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Tabcorp: A tale of two entities

Angus Hewitt  |  17 May 2022Text size  Decrease  Increase  |  
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Executive summary

The upcoming demerger of The Lottery Corporation, or Lottery Corp, from Tabcorp (ASX:TAH) allows shareholders to invest directly in the latter's crown jewel. Lottery Corp's lottery and Keno businesses enjoy superior competitive positions, while the outlook for the "new" version of Tabcorp's wagering and gaming services businesses is more challenged. Lottery Corp's licences afford the company a near-monopoly, while the new Tabcorp's licences do little to protect from digital disruption. Lottery Corp is the largest player to the fast-growing online channel, while the new Tabcorp is bleeding market share to more agile online competitors. Lottery Corp can support a high dividend payout ratio thanks to little capital expenditure requirements, while new Tabcorp will need to continue investing in its platforms to fend off competition.

We raise our fair value estimate for shares in the combined Tabcorp entity to AUD 5.00, from AUD 3.80 previously, following a fresh look at the competitive positions for the two separate entities. The raise is based principally on a lower cost of capital assumption and assigned moat rating for Lottery Corp, which we expect to thrive once liberated from the beleaguered wagering and gaming services businesses, more than offsetting additional oneoff and ongoing costs following the demerger

Key takeaways

  • The Lottery Corp enjoys a wide economic moat by virtue of its intangible assets, including brand equity and regulation. We think Lottery Corp is well-positioned to thrive as a standalone entity, and we estimate a post-demerger fair value estimate of AUD 4.00 per share.
  • We expect the "new" Tabcorp to remain competitively challenged, and we intend to maintain our no-moat rating for it following the removal of the competitively superior lottery businesses. We estimate a standalone fair value estimate at AUD 1.00 per share. As Tabcorp shares are still trading with Lottery Corp entitlements, we combine the two valuations to AUD 5.00 per share.
  • We will provide star ratings for the demerged entities once they begin trading on May 24, 2022

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