We recently researched Tabcorp Holdings (ASX:TAH) in The Dynamic Investor. Significant weakness in the shares since the FY23 results release in August last year prompted us to consider whether TAH shares may be presenting value. Since our report, the shares have gained nearly 10%. Accordingly, we consider whether the shares still present an attractive entry opportunity.

About Tabcorp Holdings

Tabcorp Holdings is a major provider of omni-channel wagering, racing and sports broadcasting, and gaming services solutions. Its wagering business (TAB) is one of the most recognised brands in the sector, with an extensive network of over 4,000 venues. Wagering operations comprise more than 80% of earnings.

In TAH’s Media business, Sky is a B2B leader in aggregated racing and sports broadcasting. The Gaming Services business is a B2B provider of monitoring systems for regulatory purposes, as well as financing and maintenance for Electronic Gaming Machines.

Key Fundamental Drivers

Volume Recovery Expected

Australian wagering volumes have consolidated at ~15% above pre-COVID levels. However, there has been recent weakness, most likely attributed to BetStop. The latter is a National Self-Exclusion Register that was launched in August 2023. In context, it is estimated that BetStop is likely to have impacted ~5% of overall volumes in the first year since its launch, based on assumptions around sign-ups and per-capita wagering expenditure.

The Australian wagering market is expected to return to growth in 1H25, as it cycles BetStop in August 2024. However, the expectation for a return to growth is dependent on: i) The Spring Carnival, which falls in the December quarter and can be impacted by weather and win rates and ii) The assumption that there are no new adverse regulatory changes.

Importantly, TAH has high fixed cost leverage to improving volumes. Given the recent trends of incremental market share gains, improving market conditions support the earnings base. Having said that, it is worth noting that whilst the top three Australian wagering players (Sportsbet, Tabcorp and Entain’s Neds and Ladbrokes) still dominate a highly fragmented market – 2nd tier players such as PointsBet and BlueBet appear to be taking share.

Cost Savings Support Operating Leverage

The Company has provided guidance for operating expenditure growth of +2.75% growth compared to FY23. This is due to investment in data analytics/brand repositioning towards sports and younger audiences.

Despite progress on cost savings, EBITDA margin is expected to decline in FY24. However, a recovery is expected in FY25 primarily on the back of additional revenue from 100% ownership under the Victorian licence structure.

Regulatory Risks Placated

The Company recently reported a significant non-cash impairment ($732m). This mainly relates to the NSW wagering licence. TAH commented that the impairment reflected softness in the Australian wagering market. The impairment also reflects higher taxes in NSW following the end of transitional payments to TAH. These had been in place following the previously-announced increase in the NSW Point of Consumption Tax (POCT) rate in June 2022.

Earlier this month, the NSW Government announced that it intends to consider a proposal from Tabcorp to increase the POCT rate in NSW from 15% to 20%. This would place NSW in line with other states.

Are Concerns About Leadership Abating?

On 14 March 2024, the Company announced the immediate resignation of Managing Director (MD) and CEO Adam Rytenskild. Mr Rytenskild had been with TAH for 23 years, including 6½ years as MD & CEO and MD – Wagering and Media. Non-Executive Chairman Bruce Akhurst subsequently stepped in as Executive Chairman in the interim.

Mr Akhurst’s lack of wagering experience, as well as uncertainty about the timeframe for a new appointment had been a source of market concern. It is also worth noting that market concerns about a new MD/CEO extend to whether there would be a change in some of the Company’s strategic targets.

Last week, the Company appointed former AFL CEO Gillon McLachlan, as new MD and CEO-elect. While not having direct wagering experience, Mr McLachlan’s appointment (effective 5 August 2024) is seen as a positive. In particular, he has strong media experience and strong exposure/experience to wagering.

Gearing Expected to Reduce

Gearing as at 31 December 2023 was 0.9x and is expected to increase to ~2.5x at the end of FY24. This is due to TAH having to pay an upfront licence fee to the Victorian Government from existing debt facilities. Whilst above its 1.0-1.5x target gearing ratio (established post-demerger), the highly cash-generative nature of the business means that such gearing levels are considered manageable.

Also, the movement in the gearing level outside of the target range is backed by TAH strategy of allowing gearing to temporarily fall outside the target range for significant / accretive acquisitions. Notwithstanding, the gearing level is expected to fall back within the target range by FY26. This is because the earnings uplift from the new Victorian licence deal will not fully annualise until FY26.

Fundamental View

Notwithstanding the recent recovery in shares, TAH is trading on a 1-year forward P/E multiple of ~16x, which is one of the lowest multiple that the shares have traded on since the demerger in May 2022. The multiple is also well below the average of ~23x since the demerger. We highlight several factors supporting our view that TAH is a stock to watch:

i. The declining gearing profile, which enables TAH to invest in growth and licences without the need for raising equity.
ii. The potential for higher-than-expected revenue and margin expansion from the new Victorian licensing deal (which is likely to emerge at the FY24 results release in August).
iii. The probable returning to growth for the Australian wagering market in 1H25; although we acknowledge that there remains the risk of heightened competition.
iv. The prospects for a more level playing field with regard to POCT.

Charting View

TAH remains in a downtrend. However, we have started to see the first signs of a reversal.  There is a major resistance zone around 67c – 70c. A push beyond that would be a positive and would be the buy trigger that we are looking for. 

 

Michael Gable is managing director of Fairmont Equities.

 

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