There's big upside to the embattled Tabcorp Holdings Limited (ASX: TAH) share price, according to UBS which added the stock to its "APAC key call list".
Shares in the wagering and lotteries slumped by 22% since the start of the year when the S&P/ASX 200 Index (Index:^AXJO) shed a more modest 9%.
The fallout from the COVID-19 pandemic hit the sector hard with social distancing impacting on gaming venues and the curtailment of key sporting events limiting betting opportunities.
Tabcorp isn't the only one in the sector that's suffering. The Crown Resorts Ltd (ASX: CWN) share price and Star Entertainment Group Ltd (ASX: SGR) share price also taking a battering.
Tabcorp share price to jump in recovery
But Tabcorp might be better leveraged to the eventual COVID-19 recovery and UBS is urging investors not to worry about its full year results next Wednesday.
"While the upcoming result will be negatively impacted by the closures of pubs and clubs (and a difficult comp in lotteries), the next 2-3 years should see higher profit than what was experienced in FY19," said the broker.
"We also see little chance of a negative surprise in the short term, with the company pre-releasing its results and the management and board changes already underway."
Smaller than expected COVID impact
Further, the impact of coronavirus on customer behaviour hasn't been as bad as initially feared. Gaming spend is already recovering and there's little sign of negative "structural" changes. That's more than what we can say for other sectors like office or retail property.
This isn't to say that punters may shun physical venues either by choice or otherwise in the post pandemic world.
But only 5% of the group's earnings before interest and tax is related to retail wagering. Also, Tabcorp's digital business seems to be gaining good traction thanks to aggressive promotions.
Digital gaining market share
These promotions have driven new punters to Tabcorp's digital platform in recent times, according to UBS.
"The pandemic has highlighted the resilience of Lotteries (where revenue trends have not changed)," said the broker.
"This adds to strong business fundamentals arising from its monopoly licences, online margin expansion and potential for changes to game maths/pricing."
Growth and income boost for the TAH share price
In other words, investors may not need to wait long to see Tabcorp's earnings recover to FY19 levels with the broker predicting this will happen in the next financial year.
UBS' 12-month price target on Tabcorp is $5 a share. This implies a 41% upside for the stock, which closed at $3.54 on Thursday.
If that isn't enough to excite investors, the broker is forecasting a 22 cent a share dividend for the stock in FY21. That puts the stock on a yield of nearly 9% in that year if you included franking credits.
