Gaming services and betting company Tabcorp Holdings Limited (ASX: TAH) delivered a solid earnings and revenue result for the six months to 31 December, but is it a company to hold in your portfolio?
About Tabcorp
Tabcorp offers a range of gaming and entertainment products throughout Australia and New Zealand. Sports fans and patrons of pubs all around Australia will recognise at least some of the company's brands: TAB, Tabaret, Keno, Luxbet, TAB Sportsbet, Tabcorp Gaming Solutions, Sky Racing and Sky Sports Radio.
Tabcorp's betting portfolio includes exclusive licences for racing in Victoria and NSW and for Keno in Victoria, NSW and Queensland, but it recently lost its gaming licence in Victoria which required it to divest 13,000 gaming machines in the state.
The company has since replaced the business segment with Tabcorp Gaming Services (TGS) which installs and manages gaming machines on behalf of licensed venues. CEO David Attenborough recently noted that returns from machines managed by TGS generated returns 2% ahead of those who did not use the TGS service.
Tabcorp also has a media business (Sky Racing & Sports Radio) which generates solid earnings and cashflow for the company.
Financial year 2014 so far.
The company announced that for the six months to 31 December earnings were up 5% to $244 million and net profit was up 4% to $75 million. As expected, revenue from racing was down as interstate and international rivals were able to compete with the bricks-and-mortar stores via Australia-wide online channels, despite Tabcorp's exclusive licences in the state.
On the plus side, margins improved as lower-cost mobile revenue increased. Additionally the company's trial against the Victorian government is continuing as a result of the lost gaming licence in the state. If the result goes Tabcorp's way it could result in a $687 million windfall. The company is expected to grow earnings by a much more respectable 15% in 2015.
Outlook
While the loss of the Victorian gaming licence was a blow to Tabcorp, the company has been able to sign up 53% of the Victorian gaming market to TGS to terms ranging between 6 and 10 years. The service is now being expanded into NSW where a trial in the first of hopefully many pokie-owing hotels is now underway.
Management certainly isn't getting ahead of itself either, Mr Attenborough said recently: "We are taking a measured approach to growing the business and we are confident that we can." While margins are low, revenue is constant and it is a business that Tabcorp understands well.
The company's all-important gaming segment is coming under pressure from interstate and international rivals delivering fixed-odds gambling on most markets via online platforms. The low-cost nature of online platforms has lowered the barrier to entry for competitors; however Tabcorp's strong stable of brands should see earnings and revenue continue increasing in the future.
Foolish takeaway
Tabcorp is recovering well after the 2012 blow of losing its Victorian gaming licence. Its TGS business appears to be growing strongly and expansion into other states will be positive for earnings in coming years. The company's strong brands and extensive online presence should continue to boost margins in coming years, even though revenue from bricks-and-mortar stores may decrease. Tabcorp appears to be a good long-term investment with steady management and a decent pipeline of growth opportunities.
