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Will Tabcorp’s digital strategy be a winner?

Tabcorp Holding’s (ASX: TAH) most recent results require careful analysis due to some significant changes in its business structure, most notably its loss of the Tabaret business license. The loss of the license to operate gaming machines throughout Victoria has caused a big drop in earnings for Tabcorp and has led to a legal challenge against the Victorian Government. This is an important reminder for investors in regulated monopolies — at any time a government can change the regulations!

To management’s credit it appears to be doing a sound job of replacing the lost revenue. One highlight from the recent first-half results was the outstanding performance of Tabcorp’s digital sales. Digital sales comprise tab.com.au and mobile apps, with 28% of sales occurring on mobile devices. Readers will of course be aware of the Australian public’s appetite for smart phones and the internet but perhaps not aware of the increasing penetration of online gambling. Digital wagering revenue grew 16% to over $1.2 billion, with Tabcorp increasing its estimated market share of the digital wagering market from 25% to an impressive 28%.

Another company enjoying the benefits of increased online gambling is Jumbo Interactive (ASX: JIN). Jumbo has agreements to sell online lottery tickets and has been increasing sales at a solid pace, with earnings and its share price following suit.

Understandably some investors choose not to invest in gaming stocks on ethical grounds. For those investors who don’t have a crisis of conscience over investing in this sector there are some very profitable businesses with decent moats. The gaming industry is rightly viewed as having defensive attributes, as even in hard times people find the money to ‘take a punt’.

Some of the other companies in the sector that could be worth considering — at the right price of course — include Tabcorp’s most direct competitior Tatts Group (ASX: TTS), poker machine makers Aristocrat Leisure (ASX: ALL), and Ainsworth Game Technology (ASX: AGI), or if you’d like a cut of the house’s take, then James Packer’s Crown Ltd. (ASX: CWN) or Star Casino owner Echo Entertainment (ASX: EGP) might be worth a look.

Foolish takeaway

Tabcorp’s defensive characteristics and moat make it a company for the watch list. If the economy is indeed on the mend, leading to more disposable income, coupled with the increased penetration of the gaming market, especially via digital, then there is good reason to think that Tabcorp’s total customer base can expand as well as an increase in the spend of current customers.

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More reading

The Motley Fool’s purpose is to help the world invest, better.   Click here now  for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.  Motley Fool contributor Tim McArthur doesn’t own any of the stocks mentioned.

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