The Tabcorp Holdings Limited (ASX: TAH) share price is bucking the downtrend after UBS urged investors to buy the underperformer.
Shares in the wagering and lottery business held flat at $3.62 in after lunch trade when the S&P/ASX 200 Index (Index:^AXJO) tumbled 1.2%.
The Tabcorp share price also outperformed yesterday when it shot up around 5% after announcing the replacement of its chairman Paula Dwyer and upcoming departure of chief executive David Attenborough.
Tabcorp and friends lagging the ASX 200
However, this doesn't change the fact that the stock is a woeful performer. Tabcorp shed more than 20% of its market value over the past year when the ASX 200 is down by 9%.
It's been a tough time for most gambling related large cap stocks. The Crown Resorts Ltd (ASX: CWN) share price and Star Entertainment Group Ltd (ASX: SGR) share price lost around 30% each, while Jumbo Interactive Ltd (ASX: JIN) slumped 40%.
Punter survey provides ray of hope
But the tide could be turning for Tabcorp, so says UBS which reiterated its "buy" recommendation on the stock after it undertook a survey with 1,000 Australia punters.
"COVID-19 has had a positive impact for digital operators with almost 40% of respondents increasing their wagering spend," reported the broker.
"While Sportsbet remains the clear market leader in brand awareness and customer experience, the use of Sportsbet as the primary betting app fell slightly to 28% (still #1 followed by Tabcorp at 19%, up 1% y/y)."
Better odds but poor payoff
Tabcorp's aggressive promotions are helping it win market share with survey respondents citing this as the main reason for placing bets with Tabcorp for the first time.
But in some sense, this is a pyrrhic victory. Intense online competition is squeezing margins while the coronavirus restrictions is having a big negative impact on its gaming venues.
The silver lining is that retail cash betting only contributed 5%, or $40 million, to the group's earnings before interest and tax (EBIT) in FY19. Surely the very modest income generating business can't be seen as being a core asset to Tabcorp.
Divestment could trigger re-rating
UBS thinks now is the time for the group to consider divesting its retail division, particularly in light of management changes.
"This scenario would result in a variable contribution margin in line with the corporates; an initial decline in EBIT of over $100m but an outlook which is highly likely to see steady growth of 5-10% pa," said UBS.
Earnings upgrade
The broker lifted its earnings per share forecast by 14% in FY21 and an additional 4% for each of the following two years.
This is to reflect a faster than expected recovery of retail closures and a stronger outlook for wagering.
"While the upcoming result will be negatively impacted by the closures of pubs and clubs and a difficult comp in lotteries, the next two to three years should see higher profit than what was experienced in FY19," added UBS.
"Ultimately, we don't believe that the pandemic will have a material impact on medium-term cash flow and underperformance represents an attractive entry point into the shares in our view."
The broker's 12-month price target on Tabcorp increased to $5 from $4.60 a share.
