The S&P/ASX 200 Index (ASX: XJO) share Tabcorp Holdings Ltd (ASX: TAH) has been called out as a buy by one of the leading brokers in Australia.
Tabcorp is an ASX share with a significant presence across the gambling landscape. TAB is Australia's biggest multichannel wagering brand, with a broad range of betting options across both digital channels and in retail throughout Victoria, New South Wales, Queensland, South Australia, Tasmania, Northern Territory, and the ACT.
The business also owns Sky Racing, Sky Sports Radio broadcast, and MAX (a gaming services provider for venues, government, and industry).
UBS recently upgraded the ASX 200 share to a buy. Let's take a look at why.
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Why the rating upgrade?
After a period of change in leadership and strategy, as well as soft market conditions, UBS had rated Tabcorp as a "strategic blank canvas". It was continuing the status quo, participating in market growth, containing costs, "but not much else".
Following an encouraging FY25 result and early signs of strategic progress, UBS said it's now ready to price in "some" benefits of strategic improvement and it sees earnings and cash flow upside to what the market is expecting for FY26 and FY27.
UBS also said it think it's fair to measure the ASX 200 share's price-earnings (P/E) ratio excluding the discount unwind of non-current payables, which has been material to Tabcorp's earnings per share (EPS) for several years, according to UBS. This would put the Tabcorp share price on an adjusted P/E ratio of approximately 20. The broker doesn't think this is stretched compared to the market, considering its profit growth outlook.
UBS is forecasting that Tabcorp's EPS could grow at a compound annual growth rate (CAGR) of 11% over the three years from FY26.
What are the signs of progress for the ASX 200 share?
The broker highlighted some of the things it's seeing from Tabcorp:
Tabcorp's new strategy focuses more on leveraging its unique assets and less on winning digital market share, with opportunities including:
(1) New retail commercial model and omni-channel activation, (2) tote consolidation, (3) better monetising media assets, (4) cost out, and (5) NSW licence renegotiation.
It is difficult to quantify the earnings/valuation impacts but so far we think it is reasonable to price in: (a) carryover benefits of cost out (~$20m pa in FY26) but future initiatives substantially reinvested, and (b) improved retail venue economics based on reset venue fees/rebates/commissions – we estimate ~$15m in FY26 based on ~3.5k venues at ~$4k per venue (within a wide range), but haven't assumed material benefits from omni-channel incentives (e.g. Tabtime, venue mode, Tap-In-Play).
UBS also noted that market conditions appear to be improving, both in terms of participation and spend per player, which is consistent with Tabcorp's market guidance for modest growth.
Price target on Tabcorp shares
UBS has a price target of $1.12 on the business, largely thanks to a sum-of-parts of the business. Therefore, the broker is suggesting the Tabcorp share price could rise by 7% over the next year, at the time of writing.
The broker said the increased earnings expectations occurred because of FY25's lower operating expenditure, capital expenditure, net interest, and cash tax, causing EPS expectations to be bumped up by between 41% and 54% for the FY26 to FY28 estimates.
