What tighter regulation could mean for Tabcorp
A new report from the federal government into online gambling marks yet another call for tighter regulations for the nation's gaming industry. We sit down with Morningstar's Lochlan Halloway to discuss what it means for the investors.
Joshua Peach: Earlier this month, the federal government released the findings of a key report into the online gambling industry. But what does this mean for the ASX investors that are taking a gamble on a gaming stock? I'm here with Morningstar's Lochlan Halloway to discuss.
Thanks for being here with us today, Lochlan. The federal government just released its report into the online gambling industry. Can you explain a little what prompted that report and what its key findings were?
Lochlan Halloway: Yeah, absolutely. So, a few things. I think firstly is an increasing number of Australians who are concerned about the prevalence and the harm caused by online gambling.
Australians lose the most per capita in the world on online betting. That's a concern. I think there's also a concern about what it's doing to children, how it's affecting young people. So, the government basically said we need to have a look at our current regulatory settings and work out are they fit for purpose and also are they meeting community expectations.
In terms of findings, look, the report basically found we need to do more on gambling regulation. That's the main takeaway. And fundamentally, there were 31 recommendations made by the inquiry about how we might chart towards tighter regulation, broadly speaking, and also some changes to the way we regulate online gambling.
Peach: Can you speak a little bit about the impact to the industry potentially going forward?
Halloway: Yeah, absolutely. So, firstly, I think we should probably recognize this continuation of efforts made by government to tighten regulation and increase scrutiny on gambling providers. This report made 31 recommendations to government. They are recommendations at this stage.
They don't have to be accepted or endorsed or implemented by government. But given that there's sort of broad public support for gambling regulation reform and it's fairly bipartisan, we'd expect that a lot of this regulation would get through in some way or another.
I think the most consequential recommendation of the report for the industry would be to ban or prohibit online gambling advertising at some point in the next three years. That's going to have quite serious impacts for those providers who rely quite heavily on advertising to drive customers and market share.
Peach: Despite those recommendations, Morningstar has held firm on its fair value estimates for Tabcorp. Why do you think investors shouldn't be worried?
Halloway: I think overall though, we believe this report is probably value neutral for Tabcorp. And the reason that is, as I said, it probably comes back to this gambling advertising piece, which is, in our view, the most consequential part of the report in terms of recommendations.
Just looking at Tabcorp, recent history, Tabcorp was the only game in town for betting. So, they were pretty much the dominant player. But over the last decade or so, their market share has slowly been eroded and chipped away by these online, more digitally-enabled competitors.
So, you're thinking like Sportsbet or Ladbrokes. But also, these are – these are new entrants and they managed to take quite a bit of share from Tabcorp through online advertising of their gambling operations, promotions and that sort of stuff.
So, if it were to be the case that gambling advertising was prohibited in the next three years, we'd expect it would be harder for these new entrants to come in, these challengers to come in and erode share from the big incumbents like Tabcorp.
So, overall, when you think about it in net-net terms, yes, tight regulation is the general trend that we're moving in, but in terms of advertising spend, it might not be all bad news for Tabcorp.
Peach: The report arrives amid a kind of broader crackdown. We've seen casino operators like Star and Crown be issued heavy fines in Crown's case. Do you think the industry overall will be seeing a higher level of regulatory burden going forward?
Halloway: Yeah. So, I think maybe here, it's probably good to recognize, well, which parts of the sector are most closely linked to gambling harm, because we'd expect those would be the areas where the government would focus most of its scrutiny and most of its regulatory changes. So, I mean, for example, when you look at where proportional gambling harm is highest, it's probably in those sectors like online sports betting, poker machines, for example, casino gaming. And understandably, as a result of their links to betting harm, they are the ones who will probably see the most regulatory scrutiny and the most regulatory change in the near future. When we look across spec, there are parts of the industry which aren't so closely linked to gambling harm. So, lotteries, for example, would be one area where we see lower levels as a proportion of problem gamblers engaging in the purchase of lottery tickets. So, when we think, well, who might be the most exposed to regulatory change, companies like Lottery Corp. might fare better given that they aren't so closely linked to the harmful side effects of gambling.
Peach: Thanks, Lochlan. Thanks for chatting with us today.
Halloway: Thank you.