Tabcorp Holdings: More normalised trading conditions in sight
About the author:
- Author name:
- By Kurt Gelsomino
- Job title:
- Former Analyst
- Date posted:
- 20 October 2021, 8:30 AM
- Sectors Covered:
- Building Materials, Industrials, Gaming
- COVID restrictions had a material impact on Tabcorp Holdings' (ASX:TAH) 1Q22 trading, with group revenue down 7.3% on the pcp and pressure on margins from increased wagering generosities and the non-repeat of COVID cost mitigation measures in the pcp.
- The Lotteries & Keno (L&K) business continued to illustrate its defensive characteristics and the demerger remains on track to be implemented by Jun-22.
- We lower our FY22/23/24 NPAT forecasts 11%/4%/4% due largely to more conservative margin assumptions on Wagering & Media (W&M) and Gaming Services (GS). Our L&K forecasts are unchanged.
- We continue to see TAH’s risk/reward profile as skewed to the upside as the demerger is progressed. Add rating maintained.
COVID restrictions weigh on 1Q22 trading; demerger tracking to plan
TAH provided a 1Q22 trading update with its AGM. 1Q22 group revenue declined 7.3% on the pcp, with COVID restrictions having a significant impact on trading. L&K continued to illustrate its defensive characteristics. While the top-line trends from W&M and GS were broadly in-line with our expectations, the cost pressures flagged indicated weaker than expected 1H22 margin expectations.
Lotteries & Keno: 1Q22 revenue was -0.2% on the pcp, which reflected 1.4% growth in Lotteries revenue (driven by Powerball and Saturday Lotto) and a 19.3% decline in Keno revenue (the impact of venue closures). We understand that the OzLotto refresh remains on track to be executed in the 4Q22, with the full year benefit of the change to be seen in FY23.
Wagering & Media: 1Q22 revenue -17.2% yoy (cycling 2.9% growth in pcp). The top-line result was significantly impacted by venue closures throughout the period, partially offset by some transfer to its digital channel.Competition remains fierce, with TAH noting the significant increase in generosities (has impacted margin) and advertising investment from the online bookmarkers during the period. TAH has seen growth in its own opex through increased technology investment and the non-repeat of COVID mitigation measures implemented in the pcp.
Gaming Services: 1Q22 revenue -14.6% yoy (cycling -55.2% in 1Q21). Similarly, venue closures continued to adversely impact the business and TAH continued to provide fee relief to closed venues. Again, significant opex growth was flagged due to the non-repeat of COVID mitigation measures taken in the pcp.
Demerger update: There was limited new information on the proposed demerger, with the proposed Board appointments of the respective companies outlined. Importantly, the demerger timetable remains unchanged, with TAH now in its execution phase, the scheme booklet is still expected to be released in Apr-22 and the demerger to be implemented by no later than Jun-22.
Forecast and valuation changes
Our FY22F group EBITDA has fallen 5.7% to A$1,033m and underlying NPAT has reduced 11.1% to A$346m.
While our L&K forecasts have remained largely unchanged (and could prove conservative if the Jackpot run improves), we have lowered our W&M (EBITDA -10.9%) and GS (EBITDA -25.1%) forecasts primarily on the back of the variable contribution margin pressure flagged in W&M and opex growth seen across the business.
The underlying NPAT downgrades in FY23F/24F are less material at 4.1%/3.5%, with our L&K forecasts remaining unchanged, partially offset by slightly more conservative margin assumptions for the W&M and GS businesses. Slightly higher net debt has seen our SOTP valuation decrease marginally to (login to view).
Investment view: Add rating maintained
Clearly, it was a challenging 1Q22 for TAH’s W&M and GS businesses, which were significantly impacted by prolonged venue closures and profitability further impacted by the company’s decision to implement less severe cost mitigation measures.
With Australia’s vaccination rates continuing to advance, we expect trading conditions will improve throughout the 2Q22, which should provide a more supportive backdrop for Wagering & GamingCo to progress its growth strategy.
We continue to view the risk/return profile of TAH as asymmetrically skewed to the upside 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 EV/EBITDA multiple of 15.8x (average of FY22F/23F EBITDA), which we think can re-rate to between 16.0x to 20.0x on a standalone basis over time. We maintain an Add rating, (login to view) price target.
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