Tabcorp: Result 2012

Wagering and gaming operator Tabcorp’s full year result was admirable considering the weaker environment haunting the nation’s retailers. It highlights the generally resilient nature of gambling revenues. Revenue increased 3% to $3.0bn, while adjusted net profit increased 13% to $340m. The board declared a fully franked final dividend of 11 cents per share (ex-date 16 Aug), bringing the annual total to 24 cents.

Unfortunately 2012 will mark the high point in earnings for the foreseeable future. Tabcorp and Tatts Group's exclusive duopoly over poker machine operation in Victoria was terminated by the previous state government. Some 90% of the gaming division’s earnings will evaporate this year. Tabcorp is challenging the licence termination in court. Nothing will bring the business back but a successful outcome could yield Tabcorp a $500m-$650m windfall.

The shift to online gambling is also casting doubt on Tabcorp’s ability to grow earnings. Businesses such as Betfair, Sportingbet and Centrebet are drawing money away from Tabcorp’s traditional ‘totaliser’ business, where revenue fell more than 5% in 2012. Tabcorp have responded by launching its own fixed odds and online betting products. But this trend is likely to reduce margins across the industry, and as the large incumbent Tabcorp has the most to lose. On a forecast 2013 earnings before interest and tax to enterprise multiple of around 10, and with debts mounting, Tabcorp is neither cheap nor safe. And we’re switching to AVOID.