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Here’s why the Tabcorp Holdings Limited share price plunged today

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Australian gaming business Tabcorp Holdings Limited (ASX: TAH) has reported its results for the first-half of financial year 2016 (FY16) today, reporting a steep decline in earnings for the period.

For the six months ended 31 December 2015, the group’s net profit after tax (NPAT) fell 33% to $81.9 million, down from $122.4 million in the prior corresponding period (pcp). The result came despite a 2% lift in revenue to nearly $1.14 billion, although even that was slightly below the $1.15 billion forecast by Goldman Sachs, according to The Sydney Morning Herald.

The lower profit compared to last year’s result was entirely due to one-off items, according to the company, without which net profit would have actually risen 7.3%.

While Tabcorp received a $31.5 million one-off tax benefit in the pcp, pumping up the result for that period, it endured $15.6 million in significant costs during the latest half – a difference of $47.1 million. The $15.6 million in costs this year included a $7.2 million cost to defend against claims made by AUSTRAC, as well as another $8.4 million to create a new sports betting business, Sun Bets, in the United Kingdom.

Notably, AUSTRAC is the Australian Transaction Reports and Analysis Centre, tasked with regulating potential money-laundering activity as well as counter-terrorism. The agency alleged that Tabcorp had failed to comply with legislation, although Tabcorp has reiterated its commitment to take its compliance obligations extremely seriously.

Before investors even consider buying shares in Tabcorp, or its rival Tatts Group Limited (ASX: TTS), for that matter, they should consider some of the risks facing both businesses and the sector in general. To begin with, it is a highly regulated industry – as highlighted by the current investigation by AUSTRAC – while competitive advantages are arguably also being eroded by the growing onling gambling market.

Tabcorp’s shares fell 3.8% to $4.35 shortly after the results were released this morning while they are trading more than 17% below their 52-week high from March 2015.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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