Tabcorp’s David Attenborough joined the write down party today slashing the value of his assets by 34 per cent or $1bn, blaming the impact of COVID-19.
This will be a familiar story this earnings season. But investors should be wary as the Tabcorp reaction neatly suggests.
The stock was trading down 1.7 per cent as pre-lunch drinks were being poured with the stock price around $3.50 a share having fallen as low as $3.34 in earlier trade.
The reason for the bounce back was simply that the profit number suggested by Attenborough was ahead of consensus, at around $270m against market tips of $260m.
The number is down 32 per cent from the year ago profit of $396 million and at an earnings before interest, tax, depreciation and amortisation level down 15 per cent.
In his statement Attenborough talked of the uncertainty and the direct impact of COVID.
The latter is in large part because the company’s retail outlets are shut and in Victoria at least remain so as are the outlets in pubs and clubs.
If someone can’t place a $10 bet at the TAB they will go online but in doing so they may well choose a competitor, which means the business is lost.
COVID has fast forwarded the switch away from physical locations to online with the mix now around 50-50, against 90 to 10 a decade ago.
This is the business risk facing Tabcorp.
The question then is can we blame COVID, or was this going to happen anyway?
Its not all bad either, because online sales don’t require commission payments to the pubs or club where the bet was placed.
In this case the real loser is the pub.
At any rate, the answer to the question is, yes it was going to happen anyway.
Luckily for Attenborough over half his earnings come from his lottery business which have sailed through the virus.
From a management perspective 2020 is a write-off so it makes sense to throw the kitchen sink at valuations which have the happy result of making last year’s number bad with the hope of boosting this year’s numbers.
With that increase comes a chance of more executive bonuses after 2020 becomes a complete washout.
Lower valuations mean lower depreciation charges, which in turn boost profit numbers, which is exactly how things will turn out for Tabcorp.
Unless of course the competition steals its business, which is a tough thought for a company so used to being the dominant player in the market.
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