For punters tiring of exotic betting options available through Tatts and Tabcorp, there may be a more exciting punt on the stocks themselves.
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.
Frequently Asked Questions about this Article…
What did the Victorian government do to the poker machine duopoly and how did that affect Tabcorp and Tatts?
In 2008 the Victorian government announced the end of the Tabcorp–Tatts poker machine duopoly, a move that sharply cut both companies' share prices. The government said it did not have to compensate the companies for about $1 billion of licences they would forgo, and the shift set up either negotiated settlements under the incoming Ted Baillieu government or a likely legal battle that could materially affect investor outcomes for Tabcorp and Tatts.
Could Tabcorp or Tatts receive licence compensation and what are the estimated payouts?
Broker research cited in the article (Macquarie) puts Tabcorp's estimated licence value at about $687 million, potentially yielding a net payout around $549 million — roughly 60–69 cents a share — versus a share price near $2.70. For Tatts, Macquarie estimated up to $419 million, worth up to about 27 cents a share for a stock trading around $2.30. Those amounts are estimates and depend on negotiation or court outcomes.
How might prospectus wording influence Tabcorp and Tatts' legal claims over licences?
The article notes that Tabcorp's 1994 prospectus (and similar wording in Tatts' 2005 prospectus) contains language that could be relevant in disputes: it says Tabcorp is entitled to receive an amount equal to the lesser of the sum paid for new licences and a benchmark sum. That wording has analysts watching potential legal challenges closely, though nobody is giving firm odds on courtroom outcomes.
Is investing in gambling stocks like Tabcorp and Tatts still a sensible move for everyday investors?
Gambling stocks historically were seen as stable, but regulatory changes have made them more volatile. A favourable settlement or court win could add significant value (and isn't fully priced in, according to some broker notes), while an adverse result or protracted legal battle would keep uncertainty high. Everyday investors should recognise both the upside tied to licence payouts and the legal and regulatory risks that remain.
What is the Sundance Resources takeover story and what does it mean for investors?
Sundance Resources, owner of the US$4.7 billion Mbalam iron‑ore project in Africa, agreed to be bought by Sichuan Hanlong Group after a boosted offer. The agreed takeover value cited was about $1.36 billion, and traders betting the deal will succeed could see roughly a 31% gain. However, the deal still needs approvals from Australia, Cameroon and the Republic of Congo, and market concern over those hurdles has already trimmed Sundance's share gains.
What concerns did analysts raise about JB Hi‑Fi and the wider retail sector?
Analysts said the Australian discretionary retail environment was very tough, forecasting little or no comparable‑store sales growth in FY12 and flat to declining margins for covered stocks. A key structural concern is growing online competition: UBS cited a roughly $7.7 billion online market in 2009/10 for relevant products, forecasting online sales to grow at a 15% CAGR to 2014/15 while bricks‑and‑mortar sales decline, increasing online penetration from about 15.6% in FY10 to an estimated 25% by FY15.
What are the details of Jeremy Reid’s bid for Everest Financial Group and why does it matter to investors?
Jeremy Reid's low‑priced bid for the remnants of Everest Financial Group had acceptances of about 85.92% at the time of the article. The takeover price was $3.75 million, with Everest holding around $8.2 million cash and more than $20 million of tax losses and deferred tax assets. Reid's takeover vehicle, Redleaf, notes potential legal costs up to $5.5 million from litigation and ASIC probes. A successful bid would take Everest private and remove it from public markets.
Given these developments, what should everyday investors monitor before making decisions?
Watch the outcomes that drive value: licence settlements or court rulings for gambling stocks, regulatory approvals for resource takeovers like Sundance/Hanlong, and structural trends such as online retail penetration affecting companies like JB Hi‑Fi. Follow broker research and company prospectuses cited in the article, monitor share prices relative to estimated payout scenarios, and factor in legal and regulatory risk — all without assuming any guaranteed outcome.
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