The Lotteries and Keno division is set to be demerged from Tabcorp by June this year. In the half-year result, lotteries once again saved the group result, probably for the last time, as COVID messed up the Wagering and Media division.
COVID affected the wagering division much more than the others. NSW lost 176 and 74 days respectively in metro and regional pub and club venues compared to just 13 days in 1H21.
Victorian venues had already been ravaged in 1H21 (159 days) and suffered a further 180 days of closures in 1H22. The overall effect was to clobber Wagering & Media revenue by 9.8% and EBITDA by 34.8% to $148 million in 1H22. Like many businesses affected by COVID closures, the effects will reverse as restrictions end implying an earnings revival into FY23f.
Conversely, with almost no impact from COVID, the Lotteries retail network revenue cranked up 12.7% in the period to $1,665 million. Venue closures impacted Keno revenue which slipped 9.8% compared to last year.
The Lotteries business is about to give itself a timely injection of pizzazz with a key change to one of its most popular products – Oz Lotto. Research conducted by the business determined that customers like Oz Lotto and wanted it to remain a jackpotting game. But customers want to see bigger divisional prizes and more frequent large jackpots. The solution is to increase the number of balls in the draw from 45 to 47. The odds of winning (mathematically) gets harder as the number of combinations increases by 40%. That will mean fewer Division 1 winners and more jackpotting of the major prize. An extra supplementary ball (from 2 to 3) helps to maintain the same win frequency for Divisions 2-7. And the kicker for Oz Lotto will be a ticket price increase of 8.3% driving a material lift in sales.
Investment view
The fundamental reason to own TAH shares now is for the likely material increase in the multiple applied to the Lotteries and Keno business when it demerges from TAH. At present, the TAH share price implies a multiple of no more than 14x FY23 EBITDA for Lotteries and Keno, but we believe that multiple will rise substantially to 19-20x once demerged. It will need to carry about $1.9 billion of debt and absorb some corporate ($40-45 million pa) and demerger costs (about $275 million), but the ability to pursue its own future both domestically and internationally will be attractive.
Ironically, after years of mergers (including Tatts Group) and demergers (Echo Entertainment, which became Star Entertainment), TAH will effectively return to its original wagering business as its core once Lotteries and Keno is demerged (Scheme documents issued in April).
Risks to investment view
The demerger of Lotteries and Keno carries some execution risk. TAH is awaiting the outcome of the Victorian wagering licence process, and this also carries potential risk if the licence was altered or lost.
Recommendation
We have retained our Buy recommendation.
