Tatts: Result 2016

Tatts has posted a decent result though Wagering won't get any easier.

Gaming company Tatts Group increased revenue 4.4% to $2.9bn in the year to June, thanks to a sharp uptick in digital sales. Digital sales for the Lotteries division, in particular, rose an impressive 32% leading to an 8% rise in revenue for the division to $2.1bn. The lotteries business – which operates Powerball and OzLotto and accounts for 60% of operating earnings – also profited from an increase in the number of jackpots above the $15m mark from 34 to 45. This, in turn, attracted more punters hoping for a big win and pushed the division’s operating margin to a record high of 15%.

Table 1: Tatts result
Year to June 2016 2015 /–
(%)
Revenue ($m) 2,928 2,804 4
EBIT ($m) 419 414 1
U'lying NPAT ($m) 263 254 4
U'lying EPS (cents) 17.9 17.3 4
Final dividend 8.0 cents, fully franked, (up 7%)
ex date 31 Aug

Net profit fell 7% to $234m, but we’re not too worried. Most of that was due to the sale of UK-based pokies business Talarius earlier this year as well as final interest payments to the State of Victoria following a negative court ruling. The High Court overturned a prior ruling that awarded Tatts $540m in compensation because the Victorian Government stripped the company of its licence to operate pokies (see Tatts loses pokie compensation case). Underlying net profit for the company’s continuing operations increased 4%.

As we explained in Tabcorp: Result 2016, the wagering divisions of both Tatts and Tabcorp face an uphill battle against lower-cost competitors, so it was good to see a 4% increase in betting turnover, compared to a 1% fall last year.

Margins, though, were down with the win rate falling from 16.0% to 14.8% due to more customers turning to fixed-price betting rather than the high-margin tote. We expect Wagering margins to continue to fall as competition is on the rise.

The share price has barely budged since Tatts: The lottery that always pays? from 20 Jul 16 (Hold – $3.98) and the stock currently sports a price-earnings ratio of 25 and fully franked dividend yield of 4.4%. Tatts has a monopoly position, long licences and is highly cash generative. We’re sticking with HOLD.