Lotteries ‘not enough’ to make up lost earnings at Tabcorp: Citi

Tabcorp’s major income segment is still ‘exposed to volatility’ within consumer spending, says Citi.

Citi flagged the near-term outlook remains challenging, prompting it to initiate a sell rating for Tabcorp stock at a price target of $2.80 each. Picture: AAP

Analysts at Citi say Tabcorp’s defensive position in lotteries is not enough to absorb expected earnings declines brought on by COVID-19’s economic disruption.

The betting giant’s near monopoly within the lottery sector has remained in a fortunate position due to cyclical jackpot trends and newsagents being able to remain open during the lockdown.

However, Citi has indicated lottery ticket revenue sales will not be enough to offset the forecasted 14 per cent decline in earnings for the 2020 financial year.

The brokerage said Tabcorp’s major income segment is still exposed to volatility within consumer spending and smaller annual price changes which are unable to offset inflation.

It also noted future earnings will correlate to the jackpot cycle, which usually adds an element of “randomness” with revenue streams.

According to Citi, around 5 per cent of its free cash flow yield within its lotteries and keno business, is generated from lottery ticket sales.

“Tabcorp’s lotteries business has no direct competitors or suppliers, eliminating competitive margin pressure,” Citi said.

Citi’s equity researchers are estimating lotto ticket sales in March and April will increase 10 per cent compared with the previous corresponding period, driven by favourable jackpot sequencing and retail purchasing points remaining open during the pandemic.

But has flagged the near-term outlook remains challenging, prompting it to initiate a sell rating for Tabcorp stock at a price target of $2.80 each.

As at 12.42pm, Tabcorp was trading up 1.4 per cent at $3.25 per share.

“We expect lottery revenues to grow 2 to 3 per cent in financial year 2020 through to financial year 2022,” Citi said.

“However, we forecast keno revenues to fall by negative 29 per cent in financial year 2020 from pubs and clubs closures due to COVID-19.”

The brokerage has also raised concerns regarding whether Tabcorp’s current dividend yield warrants a premium, due to forecasted strains on liquidity.

“Tabcorp has not cash covered its dividends in three of the past five years; as it is paying out more than its free cash flow in dividends each year,” Citi analysts said.

“The sustainability of this dividend yield is questionable in our view given already-elevated levels of gearing; limiting capacity to add further debt to fund dividends.”

Industry consolidation sparked by the merger BetEasy and Sportsbet does present growth opportunities for the betting group’s online TAB betting platform.

It is expecting Tabcorp is likely to benefit from 10 to 20 per cent leakage of BetEasy customers, who do not have an active online Sportsbet account.