Discussion with Marc Whittaker and Bruce Du
Marc Whittaker and Bruce Du discuss Tabcorp, its history and how it’s positioned for the future.
Marc: Hi everyone. Thank you for joining us. I’m with our gaming analyst, Bruce Du here at IML, and we’re here today to talk about Tabcorp. Tabcorp is very interesting company with a very long history. In fact, I’ve looked at Tabcorp either as an analyst or as a portfolio manager, for almost 20 years now. And over that period of time, it’s gone through a lot of iterations. It’s been a gaming company and a wagering company. It’s been a casino company. It’s been a lotteries company. And today, we find Tabcorp in a position very much in a back to the future position. And so Bruce, looking at Tabcorp, just what is Tabcorp today?
Bruce: Sure, Mark. So the Tabcorp we know today is essentially a national wagering business operating both digitally and through the retail betting shops in all states of Australia except WA. It’s also got a small business, which is involved in the monitoring of electronic gaming machines. But by and large, it’s a national wagering business. And formed post the demerger of the Lotteries business about 12 months ago.
Marc: That Lotteries, the merger was a fairly seminal in the recent history of the company. And one where IML as active investor had a very large and prominent role to play in encouraging management to look at the options around that divestment. It’d be interesting for our viewers, I think just to take us through why we thought that was a good idea and what we’ve seen as an outcome of that intervention?
Bruce: Absolutely. So essentially prior to the demerger, we felt that the underperforming wagering business was having an adverse impact in terms of the valuation on the share price, particularly for the Lotteries business, which we viewed as very high quality, long duration asset. We and a number of other investors pushed very hard for the board to go through the demerger process as we felt that that would unlock value, not just in lotteries, but also in wagering as well.
Marc: Right. So today, we’re left with Tabcorp, which is effectively a wagering company. And the right question to ask from people is, why own a Wagering company today? What’s the investment case for owning A. Tabcorp, but also B. A wagering company?
Bruce: Sure. So look, essentially, for the first time in a long time, Tabcorp is now fully focused on running the wagering business throughout its history, it’s had other business segments inside the business that were much larger than wagering. And as a result, there wasn’t the focus and attention required being put on the wagering business. Today, we see a renewed management and board putting a lot of focus on turning that business around. For us, Tabcorp is a turnaround story. And the two key parts of our investment thesis is, 1. A leveling of the playing field, which means the taxes that Tabcorp pay across the various states are expected to harmonize with what their competitors pay. In a lot of cases, Tabcorp had historically been paying taxes up to twice the amount that their competitors paid. The second part is that through the tax reduction, we expect increased cash flows and those cash flows will be reinvested in modernizing the product, the marketing and Tabcorp as the number 2 player already has pretty decent scale. So we think with focus for investment, the business should be able to recoup lost market share over time and see the shares rerate.
Marc: And I think part of the thesis with Tabcorp is the fact that the industry itself, the wagering industry itself is is improving. And so I think our viewers will be really interested to understand our view on where the wagering industry currently sits today and where we think it might go to? And why that plays into the thesis as well?
Bruce: Sure. So the wagering industry today in Australia is essentially three players, Sportsbet, Tabcorp and Entain, which have circa 90% market share. So it’s quite a highly concentrated industry. In terms of why the industry structure is better today, we’ve seen cost of capital lift across the board. So a lot of competitors who had historically built market share but operated at losses, the ability to sustain those losses is much less in the current environment. The second factor is the lift in the point of consumption tax. So that’s the taxes that corporate bookmakers have to pay. That’s gone up essentially across all states. And what that means is the profitability of all businesses has reduced. So if you don’t have scale, it’s very hard to compete in the market. A real life example we can point to is the launch of Betta late last year, which was backed by News Corp. A very well funded startup. From everything that we hear, that company has struggled to really gain traction, and the latest is that that business is looking to be sold. So definitely, the barriers to entry and expansion have increased substantially.
Marc: Thanks, Bruce. So in conclusion, we’ve been very pleased with the outcomes that we achieved around Tabcorp in terms of A. the divestments that we’ve seen that the fact that the share price of the Lotteries Corporation and the share price for Tabcorp today combined are trading significantly higher than when they were trading as a single group. And we’re also very happy with the trajectory of Tabcorp today and where managments focus is, the fact that the focus on cash flow, on new product development and really improving the position of Tabcorp within the wagering industry.
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