Morningstar

Morningstar, Inc.

Equity Bottom-Up

Despite trading roughly in line with our AUD 4.50 per share fair value estimate, wagering and lottery giant Tabcorp offers investors a very attractive dividend stream. At the current price, the stock yields a reliable 5% (fully franked), which is impressive, especially given the current low interest rate environment. We think the company can sustain a payout ratio of about 100%, supported by: (1) a highly cash-generating lotteries business, (2) the integration of the acquired wagering…

Narrow-moat Tabcorp reported an interim 2019 underlying NPAT of AUD 211 million, more than double the previous corresponding period. This rapid growth mainly reflected a full six-month contribution from recently acquired Tatts. Had the Tatts acquisition been in place for the full comparable period, revenue and EBITDA would’ve increased by 6% and 9%, respectively, a more modest, but positive result, nonetheless. Lotteries was the standout performer during the period, reflecting strong digital…

While the integration of Tatts' lotteries businesses provides narrow-moat-rated Tabcorp with a source of more defensive earnings, the firm's core wagering business still contributes the most significant proportion of earnings. The company’s primary objective will be integrating the newly acquired Tatts wagering business, and the company should extract significant synergies, particularly on the cost side. The inclusion of UBET further expands Tabcorp's wagering footprint as the firm strives to…

Tabcorp's fiscal 2018 underlying net profit rose by almost 40% to AUD 246 million, although the bulk of the growth was due to the half-year earnings contribution from the recently acquired Tatts. This fell short of our expectations, however, reflecting timing of the merger synergies. We have not changed our AUD 4.50 per share fair value estimate, as our long-term outlook remains broadly unchanged. We maintain our narrow moat rating, and despite the shares trading marginally above our fair value…

While the impending legalisation of sports betting in the U. S. (outside of Nevada) is undoubtedly an exciting opportunity for local wagering giant Tabcorp, we believe this is not a near-term priority. Having only recently finalised the merger with Tatts, management will have its hands full integrating the two businesses for at least the next couple of years. The pressure is on Tabcorp to deliver the promised merger synergies and, as such, we believe an offshore expansion would be ill-timed. In…

Australia

Tabcorp Holdings Limited operates as a holding company. The Company, through its subsidiaries, provides gambling, gaming, wagering, and entertainment services. Tabcorp Holdings serves customers in Australia and in the United Kingdom.

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