Tabcorp Holdings: Keeping our eye on the demerger prize

About the author:

Kurt Gelsomino
Author name:
By Kurt Gelsomino
Job title:
Analyst
Date posted:
19 August 2021, 7:30 AM
Sectors Covered:
Building Materials, Industrials, Gaming

  • Tabcorp Holdings' (ASX:TAH) FY21 result was in line with our forecasts and consensus. A record result from Lotteries & Keno (L&K) was the highlight and illustrated the resilience of the business (EBITDA +14.4%).
  • COVID-19 restrictions have impacted Wagering & Media (W&M) and Gaming Services (GS) trading YTD. We expect continued strong trading from L&K and TAH plans to target a further A$20-25m in 3S cost savings. The demerger of L&K is targeting completion by June 2022.
  • We moderate 1H22 assumptions for W&M and GS, which results in 11.2% reduction in FY22F NPAT (FY23F NPAT largely unchanged). We continue to see the risk/reward profile as skewed to the upside. Add maintained.

FY21 in line with expectations; solid outcome in far from perfect conditions

TAH’s FY21 result was in line with our forecasts and consensus expectations, with EBITDA +11.3% to A$1,107m and underlying NPAT +47.2% to A$399m.

L&K (EBITDA +14.4%) was the standout, benefitting from increased digital penetration (+480bp to 32.8%) and strong base game performance (Saturday Lotto/Set for Life refreshes and COVID tailwinds), which more than offset a 20% reduction in cumulative Jackpot value offered.

W&M also delivered an improved result (EBITDA +11.6%), with total wagering turnover +16.8% (digital +27.1% yoy) and 2H21 digital market share performance better than feared and showing some initial signs of stabilisation. GS delivered a better 2H21 result as venue restrictions eased (FY21 EBITDA -15.4% yoy). 

Operating cashflow was strong, +7.3% to A$720m and cash conversion remained high at 103%. This (combined with its A$587m equity raising) enabled Gross Debt/EBITDA to finish at 2.4x (vs. 3.8x the pcp) and slightly below the bottom end of the Board’s 2.5-3.0x target range. A 7.0pcs ff final dividend was declared.

Restrictions weigh on near-term W&M/GS trading; progressing L&K demerger

As expected, no formal FY22 guidance was provided. TAH provided a trading update for the month of July, with recent lockdown restrictions adversely impacting W&M revenue by A$30-40m and GS by A$5-10m. A ‘marginally positive’ benefit was seen in Lotteries and Keno was adversely impacted by NSW retail closures.

TAH will provide its next trading update at its AGM on 19 October.

With six large Jackpots (MorgansE cumulative value A$383m vs. A$300m the pcp) so far and continued strong underlying sales demand, we think L&K has made a positive start to FY22 and estimate total national lottery sales have risen ~10% FY22 YTD.

We expect FY22 margins should continue to benefit from an ongoing increase in digital sales penetration. We think the Oz Lotto game refresh will most likely be implemented in 4Q22, with the expected ensuing benefit of increased sales demand/price improvement to largely fall in FY23.

TAH delivered its final incremental merger synergies in FY21 (A$95m cumulative), as well as A$30m from its 3S Optimisation Program. A further A$20-25m in EBIT savings from 3S are targeted in FY22.

W&M will also continue to progress its growth strategy of improving its customer experience, growing its Sky business and executing targeted international expansion. While COVID will prove challenging in the short term, GS will continue its turnaround plan.

TAH is targeting to implement its demerger of L&K by no later than June 2022.

Forecast changes

Our FY22 EBITDA forecast has fallen 5.9% to A$1,095m (-1.1% yoy) and NPAT has been lowered 11.2% to A$389m (-2.5% yoy). Our FY23 forecasts remain largely unchanged (NPAT -1.0%). The FY22 revisions reflect more conservative 1H22 revenue/margin assumptions for W&M and GS given the current lockdowns across NSW and VIC.

Forecasting the impact of the lockdowns is challenging and will ultimately depend on the duration/nature of restrictions. Our L&K forecasts are unchanged and could prove conservative if the strong Jackpot run continues. Lower net debt has seen our SOTP valuation and price target rise to (login to view).

Investment view: Add maintained

We continue to view the risk/return profile of TAH as asymmetrically skewed to the upside over the next ~12 months as the demerger of the high quality, infrastructure like L&K business progresses.

At the current share price, we estimate L&K is trading on an FY22/23F EBITDA multiple of 15.2x/14.5x and think this can re-rate to between 16.0x-20.0x on a standalone basis over time. Add maintained.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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