Having parted ways with the lotteries business, Tabcorp has returned to its horse racing industry roots with the incongruous gaming services business in tow. Pre demerger, TAH’s Board had rejected overtures for the Wagering & Media business.
The ‘new’ TAH now consists of two divisions. Wagering & Media is what TAH is known for and operates the TAB brand across Australia. A retail network of 4,257 on course and retail venues are supplemented by a fast-growing digital offering.
The Sky Media business holds long term media rights to race broadcasting and is distributed to 4,790 agencies and licenced venues around the country and overseas.
The exception is Western Australia where the State Government continues to own the licence, but this represents a future opportunity for TAH. We estimate the WA licence to be worth around $1 billion.
The Northern Territory continues to harbour a number of corporate bookmakers who provide significant competition to the TABs (see Figure 4). A point of consumption tax (POCT) was introduced nationally in 2017 but this has only partially closed the margin advantage of the bookmakers due to lower taxes in the NT.
Sports betting has become increasingly popular and now represents approximately 28% of FY21 wagering with racing at 72%. This is another area of growth for TAH.
Wagering & Media had FY21 revenue of $2.3 billion and EBIT of $414 million.
Gaming Services operates the Max brand and provides electronic gaming machine services to venues around Australia. FY21 revenue of $183 million and EBIT of $71 million was generated from 3,955 venues serviced.
Investment view
As recently as April 2021, TAH had received more than one serious offer from corporates and private equity groups for either the Wagering & Media business alone or including the Gaming Services business. Entain’s $3.5 billion pitch for Wagering & Media put a marker out there against which TAH’s current market capitalisation of $2 billion looks decidedly anaemic. We do not rule out a future corporate bid, but TAH probably has some limited leeway to prove its worth through the demerger preference of the Board.
TAH is facing some near term earnings risk and the company has an outstanding legal battle with Racing QLD in which the worst case scenario could cost TAH an additional $45-50 million per annum out to 2044.
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 WA TAB licence presents a real opportunity for TAH. The WA Government is conducting a competitive tender process with a conclusion expected during Q3 of CY22. We estimate it could cost around $1 billion, potentially stretching TAH’s conservative balance sheet, but would be immediately highly earnings accretive.
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 restarted our coverage of TAH with a Hold recommendation while recognising potential valuation upside.
