Check The Odds On The Best Bets For Share Punters
Sun Herald
Sunday June 19, 2005
Gambling companies are attracting attention with the Tatts float. David Potts looks at their chances.
YOU'VE got to be in it to win it, so the saying goes, but my experience of having a flutter is when you're in it, you've lost it. Not that I'm bitter or anything. But I'd rather be the bookie than the punter, or the house than the big roller, any day. Only somebody like Kerry Packer can pull off both.And, wouldn't you know, the share price of his listed company Publishing and Broadcasting (PBL) has taken off, again, thanks to all the speculation about new casinos in Macau.The tabs on TattsStill, that's nothing on the interest the Tattersall's float is generating, even though, or perhaps because, the shares are well-nigh impossible to get.Their price will be somewhere between $2.40 to $2.90, but because the stock will be so tightly held brokers are tipping that it could go as high as $4 on day one.Mind you, none is allowed to be seen to be spruiking it before listing, but rest assured I heard one say it.The prospectus forecasts an annualised 6.3 per cent fully franked dividend at the low-end price which, considering the interest from institutions alone, is at best academic and the more realistic 5.2 per cent based on the top end of $2.90.Yet brokers are saying that anything Tatts can do, Tabcorp can do better.UBS gaming analyst Anthony Aboud has even calculated that, using the figures in the Tatts prospectus, Tabcorp must be worth another 25 to 93 cents.Certainly there's no disputing the quality of Tatts. Great balance sheet, no debt, a cash flow to die for and about to get another $290 million from the float to play with.And did I mention the 5.2 per cent dividend that is franked, and so comes with its own 30 per cent tax break? Just checking.Even the rather pressing fact that its Victorian lottery licence, which it has held forever, expires in 2007 has barely rated a mention in dispatches, perhaps on the ground that nobody else is interested in running a lottery where are the Packers when you expect them? and in any case, the worst Tattersall's faces is a likely increase in its 7 per cent licence fee.Frankly, it's hard to imagine that there's not much money in running a lottery and a lot more than in winning one but the fact is that even for Tattersall's, it's the Victorian duopoly in gaming machines where the big profits are.Duopoly? You'll never guess who the other one is. Oops, you did. Yes, Tabcorp, which faces its own reckoning in 2012 when its Victorian gaming licence is due for renewal. As it is, a quarter of its gaming profits go to VicRacing.Price and prospectsAs with any share investment, it all comes down to price and prospects.And Tabcorp last week revealed it has a 67 per cent share of a new venture seeking permission to sell lottery tickets in China. If it gets up and every Chinese buys a lotto ticket . . .I think you get my drift.Even so, there's no question among analysts that Tatts is an immediate bargain if you can pick up any shares for $2.90 or less.But over time they're not so sure.As CCZ Statton analyst Tony Waters points out, it's going to be hard for Tatts finding somewhere to spend its $290 million kitty, unless it hands it back to shareholders. Hmm, now there's a thought."It's about five years too late for the consolidation in gaming companies," he says. "So what is it going to buy?"Remember, Tabcorp snapped up Star City and Jupiters, PBL got Crown and Burswood and Sky City Entertainment has Adelaide and Darwin. By the way, isn't it funny how Sydney owns the Melbourne casino and Melbourne owns Sydney's . . . but where was I?Oh yes, Tatts and its future. It does have some minority interests overseas, but its prospects would seem limited because of the natural disinclination of politicians to hand over state licences to foreigners.Besides, Waters points out that the past half year, Tatts has been growing at 1 to 2 per cent, likely to rise to 2.1 per cent next year, compared with Tabcorp's 8 per cent.The waiting gameEven the cosy Victorian duopoly is no longer split down the middle but favours Tabcorp, which I have on the best authority has snazzier slot machines.As far as brokers are concerned, the odds are with Tabcorp.Still, neither stock could be considered cheap."They're good businesses, but investing is all about the right valuation," said Jason McIntosh of share tip sheet Fat Prophets.He points to the price/earnings (P/E) ratio of gambling stocks being higher than average. Because this ratio measures how many years of profits it would take to get your money back, the higher it is, the longer you have to wait. Like gambling itself, you'd need to be extremely patient.One complication in comparing P/Es is that the accounting rules have changed. Under the new international financial reporting standards, the treatment of goodwill, a sizeable component whenever there's a merger or takeover such as in the casino stocks, has changed.Forecasts of 2005-6 earnings by CCZ Statton under the new rules show Tabcorp is relatively cheap. Its projected P/E is 13.8, compared with Tattersall's 15.9, Sky City Entertainment's 17 and Unitab's 19.1.Among the other stocks, brokers say Sky City Entertainment has proportionately more borrowings than their peers, while Unitab has been too well liked by analysts because it has become very expensive.Time your plungeBut it seems the stocks of sin still have a way to go. Little wonder. They don't have to spend anything to get extra dollars flowing in. They're resistant to recessions, and even the ageing population suits them because most pokie players are over 55.Not to mention casinos. The two likely to benefit most from new casinos in Asia are PBL, as a potential owner, and Aristocrat Leisure, as a potential supplier.Doubtless it's more than a coincidence that the Packers have built their wealth in television, where the number of players is strictly controlled, and are now building on it in casinos, where in every country the number of players is also strictly controlled. Clearly they know how to make money out of government regulations.PBL also has a half share of Betfair, a British invention where you bet against other punters and can even back losers. Now, that sounds more like it.Needless to say, the racing industry hates the idea but Tasmania is close to deciding whether to license Betfair, in which case it would be able to advertise its wares in Australia for the first time.For its part, Aristocrat has taken the US by storm and, as one broker put it, "it's great in virgin territory" where it has to start from scratch.It's also been a rip-roarer of a stock since the start of the year, jumping some 450 per cent."The only people who could screw it up are themselves," joked Michael Heffernan of Reynolds Stockbrokers. Only they nearly did."It's got good technology, good games and it's never missed out on a licence," he said.Despite its amazing run, the best isn't over.Heffernan predicts it will come into its own after 2007 when new casinos will have opened in Asia, eastern Europe and Japan.Other brokers like the stock too. "Aristocrat is one of the best businesses in Australia," Aboud said.The trouble is the market knows it, so it's not going cheap."If it misses one market target, it'll be sold down," he said. "That's when to buy."WHAT THEY OWNTABCORPStar City, Sydney.Jupiters casinos, Gold Coast, Brisbane, Townsville.TABs, NSW, Vic.Sky Channel.Licence for half of Vic slot machines.TATTSLicence for half of Vic slot machines.Tattslotto and lotteries in Vic, Tas, ACT, NT.UNITABTABs in Queensland, South Australia and Northern Territory.SKY CITYCasinos in Adelaide and Darwin and four in NZ, including Auckland.Village Sky City cinemas in NZ.Canbet, 28 per cent.PBLCrown, Burswood casinos.Half of Betfair betting exchange.Nine Network.ARISTOCRAT LEISUREManufactures and sells gaming machines in Australia, US, NZ, Europe and Africa.
© 2005 Sun Herald
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