Why the Tabcorp Holdings Limited share price is on the rise

Shares in gaming giant Tabcorp Holdings Limited (ASX: TAH) are up almost 2% this morning to $4.45 after the company released its first quarter trading update for the 2018 financial year.

Group revenues for the September quarter were up 5.7% on the prior corresponding period (pcp) at $578.8 million. The gaming company’s core wagering and media division was the best performer with revenue increasing to $481.5 million, a gain of 4.5% on the pcp.

The news was not all positive as the company’s online bookmaking business Luxbet continues to struggle.

Excluding Luxbet’s underperformance, Tabcorp’s wagering and media revenues grew by 5.7% on the pcp. Furthermore, Tabcorp’s UK operation, Sun Bets, a joint venture with News Corp (ASX: NWS) failed to meet expectations with revenue up only 5.3% on the pcp to $1.1 million. Both Luxbet and Sun Bets remain under review as the company looks to turnaround the underperforming components of its business.

The increase in the company’s wagering and media revenue was attributed to the growth in digital turnover. Digital turnover continues to grow at double digit rates, with turnover up 17% on the pcp to $1.13 billion. The growth in digital has come with some minor cannibalisation, as turnover at the gaming company’s retail outlets shrunk 1.1% to $1.55 billion as the trend to online gambling accelerates.

Revenue in the company’s gaming services segment grew by 47.8% on the pcp to $41.4 million following the acquisition of Intecq and benefits from the TGS expansion. In contrast, Keno revenue was down 5.3% on the pcp to $54.8 million which was due to a strong jackpot sequence.

Tatts merger?

Today’s announcement also included an AGM address from the company’s Chairman providing an update on Tabcorp’s proposed merger with Queensland-based gaming company Tatts Group Limited (ASX: TTS). The Australian Competition Tribunal has conducted another hearing of the proposed merger this week and both companies are awaiting its decision before proceeding with the merger which would be implemented in December.

Foolish takeaway

Another solid quarter of growth by Tabcorp and the company advised it will maintain its high dividend payout ratio of 90% of NPAT before significant items and amortisation.

The company trades at approximately 20 times estimated FY 18 earnings with a dividend yield of 5.6%. The proposed merger with Tatts is predicted to unlock substantial value for shareholders with $130 million of EBITDA from synergies and business improvements expected in the full first year of integration. Potential investors may want to wait for regulatory approval before initiating a long position.

Motley Fool contributor Tim Katavic has no financial interest in any company mentioned.

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