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Footy finals fever: 2 gaming stocks may be worth a punt

Glenn Freeman  |  30 Sep 2016Text size  Decrease  Increase  |  

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Grand final time has been and gone, but two leading Australian wagering companies also dominated media coverage as part of the nation's other obsession: the punt.


With the AFL and Rugby League grand finals run and done for another year--with the Sharks extinguishing the Storm and the Bulldogs mauling the Swans in--it's worth considering the companies behind Australia's lucrative sports betting market.

Bright, brash advertisements spruiking a number of wagering platforms splashed across our TV, mobile and tablet screens across this long weekend gone.

The overall online gaming sector is valued at somewhere between $1 billion and $1.6 billion, according to a white paper tabled by the then Minister for Communication, Barry O'Farrell, at the end of 2015.

Tabcorp (ASX: TAH) and Tatts Group (ASX: TTS) are the two dominant players in this space, and by a substantial margin over the competition.


Australian wagering landscape


Source: Tatts Group presentation


"Investors are paying up for these stocks, being attracted by their relatively stable earnings, high dividend payout ratio and fully franked yield in the current low interest rate environment," says Ravi Reddy, equity analyst, Morningstar.

Some institutional investors such as superannuation funds and some fund managers overlay sustainability (SRI) filters to avoid certain companies such as those involved in gambling, tobacco, alcohol and hydrocarbons production.

However, Reddy suggests the mix of SRI funds and investors accounts for only a small proportion of the total investment universe.

Leaving aside the ethical debate, interest gambling is strong--as evidenced by the proliferation of advertisements on TV and online, especially during football finals season.

Numerous players, including smaller domestic operators and global chancers, are trying to move in on the territory of the established wagering companies.

Digital players including Sportsbet, Crownbet, and offshore entrants William Hill and Ladbrokes are combining to wage what Brian Han, a Morningstar senior equity analyst, describes as a "technological blitzkrieg".

"These players have fuelled the rise of the digital channel from virtually a standing start in 2001 to just over 60 per cent of the total estimated $24 billion in wagering turnover in Australia," Han says.

With turnover of almost $4.0 billion, Sportsbet has now surpassed Tabcorp (excluding the separately branded Luxbet) as the kingpin in online betting.

"Sportsbet's earnings account for 44 per cent of owner Paddy Power's group total, and is the crown jewel of the Irish gaming giant's empire," Han says.

"And why wouldn't it be, after another impressive 39 per cent increase in online betting turnover growth in 2015 to $3.8 billion and a bumper 52 per cent surge in operating profit to $117 million."


Wagering Turnover (A$ million)


Source: Tabcorp


Digital disruption

Reddy believes the massive penetration of mobile devices are a further nuance within the digital disruption story.

"Of digital, mobile remains the key growth driver for digital, accounting for about 65 per cent of total digital turnover [in gaming]," he says.

This medium increases the effectiveness of promotions that have become increasingly popular among Sportsbet and its contemporaries, including those offering refunds if the first half of a match is scoreless, or offering bonus credit to punters who open a dedicated account.

"And I suspect most people that are enthusiastic [about sports betting] often wouldn't be beholden to just one account, they would more than likely have a couple [with different wagering companies]," Reddy says.

Pick a winner

As the leaders in the overall wagering space, with a business model combining traditional store-front and digital, Tabcorp and Tatts are the incumbents with the most to lose from this disruption: "Digital wagering is growing strongly, whereas retail [gambling at storefront locations] is going backwards," says Reddy.

That said, he believes they're still strong performers, with both holding extremely strong brands. "Tatts was slower to respond to digital competition, but then wagering isn't as big a part of the business for them."

Wagering accounts for around 75 per cent of Tabcorp's total revenue, and around 30 per cent of Tatts'.

"Dividends are what has made them attractive to investors, given our interest-rate environment. They're relatively evergreen, with more steady earnings rather than cyclical. And given they're operating in a mature market, they're also good yield-payers," Reddy says.

While he suggests international competition is a competitive tension for them, just how disruptive offshore operators will be remains an open question, along with the scale of any threat.

A government review that kicked off in April this year may be another element that could help the incumbent gaming players see off the overseas competition.

"This government has accepted the recommendations [from the review] and is trying to implement some of them, but I'm not sure how easy it will be," Reddy says.

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Glenn Freeman is Morningstar's senior editor.

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