. UBS is not surprised at the impairment as these divisions underperformed and there are structural changes occurring.

However, while the quantum is large, there is no ongoing cash flow or balance sheet impact. The company has noted the competitive intensity and structural changes in wagering & media, particularly in the digital segment.

Online

The retail wagering channel has been severely affected by the pandemic and is now primed for further shutdowns now being enforced across Victoria. With major sports severely restricted this has also trampled the more buoyant sports betting over much of the June quarter.

Morgans does not expect the retail channel will recover for quite some time, assessing the lockdowns, which have varied from two months (NSW) to at least five months (Victoria) was always going to accelerate the structural shift to online.

Citi agrees and suspects retail wagering will not return to pre-pandemic levels, noting online has been gaining market share steadily for several years and, from 51% in FY20 is likely to increase to 70% by FY27.

Lottery revenue has increased as pubs, clubs and casinos were closed and Citi estimates, adjusting for the jackpot level, Powerball and OzLotto produced ticket sales growth of 30% and 26%, respectively over FY20.

Ord Minnett concludes Tabcorp faces declining retail, tote and race wagering while its share of growth segments such as fixed-odds, online and sport is being challenged by corporate bookmakers.

FNArena's database has two Buy ratings, four Hold and one Sell (Ord Minnett). The consensus target is $3.69, signalling 2.7% upside to the last share price.

See also, Tabcorp Gains More Digital Lottery Power on June 30, 2020.

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