Punt on gambling stocks an exotic bet

These wagering-driven stocks have usually been a safe but boring bet for investors given the relatively stable nature of the businesses.

That changed in 2008 when John Brumby's Victorian government announced the Tabcorp and Tatts poker machine duopoly will end in August next year - shredding their share prices in the process - and claimed it did not not have to compensate the companies for the $1 billion worth of licences they will forgo next year.

With the big date now less than a year away, and the awarding of various Victorian gambling licences complete, it is only a matter of whether the Ted Baillieu government cuts a deal with the two or battens down the hatches for the inevitable legal brawl.

A win would be significant for both stocks and not just in terms of market sentiment. According to a research note from Macquarie Equities, Tabcorp - which said this week the estimated licence value is $687 million - could receive a net payout of around $549 million.

This equates to 60? to 69? a share - a sum not reflected in the current share price which trades around the $2.70 mark.

For Tatts punters the returns will be more modest. Macquarie's estimated payout of up to $419 million is worth up to 27? a share for a stock trading around $2.30.

Nobody is giving odds on who would win a courtroom stoush but the wording of the prospectus from Tabcorp's privatisation by the Victorian government in 1994 is interesting, to say the least.

"Tabcorp is entitled, whether or not it is the successful tenderer [for new licences], to receive an amount equal to the lesser of the sum paid for the new licences and a benchmark sum." Macquarie notes similar wording was contained in the 2005 Tatts prospectus.

MINER WINDFALL

Analysts at CLSA were touting another enticing punt for local investors, this time in the resource sector with Sundance Resources providing the potential windfall.

Sundance, owner of the $US4.7 billion Mbalam iron ore project in Africa, agreed to sell itself to Sichuan Hanlong Group after the Chinese conglomerate boosted its offer last week. While the agreement was struck at the biggest premium for a metals or mining company in five years, Sundance has given up most of its gains since Hanlong's proposal was first announced in July over fears the deal won't get up.

While Sundance has retreated on speculation the deal may face delays as Sundance and Hanlong seek approvals from Australia, Cameroon and the Republic of Congo, CLSA Asia-Pacific Markets says the Chinese government's economic ties with the two African nations will help bolster support for the $1.36 billion takeover.

"The deal will be completed," said CLSA analyst Michael Evans. The negotiations between the companies and the governments involved are "more advanced than the market or the share price is suggesting", he said.

By betting the acquisition will succeed, traders now stand to reap a 31 per cent profit, according to data compiled by Bloomberg.

DRAIN FORECAST

It was hard to glean any good news for the retail sector from JB Hi-Fi's annual meeting update this week, unless you were breathing a sigh of relief that the market has not deteriorated further since July.

"The Australian discretionary retail environment remains very tough, and we forecast little or no comparable store sales growth in FY12 for the stocks that we cover, as well as flat to declining margins," said Goldman Sachs retail analysts after the meeting.

The sad fact for JB Hi-Fi is that its maturing model makes the company more prone to structural issues such as online competition, which has been a growing threat for competitors like Harvey Norman and The Good Guys.

JB Hi-Fi may be nibbling market share from these competitors, according to some brokers, but online competition will be a far tougher nut. UBS cited Forrester Consulting research when reporting the online market in Australia for products relevant to JB Hi-Fi and Harvey Norman was around $7.7 billion in the 2009/10 year.

The broker's forecasts assume online sales will grow at a compound annual growth rate (CAGR) of 15 per cent between this financial year and 2014/15, while bricks and mortar stores' CAGR will be negative 0.5 per cent a year. "Under this scenario the penetration of online household good sales moves from around 15.6 per cent in FY10 to 25 per cent in FY15," says UBS.

As an indication of where things are heading, in the US, online sales account for 41 per cent of electronics and appliance sales, and 7 per cent of furniture.

Not that UBS has gone sour on JB Hi-Fi's prospects, at least. "We believe [the] market's concerns over JB Hi-Fi's medium term outlook are overdone and reiterate our 'Buy' rating," says UBS.

EVEREST BID

Jeremy Reid's low-ball bid for the remnants of Everest Financial Group appears set for success with acceptances rising to 85.92 per cent yesterday for the former Babcock & Brown affiliate. The former Everest CEO appears to be on the verge of nabbing himself a bit of a bargain.

The $3.75 million pricetag sits nicely against cash reserves of $8.2 million and more than $20 million of tax losses and deferred tax assets, although Reid's takeover vehicle says Everest faces legal costs of up to $5.5 million stemming from litigation by former investors and investigations by ASIC. A successful bid will remove Everest from public view, and into the arms of Reid's private company Redleaf. Reid is Redleaf's sole director and his wife, Tammi, the sole shareholder.