Tabcorp has taken a few kilos out of its saddle with a significantly better outcome to the Racing QLD dispute than feared. The settlement not only provides some regulatory certainty in Queensland, but it simultaneously closes the gap to its online competitors.
TAH’s two year dispute with Racing QLD has been settled. In conjunction, the Queensland Government has announced reforms to the wagering industry that contains an element of karma. The legislated reforms will level the playing field by ensuring TAH’s wagering tax and product fees in Queensland are the same as for Northern Territory licenced bookmakers.
Under the new framework, TAH will pay taxes and product fees equivalent to approximately 35% of QLD revenue, reflecting a 20% point of consumption tax (POCT) payable to the state government. It will also pay a 15% product fee to Racing QLD, replacing the previous impost of about 44.5% of revenue. Based on TAH’s 2021 QLD revenue of $315 million, this implies a reduction of approximately $30 million per annum for TAH.
TAH’s online competitors will face a 5pp increase in POCT while Racing QLD will benefit from the higher POCT, and the state government will be no worse off.
TAH will make a one-off settlement payment of $150 million. This incorporates $100 million to Racing QLD and $50 million to the Queensland Government. This outcome is substantially less than the potential worst case scenario, but larger than the $75 million post-tax provision TAH had made in its accounts.
Importantly, the settlement removes a key overhang for the stock and potentially turns a negative into a positive. We now expect TAH to pursue similar tax and fee arrangements in other states. We estimate that NSW comprises about 50-55% of TAH’s wagering revenue, with Victoria at 30-35% and Queensland at about 15%. If TAH was successful in lobbying other states for a similar arrangement, it potentially negates any competitive response from the NT bookmakers to promote wagering in states that give them an edge against TAH.
Investment view
TAH is pursuing growth in sports betting and online, but a more equitable retail wagering landscape cannot hurt its growth prospects. The relatively good outcome of the Racing QLD dispute does highlight the vulnerability of the gambling industry to regulatory and legislative changes, though these are not always bad.
TAH is facing the renewal of its VIC wagering licence in 2026, assuming the government extends it for two years, but otherwise has a multitude of long-dated licences.
The opportunity to acquire the WA TAB licence from the state government could cost upwards of $1 billion but would be immediately highly earnings accretive for TAH.
TAH’s Wagering & Media division was the subject of intense corporate acquisition attention prior to the recent demerger of The Lottery Corporation. The intricacies of the multiple licencing agreements across several states may have been a stumbling block in any case, but if TAH can genuinely improve its franchise in the next year or two, we would not rule out another round of takeover attempts.
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 while recognising potential valuation upside.
