Why are Tabcorp shares slumping?
Tabcorp shares have slumped amid a slower than expected turnaround and the prospect of tighter advertising rules.
Mentioned: Tabcorp Holdings Ltd (TAH)
Why has Tabcorp's recovery been slower than expected?
Angus Hewitt: Yeah, so there's really three things. First is the weaker, near-term wagering environment. And that's driven by cost-of-living pressures, which is weighing on gambling spending in general and also wagering in particular. Second is competition. So, we've got competitors like Sportsbet and Ladbrokes, which are always looking for ways to take Tabcorp's share.
Tabcorp (ASX: TAH) once had retail exclusivity. They still have retail exclusivity, but that doesn't mean too much when punters can just place a bet on their phone inside a Tabcorp venue. And then third is costs. So, their transformation project was designed to really cap costs through fiscal 2025. And labor cost inflation and high regulatory cost means this really isn't going to come to fruition. They've beaten their 2025 cost targets, and it looks like this cost inflation that's come through in 2024 is going to prove permanent.
How could tighter advertising rules impact Tabcorp?
Hewitt: Yeah, it's actually probably going to be mixed if advertising bans do come through as far as the impact on Tabcorp is concerned. The downside is pretty obvious. Restrictions on advertising mean it's probably going to be harder to attract new punters, and it's also going to likely lead to an overall reduction in the size of the wagering market, wagering turnover in general.
But that's offset by the fact that Tabcorp wouldn't need to pay advertising fees anymore, so that's a lower cost base there. And also, it's probably going to prove competitively more beneficial for bigger players like Tabcorp, like Sportsbet. They've already got the visibility, they've already got the brand recognition, and upstarts don't have that. It's going to be really hard for smaller players to take share from the bigger players.
Are there paralells there with what we've seen in cigarettes?
Hewitt: It's probably notable that Tabcorp itself has been pushing for restrictions on gambling advertising. It's not a selfless endeavor, right?
More advertising equals more competition. So, the cigarette industry has obviously seen advertising expenses go way down and margins have expanded. It's possible Tabcorp haven't been talking about it in that sense. They've been talking about it in a social good sense, but like I said, I don't think that's a selfless endeavor purely.
Are Tabcorp shares undervalued?
Hewitt: We still think Tabcorp is materially undervalued. We think the biggest thing is the near-term downturn in wagering turnover will prove cyclical. And that's due to cost-of-living pressures, right? They're not going to [stay] around forever. So, we think the downturn in wagering is probably going – wagering turnover in general is probably going to increase return to growth in fiscal 2026. And in fiscal 2025, the new Victorian license comes on board, which also comes with an uptick in earnings. It was previously a joint venture.
