Tabcorp Holdings Limited (TAH)

HOLD

Is digital a miss?

RESULTS ANALYSIS

28 Aug 2023

Sector: Consumer Discretionary

Need To Know

Mixed earnings result, deterioration in the key digital business. Higher OPEX flagged ahead.
TAH 2H23 digital revenue declined by 9% y/y.
Key catalyst: Upcoming renewal of TAH’s Victorian wagering licence. Outcome expected in October 2023.

FY23 Results overview (vs consensus):

Revenue A$2434m, A$2469m

EBITDA A$391m, A$380m

NPAT A$84.3m, A$73m

DPS 2.3cps, 2cps

TAH reported an EBITDA that exceeded market expectations, primarily attributed to a reduction in OPEX which came in lower than anticipated. OPEX of $618m was well below the guidance range of A$640-$646m due to the benefits of Genesis (TAB25 cost-out program) and the announced sale of MAX Performance Solutions (MPS) (expected completion during 1H24).

The sale of MPS is part of TAH strategy to pivot from gaming services towards integrity services, which is becoming a valuable asset to hold as there is an increased regulatory focus on gaming machines.

Loss in market share. TAH saw a decline in its digital revenue for 2H23 of 9% yoy in 2H23 and a digital market share loss (to 24.5% vs FY22 24.9%). We view this decline as a negative given it had increased its investment into digital and had an app re-launch in Sep-22.

Additionally, a decline in TAH digital market share brings to question whether it can achieve its TAB25 target of 30% digital market share by 2025.

Victorian Licence renewal. A key near term catalyst for TAH is the pending renewal of its Victorian wagering licence which should be announced by October 2023.

There are three possible scenarios that could play out; 1) the licence is renewed, 2) the government rejects TAH’s gaming licence, 3) A ‘split licence’ outcome. This scenario involves TAH no longer being a monopoly in Victoria, resulting in potentially two or three new competitors being introduced into the market. This scenario would provide the government with maximum potential revenue outcome but would leave TAH earnings in a vulnerable position.

Consensus earnings revisions. 3-4% FY24 earnings downgrade for EBITDA and NPAT.

Outlook. TAH management provided cost guidance for FY24 with Group OPEX of A$630-640m, implying a 3% growth at the midpoint. No earnings guidance was provided.

Investment View

The decline in TAH digital revenue market share is disappointing and brings into question whether TAH can hit its TAB25 market-share targets. The outcome of the Victorian licence renewal is a near term catalyst for TAH that could have a significant impact on its earnings. A negative outcome would mean an end to TAH’s long standing retail exclusivity in the state and a decline in its VIC earnings.

On a valuation front we see TAH trading around a fair value of 6-7x EV/EBITDA. Pending the outcome of the Victorian licence renewal, we rate TAH a Hold.

Risks to Investment View

A split or rejected Victorian waging licence . A continued decline in digital revenue market share.

Recommendation

We have retained our Hold recommendation.

Figure 1: We see TAH trading at a fair value of 6-7X EV/EBITDA.

Stock Overview

Key Properties

Financial Forecasts

Share Price

Company Overview

TAH offers gambling and entertainment services in Australia through two segments: wagering & media and gaming services.

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