Markets: Higher stakes for struggling Tabcorp

Tabcorp Holdings’ figures are in for the financial year and they are underwhelming. The company’s net profit after tax came in lower than some analyst estimates of $145 million, at $139.1 million.

It has been a difficult operating environment for the betting and entertainment group over the past 12 months, with changes to the business that were beyond its control. These have made it near impossible to compare the previous year to gauge how the business has gone on a relative basis. But we can look at the current landscape and use this to look forward.

Final dividend came in at 8 cents, bringing the total to 19 cents for the financial year, down from 24 cents in the previous year. Falling dividend dollar value and a depressed share price will not please Tabcorp’s investor base.

The past financial year has seen the company having to adjust to lower revenue from wagering, following its share of Victorian Wagering Joint Venture falling from 75 per cent to 50 per cent. In addition, its Victorian Tabaret business ceased on 15 August 2012.

Wagering delivers the lowest profit margin to the business but it’s where the majority of Tabcorp’s spend goes. For the year, it was up 5.9 per cent. Managing Director and Chief Executive David Attenborough has said the focus is to maintain market leadership across this sector.

This may prove difficult, especially in an environment where wagering is becoming increasingly competitive, with strong opponents such as Tom Waterhouse (just sold to William Hill) and Sportsbet.

Moving with punters’ preferences, fixed-odds betting revenue was up 25.8 per cent to $404.2 million for Tabcorp, offering a sign it is aware of the competitive pressures. But fixed-odds offers a lower margin, consequently generating less revenue and earnings growth for Tabcorp than other parts of its business. Defending market share across this sector is going to be pivotal for ongoing success.

The gaming landscape is changing and is under constant threat of regulatory change from state and federal governments. Tabcorp is already well aware of this following its recent dealings with the Victorian government.

Lower interest rates should favour the company’s bottom line by relaxing pressure on disposable household incomes. But discretionary consumption remains a risky area, particularly when investor confidence is low as a result of economic conditions and political uncertainty.