The Tabcorp Holdings Limited (ASX: TAH) share price has recovered from its dramatic dive in May when it lost about 80% of its value in one day.
This happened after the gaming entertainment company announced that its lotteries and Keno business would be siphoned off into a new ASX-listed entity called Lottery Corporation Ltd (ASX: TLC).
The Tabcorp share price fell from $1.06 on 24 May to 91 cents on 1 June.
It has since recovered to trade as high as $1.08 over the past month.
'Successful demerger'
In a recent update, analysts for the Airlie Australian Share Fund said the "early signs are encouraging for yet another successful demerger story".
The fund said: "At the time of writing [30 June], the demerger trade has performed well. … we are now starting to see some value emerging in the remaining Tabcorp entity, where the wagering, media and gaming services businesses are held."
Tabcorp is the second largest operator in Australia, wagering with more than $16 billion in turnover. It's also the second largest digital player with more than $9 billion in turnover.
The market leader is Sportsbet.
Regulatory changes positive for Tabcorp
TAB holds the exclusive retail and totalisator licences for every Australian state and territory bar Western Australia. In order to have this exclusivity, Tabcorp pays higher taxes and product fees. This amounts to 66% of its revenue compared to 43% for Sportsbet.
The value of this exclusivity is now less as more gamblers bet online using fixed odds rather than the tote.
As Airlie noted:
While the introduction of the point of consumption tax (POCT) in 2019 has rectified some of this imbalance … in just the few weeks since the demerger, Tabcorp management has already made substantial progress in reducing this cost disadvantage.
As part of the settlement of Tabcorp's dispute with Racing QLD, the Queensland Government has announced reforms to the State wagering tax, which will have the effect of levelling the playing field between Tabcorp and online bookmakers.
Airlie also pointed out that the NSW Government increased the POCT from 10% to 15% on 1 July.
… Tabcorp will receive transition payments over 18 months to ensure they are 'no worse off' under the POCT increase.
… we consider the impact on online bookmakers is likely to be far more severe, helping to reduce the margin differential.
More regulation may dissuade new market entrants
Airlie said changes to the POCT "have dramatically decreased the variable contribution margin for industry participants".
From the perspective of a new entrant, this is a dramatic reduction in the percentage of turnover that can be spent on product development, marketing, and other expenses essential to gaining scale and creating a viable business.
This perhaps explains why the industry has undergone material consolidation over the last decade, shrinking from around 10 key players in 2009 to around just 6 today.
More people gambling
Airlie said the "industry economics remain attractive" and "scale operators exhibit healthy margins and strong returns on capital employed".
Total market wagering turnover grew at a compound 6% per annum over the 10 years to 2019.
Airlie said:
Now that Tabcorp is its own separate entity, this could mean management can make more long-dated investments in product functionality and customer service. We consider that these steps should help to further stabilise market share moving forward.
The numbers look good
Tabcorp is trading on an earnings before interest and tax (EBIT) multiple of approximately 13 times.
Airlie said the balance sheet is "healthy with net debt of less than $100 million". It also pointed out "very strong free cash flow generation".
Airlie said despite "material hurdles for management to overcome", buying Tabcorp on 13 times EBIT "looks like a solid bet".
