It performed strongly from its listing in 1994 until 1999 but
has since traded in a $4 range from top to bottom almost three times. The acquisition
of the Sydney Star City Casino in 1999 accounted for some of the early price
weakness but has since propelled Tabcorp’s growth. The current weakness is partly
due to the risk of it making another large acquisition.
Profile The Kennett Victorian government floated Tabcorp Holdings in 1994. It has
rewarded early investors, with dividends growing from 15 cents a year in 1995 to
more than 62 cents last year. Principal activities revolve around gambling.
Current details
The Victorian Government introduced a smoking ban in clubs and
pubs in September last year, which has contracted gaming revenues. It is too early
to extrapolate a full year’s effects but Victorian gaming revenue will probably have
no growth this year at best. The Star City Casino and hotel continue to provide
growing returns. Total group net profit jumped 39 per cent to $261 million for the year
to June. Tabcorp pays out about two-thirds of profits in dividends, with a franked
dividend yield of 6.2 per cent. This year’s profits look similar but if Tabcorp issues
shares to acquire Jupiters there will be a dilution to Tabcorp earnings as Jupiters
is selling on a higher price-earnings. This would lead to share price weakness.
Sector
Tabcorp Holdings (market capitalisation $3.7 billion) is in the process of
making a merger offer for Jupiters Limited ($1.2 billion). Jupiters runs two casinos,
on the Gold Coast and in Brisbane. Jupiters was, in its own right, having merger
discussions ($600 million) with UniTAB (formerly TAB Queensland). There are two
potential sticking points. The first is that the Queensland Government could place
onerous conditions to protect Jupiters’s position as a tourist magnet. On this point
the Queensland Government would prefer the UniTAB/Jupiters scenario merger.
The second sticking point is how the Australian Competition and Consumer
Commission will perceive
the market dominance
that the Tabcorp merger
would have in restricting
competition.
Worth buying?
If Tabcorp
Holdings does not
acquire Jupiters, the
short-term risk drops and
the price could recover
much of its recent slide.
The current weakness
presents an opportunity
for investors looking for
income to buy and
accumulate at about the
$9.80-$10.30 range for a
yield of about 6 per cent.
Geoffrey Hill is presenter of ABC News Radio’s daily afternoon finance report and is an
independent private client adviser. Email gh@ghill.com.au
