Across client accounts that have selected the “Income” Australian Equity option we have bought Tabcorp Holdings (TAH), a diversified gambling entertainment group offering a diverse product range including wagering, lotteries, Keno, media and gaming services throughout Australia and the United Kingdom. This purchase has been funded from the sale of Flight Centre Travel Group (FLT).

We are positive on the medium-term outlook for TAH for the following reasons:

  • the Tatts merger adds a complimentary business with stable revenue and long term exclusive licenses
  • the merger also provides opportunity for substantial synergy benefits
  • increasing lottery sales via digital channels provides scope for margin improvement
  • the combined wagering business enjoys a dominant market position and improving regulatory environment
  • the gaming services division is growing strongly, enjoys inflation linked price increases and has excellent margins
  • opportunities exist to improve fixed price yields in UBET

As with all investments it is not without risks which include operating in a highly regulated industry with increasing restrictions aimed at protecting customers. The online wagering environment where corporate bookmakers have in recent years enjoyed a cost advantage is particularly competitive, and ‘synthetic lottery’ operators like Lottoland pose a threat to the monopoly position traditionally enjoyed by incumbent lottery providers – proposed regulatory changes may however help ease both the latter pressures going forward.

The purchase was funded from the sale of Flight Centre following very strong price appreciation in recent months that has also seen the forecast dividend yield fall dramatically. While the reporting season showed that trading across all regions in which Flight Centre operates was strong, especially the international and corporate businesses, the domestic leisure market remains subdued with near term profit growth potentially slowing. At current valuations we prefer the more certain forecast dividend yield from Tabcorp for clients that have elected the ‘Income’ option, despite the medium-term earnings growth potential offered by Flight Centre.

If you have any queries, please contact Elston.