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ASX: TAH - Tabcorp Limited

TAH - Tabcorp Limited

Tabcorp Limited (ASX:TAH) is Australia's leading wagering, racing media and Keno operator.

Tabcorp manages leading customer brands in Australia, including TAB.com.au, Keno, Luxbet, Tabcorp Gaming Solutions, Sky Racing and Sky Sports Radio. These brands serve millions of customers every year.

Tabcorp's four businesses are:

1. Wagering - totalisator and fixed odd betting

2. Media and International - broadcasting of sporting and horse racing events

3. Gaming - electronic gaming machine operations

4. Keno - operating Keno in clubs and hotels within Victoria, New South Wales and Queensland

In June 2011, Tabcorp completed the demerger of its Casinos Business to form the newly listed Echo Entertainment Group Limited.

Does this business have a sustainable competitive advantage?

Tabcorp has a sustainable competitive advantage across part of their business with a 10 year licence to provide Keno operations in Victoria which began in April 2012. And, they possess a 12-year Victoria Wagering and Betting License which started in commenced in August 2012.

These licenses should ensure that Tabcorp will generate continuing streams of income over the next 12 years from two of its four business divisions.

Tabcorp's other easy-to-see advantage comes from the broad range of distribution channels and brands that it promotes. Their betting products being their brands are distributed at TAB outlets, clubs, pubs, hotels, race tracks and online across your internet connected device of choice.

What are the risks facing this business?

The biggest risk is the growing competition particularly in the digital/online space for their wagering business. With seemingly little barrier to entry to set up an online betting/bookmaking service, providing a profitable point-of-difference in this space will continue to be difficult.

A second risk comes from the debt levels the business carries. The licence wins in Victoria have come at a cost and the company holds 80% of their equity as debt as of December 2012.

Is it run by able and trustworthy management?

Management has done a great job to secure licenses in Victoria in recent years. This bodes well for the longevity of the business.

Is it trading at a bargain price?

On a fundamental balance sheet view of the business and considering the current debt levels, it is expensive. However, I wonder if the share price improvement since November is merely:

1. 1. A function of a rising tide lifting most boats including Tabcorp, or

2. 2. The market pricing in a restructure of online gambling given the negative media coverage afforded this year to arguably Australia's highest profile online gambling provider

Rank 2012 Actual Valuation Today's Share Price Margin of Safety 2013 Forecast Valuation 2014 Forecast Valuation 2015 Forecast Valuation
Bronze 3 $3.21 $3.34 -161% $1.28 $1.31 $1.73

*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

Summary

In summary, Tabcorp is a business that will be operating for at least the next 12 years given the licenses it holds. The company has taken on more debt in recent years and while profitable, has not produced cash flow that reflects that profitability. The company will face continuing changes due to the impact of online gambling and I will watch this space with interest.