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Deep-dive 2022-28: Tabcorp

Australian wagering monopoly recovering from COVID-19, helped by new regulation

Disclaimer: Asian Century Stocks uses information sources believed to be reliable, but their accuracy cannot be guaranteed. The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. You are advised to discuss your investment options with your financial advisers, including whether any investment suits your specific needs. From time to time, I may have positions in the securities covered in the articles on this website. Full disclosure: I do not hold a position in Tabcorp at the time of publishing this article. Note that this is a disclosure and not a recommendation to buy or sell.

Tabcorp (TAH AU) is Australia’s second-largest company in the wagering industry, offering punters the ability to bet on horse races and other sports events.

The government of Victoria set up the company in 1961 under the name of the Victorian “Totalisator Agency Board” (TAB).

Since then, the company has quietly consolidated the industry into a single entity. Today, Tabcorp holds exclusive retail and totalisator licenses across all Australian states and territories except Western Australia.

Totalisator (“tote”) betting differs from fixed-odds betting in that the company doesn’t offer odds to the gambler. Instead, the operator puts all bets into a pool, and the house take is removed. The remaining money is then shared among the winning individuals. In tote betting, the operator itself doesn’t take much risk.

In May 2022, Tabcorp spun off its lotteries and keno division: The Lottery Corporation, with its ticker TLC AU. The remaining “New Tabcorp” has three divisions:

  1. The wagering business: Enabling customers to put on wagers on horse races and other sports events across 4,300 venues in Australia

  2. The media business: Several TV channels stream racing-related content to Australian viewers, both at home and in-store.

  3. The game services business: Servicing electronic gaming machines in pubs, hotels, etc., across New South Wales, New Territory, Queensland and elsewhere.

Many local investors seem to consider The Lottery Corporation to be the superior long-term investment alternative. And indeed, Tabcorp looks like the more troubled business of the two. For example, Government-mandated store closures caused Tabcorp’s wagering turnover to drop. And the rise of online gambling has enabled Northern Territory bookmakers and overseas competitors to take market share from Tabcorp. Since they have been operating with lower taxation pressure than Tabcorp, they’ve been able to offer punters better odds.

But there are also several positives with Tabcorp’s recent demerger:

  • Most of the debt was shifted onto The Lottery Corporation's balance sheet. New Tabcorp, on the other hand, is virtually debt-free.

  • Australia is finally moving on from COVID-19-related lockdowns, with the country learning to live with endemic COVID.

  • Tabcorp is now lobbying hard for regulators to equalise the playing field between offline operators and online competitors.

  • Tabcorp’s management team has been replaced with younger faces. In particular, controversial CEO David Attenborough has left the organisation. Tabcorp is also becoming more of a customer-centric organisation, as evidenced by a new Chief Customer Officer and customer-related KPIs used to calculate the remuneration of the senior management team.

  • The new wagering app released in September 2022 could help Tabcorp become more competitive, although the initial reviews were lukewarm. Tabcorp’s online business already represents 62% of wagering turnover, but it still lags behind the market leader Sportsbet with its two million+ active accounts.

Tabcorp’s current enterprise value is around AU$2.3 billion, equivalent to a forward-looking EV/Sales multiple of 0.9x. The peer group trades closer to 2.5x. Tabcorp’s pro forma income statement shows a pre-COVID operating margin of 11%, broadly in line with the peer group. If so, we might be looking at a sub-10x EV/EBIT once the business recovers from COVID-19.

Apollo recently announced a bid of AU$4.0 billion for Tabcorp’s wagering and game services business. The regulatory hurdles are admittedly high, but at least the bid tells you how the private market values the business. Similar transactions have taken place at 10x EV/EBITDA, which - if applied to Tabcorp’s forward-looking EBITDA - would imply an enterprise value of almost AU$5.0 billion.

Significant insider buying from CEO Adam Rytenskild and Chairman Bruce Akhurst suggests that they are seeing value in the company.

The key risks are from online competitors, an upcoming 2024 license renewal in its home state of Victoria, and any delays in the recovery from COVID-19.

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