Tabcorp Holdings: Lotteries continuing to shine

About the author:

Kurt Gelsomino
Author name:
By Kurt Gelsomino
Job title:
Former Analyst
Date posted:
18 February 2022, 7:30 AM
Sectors Covered:
Building Materials, Industrials, Gaming

  • Tabcorp Holdings' (ASX:TAH) interim result was ahead of consensus expectations, with another record result from Lotteries & Keno (L&K) the clear highlight.
  • As expected, Wagering & Media (W&M) and Gaming Services (GS) were impacted by venue closures; however, the businesses should benefit from an easing in COVID restrictions from the 2H22 onwards.
  • Cash generation remained very strong and continues to see leverage at the bottom-end of the Board’s target range. This should ensure both L&K and Wagering & GamingCo are adequately funded to pursue their respective growth strategies post demerger.
  • We upgrade our forecasts following a stronger than expected interim result. We continue to view the risk/reward profile of TAH as attractive as its demerger is progressed. Add rating maintained.

Tabcorp Holdings

TAH reported 1H22 revenue of A$2,934m (+2.2% yoy), underlying EBITDA of A$529m (-5.5%) and underlying NPAT of A$187m (-9.7%). The result materially exceeded our forecast and was 6.5% ahead of consensus NPAT. 

The beat for us was primarily driven by another record result from L&K, with EBITDA +15% to A$358m and benefitting from a strengthening 2Q22 jackpot environment, ongoing increase in digital penetration (+460bp yoy to 36.7%) and active game/sequence management. With TAH cycling a weak pcp, we note ‘large jackpots’ of 23 were only ~1-2 above ‘average’. 

W&M (EBITDA -34.8% to A$148m) was in-line with our forecast, with profitability impacted by prolonged venue restrictions in its key NSW market and a highly competitive operating environment (inc. generosities and advertising spend). Digital market share trends started to recover over the 2Q22 as restrictions were eased, enhancing the value proposition of its Digital-in-Venue product. 

GS (EBITDA -4.5% to A$21m) was ahead of our expectations, albeit from a low base. Importantly, the segment returned to its full fee model on 1 December 2021. At this stage, ~50% of its MAX Venue Services EGM contracts (expiring Aug-22) have been extended (to 2027-30) on a full service model, ~30% will not be extended and the remaining ~20% are under discussions. 

Operating cashflow remained solid at A$435m (vs. A$582m the pcp), with conversion (~116%) benefitting from a build in payables at y/e and is expected to normalise at ~100% over FY22. Gross debt / EBITDA was 2.5x and at the bottom end of TAH’s 2.5-3.0x target range, which provides a strong foundation for both businesses to pursue their respective growth strategies post demerger.

Demerger on track and the key near-term focus

Limited FY22 outlook commentary was provided, with TAH’s immediate focus clearly on progressing the demerger of L&K, which remains on track for June 2022 implementation (scheme booklet expected in late March/April).

The Oz Lotto (c14% of 1H22 L&K sales) game change is expected to be implemented in May 2022. The changes are centred on strengthening the jackpot positioning of the game and will result in the game price rising 8.3%. TAH expects to retain ~50% of the game increase and the balance through increased sales. Large jackpots have started 2H22 positively with 8 (inc. 17 Feb) to date, with TAH to cycle 23 in the 2H. 

Both W&M and GS should benefit from a normalisation in venue restrictions in the 2H22 (vs. the 1H22). TAH plans to launch a refreshed strategy for W&M post the demerger and will release a new App in time for the Spring Carnival (1H23).

FY22 net yields are expected to be within its 13.0-13.5% target (vs. 12.9% in 1H22) and discussions are ongoing in regard to a potential WA TAB transaction and VIC license renewal (although confidentiality precluded any update on these fronts).

Investment view

A stronger than expected L&K result has more than offset moderated assumptions across W&M/GS and resulted in our FY22/23/24 group NPAT forecasts increasing 11.0/5.2%/5.1%. TAH’s interim result has again highlighted the high-quality, infrastructure-like nature of its L&K business (~75% of our SOTP EV).

We estimate L&K is currently trading on NTM EV/EBITDA multiple of ~15.5x, which we continue to believe can re-rate to >16x on a standalone basis in time. We continue to view the TAH risk/reward profile as attractive and maintain an Add rating.

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