Tabcorp Holdings: 1H23 earnings - Aim high

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
22 February 2023, 7:30 AM
Sectors Covered:
Gaming and Retail

  • Tabcorp Holdings (ASX:TAH) reported 24% higher EBITDA in 1H23, in line with consensus. A post-COVID-19 surge in cash wagering was a key driver. TAH set ambitious targets for FY25.
  • We have lowered our EBITDA estimate for FY23 by 1% and increased our EBITDA estimate for FY24 by 1%.
  • We reiterate our Add rating and (login to view) target price.

Result synopsis

Tabcorp (ASX: TAH) reported EBITDA of $197m, up 24% on the pro forma earnings in 1H22. Revenue was up 11%. The $38m increase in EBITDA was driven by growth in the variable contribution of both the Wagering & Media (+$24m) and Gaming Services (+$27m) divisions, offset by $13m higher opex.

TAH held its digital market share steady at 25.1%, arresting a decline that has been in train since 2019. NPAT was $47.3m, 5.9% above our estimate, with a low effective tax rate offsetting higher finance costs. Net debt was higher than expected at $382m, but cash received since the period-end reduced this to $256m.

TAH released details of its ‘TAB 25’ operational and financial targets for FY25 and upgraded its FY23 guidance for opex efficiency, reflecting the initial momentum of the Genesis program.

Morgans comment #1: TAB 25 is a blueprint for value creation

TAH has set out its key targets for FY25 or, as the CEO described it, ‘a tale of six halves’. The targets are ambitious. TAH aims to increase its share of the digital market to 30% by FY25, implying double-digit annual growth in the digital business.

TAH launched its new app in 1H23 and reports 8.3% growth in active digital customers since relaunch. TAH believes this new app, combined an enhanced consumer experience (CX) and new products, including same-race multi and Bets Friend (a social feature inspired by TAH’s investment in Dabble), will see it not only maintain its share of the market, but actively grow it.

The second major component of TAB 25 is a reduction in opex to $600-620m. If it were just subject to inflation, TAH’s opex would rise to around $700m by FY25 if no action was taken to actively reduce it. TAH’s ambition to lower opex by $80- 100m, however, is predicated on an improved focus on profitability throughout the organisation, in areas such as labour productivity, technology and procurement.

TAH says it does not intend to take a ‘slash and burn’ approach to cost-out programmes. We look forward to TAH’s investor day in May to provide further details of how it intends to achieve the requisite savings. We have built an assumption of $624m opex into our FY25 estimates.

A third key outcome from TAB 25 is doubling the return on invested capital (ROIC) to 10%. Our estimates have ROIC from 5.3% in FY23 to 9.0% in FY25, which may imply that either TAH has its sights set on a higher EBIT in FY25 than we forecast ($219m) or that it has plans to reduce its invested capital base beyond our forecast. Or both.

Management incentivisation is aligned with the TAB 25 targets and, if they can be achieved, we believe the strategy will create genuine shareholder value.

Morgans comment #2: 1H23 growth propelled by post-COVID rebound

Normal service is resumed. TAH achieved 8.6% growth in Wagering & Media revenue in 1H23. This includes 58.1% growth in cash wagering revenue as venues reopened post-COVID lockdowns.

A post-COVID recovery was also evident in Gaming Services, which reported 36.7% revenue growth.

Changes to earnings estimates

TAH changed its guidance for FY23 opex growth to 2-3%, on FY22 pro forma, from 3-4%. This implies FY23F opex of $640-646m (MorgansF: $642m). We have lowered our FY22 EBITDA by 1% to $400m due to a slightly lower estimate of variable contribution.

Our FY24 EBITDA estimate increases 1% to $431m. The new USPP takes effect in March and we have increased our finance costs, resulting in a 3% reduction in forecast NPAT in FY23 and a 4% reduction in FY24.

Investment view

TAB is the best known brand in Australian wagering, but it has, in our view, punched below its weight for some time in the important digital field. If the company can turn this around, as it plans to do, while improving opex efficiency, it will create real shareholder value.

There are early signs that traction is being established and we retain an Add rating. Our target price remains (login to view), giving 18% potential TSR.

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You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

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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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