Tabcorp Holdings Limited

Tabcorp Holdings Limited (ASX: TAH) is an Australian-based diversified gambling entertainment group. It also has a  wagering pooling hub in the Isle of Man and a vision distribution hub in Las Vegas, USA. The company operates through three business segments viz; Lotteries and Keno; Wagering and Media; and Gaming Services. It manages various iconic brands that include The Lott, Keno, TAB, SKY Racing, MAX, among others.

Solid Performance in FY21 (For the Year Ended 30 June 2021)

• It has recorded an 8.8% growth in its overall revenue to $5,686 million driven by growth across business segments barring the gaming services segment.
• Revenue from the Lotteries & Keno segment increased by 9.9% YoY to $3,206 million with EBITDA improved 14.4% to $620 million supported by the benefit of game development as well as active portfolio and sequence management.
• Gaming Services revenues, however, reduced by 17.2% YoY to $183 million mainly weighed down by lower fees earned during the duration of lockdown and limitations on density.
• The board has declared a final dividend of 7.0 cents per share, fully franked, that signified a payout ratio of 80% of NPAT before significant items.
• It attained EBITDA growth of 11.3% YoY before significant items driven by a strong performance by Lotteries & Keno business along with the improvement in Wagering & Media business.

Exhibit 1: Segmental Revenue Performance

Source: Analysis by Kalkine Group

Intends to Demerge its Lotteries and Keno Business

Following a detailed strategic review to enhance shareholders’ value, the company intends to demerge its Lotteries & Keno business. This will enable the company to create two separate market-leading companies namely Lotteries & KenoCo and Wagering & GamingCo, which will hold separate operating structures as well as strategies and growth prospects. The proposed demerger will also aid the businesses in boosting scale and diversification as well as assist in partaking in future M&A activity and enable access to new investors. The proposed demerger is expected to be completed by the end of June 2022, post the requisite approvals.

Betting High on Optimisation Program

TAH continued to progress with its three-year enterprise-wide optimisation program, ‘3S’ (Simpler, Smarter, Stronger) as the company has achieved EBIT savings of  $30 million in FY21. This was achieved due to enhanced reseller agreement at Lotteries & Keno, along with agency rationalisation at Wagering & Media, and benefit of changes in operating structure at Wagering & Media and Gaming Services. Further, the advantage of enterprise-wide process simplification and redesign also contributed to the savings. Additionally, the company is eyeing further EBIT savings in the range of $20-25 million from this particular program in FY22.

Solid Financial Position

The company has a robust as well as flexible financial position with a healthy balance sheet following the capital raising program in September 2020  and solid operating cash flow conversion. The company has utilised the funds from the equity raising of around $600 million to repay its existing debt. Further, the sale of its stake in Jumbo Interactive Limited has enabled the company to generate gross proceeds of $98 million.

Moreover, the pay-out remained at the top end of the target range. The company has witnessed significant improvement in ROIC in FY21 to 7.9% compared to 6.4% in FY20 and it is eyeing further improvement. Notably, the gearing stood at 2.4x in FY21 against the target range of 2.5x to 3.0x.

Key Metrics

TAH continued to witness growth in its revenue as well as gross profit over the years, barring in FY20 that translated into a robust revenue CAGR of 26.3% over FY17-21. Further, the gross profit has also witnessed a healthy CAGR of 17.7% over FY17-21.

However, TAH’s gross margin continued to decline over the year to 33.7% in FY21 compared to 44.7% in FY17. Its ROE remained volatile during FY17-21, although the ROE has rebounded sharply in FY21 to 4.2% from -13.2% in FY20.

Exhibit 2: Key Financial Metrics

Data Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 21.10% of the total shareholding while the top four constitute the maximum holding. Notably, AustralianSuper and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 7.83% and 2.85%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Data Source:  Analysis by Kalkine Group 

Key Risks

The group’s businesses are regulated by laws, licences, regulations, rules, permits, and other approvals. Any significant breach of the pertinent obligations or compliance would adversely affect its financial performance. Changes in laws and the regulatory environment would also have a bearing on its operations. Further, its businesses are susceptible to a slowdown in consumer discretionary spending and changes in consumer preferences. Adverse movements in interest rates and foreign currency exchange rates are also other potential risks.

Outlook

The management believes that the company’s core businesses are better placed to compete on a standalone basis going ahead. The management also stated that the growth in its Lotteries & Keno business to be fuelled by the benefits of product innovation, expanded participation across entire channels, and digital development. The growth at its Wagering & Media business will be driven by an enhanced customer experience along with the advantage of domestic structural reform and expansion in its international presence. Further, it is advancing on the execution of its strategy to simplify and streamline the gaming services business.

Valuation Methodology: Price/EPS Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period) 

Stock Information                                           

TAH has delivered 9-month and one-year returns of ~+21.15% and ~+44.44%, respectively.

The stock has been valued using a Price/EPS multiple-based illustrative relative valuation and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to Price/EPS Multiple (NTM) (Peer Average), considering robust financial position as well as decent outlook.

For the purposes of relative valuation, peers like Jumbo Interactive Ltd (JIN.AX), Aristocrat Leisure Ltd (ALL.AX), among others have been considered.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the current market price of $4.76 per share (Time: 12:35 PM (GMT +10), Sydney, Australia) on 22^nd September 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices