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Times are changing for Tatts

This is the first full report after Tatts Group’s (ASX: TTS) Victoria Tatts Pokies licence expired in August 2012. At the same time, it acquired the licence rights for managing South Australia Lotteries, and now 46 weeks of revenue and profits from that acquisition can be seen.

For revenue from continuing operations (excluding Tatts Pokies), there was an 11% increase to $2.95 billion, and net profit after tax from continuing operations was up 40.8% to $227.4 million. However, if we compare totals from 2012 annual report, there was actually a 24.5% drop in revenue from $3.88 billion, and a 22.5% decrease in NPAT, of which a majority of the difference would be from the loss of Tatts Pokies revenue.

For older shareholders, they would see the drop, but new investors can possibly realise more value by having that out of the way and looking for growth from SA Lotteries as well as from new initiatives in online wagering and lotteries. The new licence did cost the company $427 million, so that went against this year’s revenue.

Tatts Lotteries delivered revenue growth for the year of 13.6% to $2,008.6 million. The two most popular lotteries, Powerball and Oz Lotto, increased sales by 50.3% and 35.1% respectively.

This was also the first year that Tote Tasmania’s revenue is included, and with Tatts Bet, sales for fixed price betting were up 20.6%. Maxgaming saw a revenue decrease of 1.3%, but with management developing new products and focusing on cost cutting, EBIT for this division was actually up 8.1%

Two divisions, Bytecraft and Talarius, both saw net losses in earnings before interest and tax.

Even though Tatts Pokies is not a continuing operation now, for the first six weeks of the financial year until August 15, 2012, it did provide $190.7 million of sales and $35.8 million in EBIT of this annual report’s total revenues and earnings. For the coming year, that will not be present, so investors will have to see how SA Lotteries and other expansion can make up for that revenue loss.

As for financials, return on equity was 8.79% and net profit margin was 8.28%, both down from last year. Its gross gearing is still not excessive, but it has been growing over the past several years. Book value per share is $1.97 and the share price is around $3.20. That is basically the same price it listed at in June 2005.

A 7.5 cents per share dividend fully franked was declared, bringing the total year dividend to 15.5 cps, making a 4.84% gross dividend yield.

Foolish takeaway

Companies in transition can seem sometimes like losing propositions, and very well can be for older shareholders, so you have to adjust your portfolio with respect to how the company’s business story changes over time. When the story gets better, or a tough patch has been passed, true value investors move before the general market notices the change thoroughly.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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