Morningstar | Tabcorp's Life After Tatts: Wagering Is Still King
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 compete with aggressive online competitors. We retain our AUD 4.50 fair value estimate and at current prices, Tabcorp screens as fairly valued.Wagering still represents the largest component of Tabcorp's business, at nearly 50% of earnings. Tabcorp's significant TAB brick-and-mortar distribution channel, once its shining jewel, has been declining for a number of years with the advent of pure-online competition. Nevertheless, the firm's multichannel strategy is resonating with consumers, and we project around 10% annual growth in digital for the next three years, sufficiently offsetting modest low-single-digit declines in brick-and-mortar turnover. We expect digital to represent more than 50% of wagering turnover by fiscal 2022--up from 17% in fiscal 2011.
Following the addition of Tatts, Tabcorp now enjoys a near-monopoly position in lotteries. The federal ban on synthetic lotteries, which comes into effect in January 2019, has removed competitors such as Lottoland and further strengthened Tabcorp's position. The firm is targeting annual synergies from the integration of AUD 130 million by fiscal 2021. We believe this is achievable--growing from our forecast of AUD 50 million in fiscal 2019 to AUD 130 million by fiscal 2021. We expect the majority of synergies to be derived from the cost side--removing duplicate functions and rationalising corporate and technology costs--and yield and turnover improvements in Tatts' struggling UBET business under the TAB brand.
Tabcorp Holdings is an Australian gambling entertainment company. Co. has three segments: Wagering and Media operations, which includes its network of TAB agencies, hotels and clubs, and on-course totalisators in Victoria, New South Wales and the Australian Capital Territory (ACT) as well as its Three Sky Racing television channels broadcasting thoroughbred, harness and greyhound racing and other sports; Gaming Services business, which consist of Tabcorp Gaming Solutions that provides a mix of gaming capabilities, services, advice and financing to licensed gaming venues; and Keno business, a random number game that is distributed to clubs, hotels and TABs and is available online in the ACT.
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