Tabcorp Earnings: Costs Contained and Wagering Share Increased

We raise our fair value estimate for no-moat Tabcorp TAH by 5% to AUD 1.10 per share following fiscal 2023 results. Underlying EBIT more than doubled from pro forma fiscal 2022 (excluding the now-demerged Lottery Corp) to AUD 151 million, about 1% ahead of our forecast. Tabcorp rebounded strongly from COVID-19 closures in fiscal 2022, which weighed on TAB wagering and revenue linked to electronic gaming machines. The valuation uptick reflects increased confidence in the company’s cost-out program and the time value of money.

The cost performance was strong, with operating expenses down 1%, ahead of plan. Tabcorp’s Genesis program aims to bring fiscal 2025 operating expense to between AUD 600 million and AUD 620 million. The firm estimates that under a “business as usual” approach, operating expenses would have exceeded AUD 700 million by fiscal 2025, assuming 4% growth. With about AUD 9 million in cost reductions recognized, much of it in personnel and marketing, and another AUD 11 million flagged for fiscal 2025, we now think Tabcorp will hit this target. We reduce our fiscal 2025 operating expense forecast by 2% to AUD 614 million.

Wagering and media EBIT of AUD 116 million was 61% higher than in fiscal 2022. The TAB brand lifted revenue share by 1% to 34.6% as wagering returned to venues. Punters returning to pubs is key for Tabcorp, with physical wagering exclusivity in every state except Western Australia. Digital technology has eroded the value of Tabcorp’s state-based physical wagering exclusivity, underpinning our view that the firm lacks an economic moat, and the shift to digital channels accelerated under COVID-19 restrictions. While some cannibalisation between Tabcorp’s retail and digital channels is to be expected, market share growth was achieved with only a 40-basis-point loss in digital revenue share to 24.5%.