Tabcorp’s CEO says the company has drawn a line in the sand over its FY22 result and is now embarked on a digital odyssey aiming for a younger and broader audience. TAH may yet win the WA TAB licence.
Digital dawn. TAH has launched its new app with strong initial results in terms of participation and take-up. This is the beginning of a broader range of new digital products that will be much faster to market. The company’s hero metric, as they describe it, is to grow digital revenue market share. The competition is fierce, funded and well established so the advantage of incumbency in retail and totalisators is no longer enough for TAH.
September quarter revenue grew by 18.7% yoy and was quicker than the 14.7% growth reported for the June year. The company acknowledged the very weak prior period flattering these numbers, but in the wash-up, TAH has not quite recouped its pre-COVID activity. There will have been some customer leakage to online competitors during the closure of some TABs in the prior period.
Cost growth guidance was reaffirmed at 3-4% pa in FY23f, skewed to the first half as TAH spent on marketing the new app, and promoting the Spring Racing Carnival and the upcoming FIFA World Cup.
New online competitor, Betr, has entered an increasingly crowded market. But contrary to previous press speculation, Betr has pulled out of the race for the WA TAB licence. TAH has a good chance of winning the licence which could be worth $600-700 million including synergies of approximately 25-30 million pa. It would be immediately accretive for TAH in the order of 9-10% on FY24f earnings per share. TAH could realistically fund the acquisition without raising new equity, but this would temporarily push gearing to ~1.7x, slightly above its 1.0-1.5x target range. The WA Government may consider increasing the Point of Consumption tax (POCT) from 15% to 20% of revenue for bookmakers.
Investment View
The shift of strategy towards digital products and revenue is a logical one for TAH. It does not mean the core business will be neglected, but the avenue of growth will be in the new products and markets that attract new customers and encourage existing ones to spend more. It will require plenty of development and marketing spend and will face plenty of competition, so success is not guaranteed.
Risks To Investment View
The wagering industry is regulated, licenced, and taxed at a State Government level. There is a reasonable amount of risk associated with changes to each of these factors and historically, change has been frequent. Changes in consumer preferences in gambling and the general level of participation may change over time. The horse racing industry can also be subject to biological risks such as the Equine Influenza outbreak in 2007.
Recommendation
We have retained our Hold recommendation.
