Tabcorp’s Shocker

The hatches have been battened; the gate bolted after the horse has gone and the strategy is changing at Tabcorp, but changing one would feel, all too late.

The company yesterday said first-half profit fell 22 per cent after one-off items, on lower earnings from casinos and higher costs, especially in its wagering business.

The size of the fall spooked the market and even though some analysts had been concerned about the company’s direction and profitability, the fall in earnings and tenor of comments came as a shock.

So the big expansion of the past three years is over, the forays internationally are off and its back to the nitty gritty of the everyday ‘grind’ at the casinos and the better shops.

The market remains to be convinced.

The shares tumbled 75c at one stage to $16.99 before recovering cautiously to finish around $17.11, off 64c.

The result and extent of the problems shouldn’t have come as too big a surprise though as twice late last year the company warned that it was stepping up its cost cutting and making other changes, to try and repair the operational problems. Some of the one-off write-offs were signalled then.

The second time saw a bigger series of cost cuts revealed, always a sign of a company and its management behind the game and scrambling for control.

And so it was yesterday with the company saying net earnings tumbled to $224.1 million in the December half from $285.6 million.

Profit before one-off items fell 3.6 per cent to $270.3 million compared with expectations for earnings of around $286 million to $288 million for some analysts. That represented a fall in earnings per share from 54c to 43c.

Normally the operational line gives a better indication of how the company went and the 3.6 per fall does give some idea. But in the case of TAH the one-off items need to be included because they are directly related to the cost of trying to reverse that slump.

That’s a big ouch and it is one of the more disappointing earnings reports of the current season.

The company said “normalised net operating revenue was up 3.7% to $1.99 billion, reflecting a strong performance in wagering which offset a weaker performance in casinos”.

And in a sign that the company realises it has an image problem, interim dividend is being boosted 3c a share to 47c to keep shareholders happy when they look at the lower share price.

The TAH result emphasises the dangers of surprising the market: contrast TAH’s way to that of Wesfarmers and Telstra which last week both reported lower earnings after warning that they was going to happen. TLS shares are firm and WES shares recovered their poise after a small panic.

But now TAH CEO, Matthew Slatter says the company has left the takeover trail after almost $4 billion in buys since 2003. There was that now over-priced failed tilt at UniTaB in Queensland last year (which went on to merge with Tattersall’s).

Mr Slatter has discovered that the problems are closer to hand: they are operational, the smoking bans hitting casino revenues and the still lingering impact of the absurd broadcasting wars on its wagering business.

“Merger and acquisition activity and international moves are off the agenda until we get these businesses delivering better results,” Mr Slatter said in a statement.

“The outlook for the balance of the financial year remains challenging particularly in the casinos division where smoking bans continue to impact revenue.”

Which is shorthand for; the second half may be no better!

The wagering business’ EBIT fell 2.5 per cent to $143.6 million on higher costs for race broadcasting rights and integration of technology systems from TAB outlets.

To end a two-year standoff on race broadcast rights, Slatter agreed to pay $27.5 million annually to thoroughbred clubs in Sydney and Melbourne to show events on his Sky television channel. The dispute hurt growth in the TABs business because gamblers wouldn’t bet on events they couldn’t see. (It seems so simple, doesn’t it.)

Tabcorp took A$30 million charge in wagering during the half as they moved to a single technology system for the unit covering NSW and Victoria. A further $50 million, revealed late last year, is being spent updating the TAB outlets in NSW which look dated and lag behind the Victorian outlets in terms of appeal and ease of betting.

Earnings from TAH’s four casinos, including Star City in Sydney, fell 19 per cent to $169.2 million thanks to smoking bans which cut gambling and higher costs for the revamp of Jupiters on the Gold Coast.

Poker machine earnings were a tiny bright spot, rising 0.2 per cent to $136.5 million.

But you get a flavour of the sudden conversion to operational enhancement with these comments from the company and Mr Slatter.

“For the next 18 months to two years we are focused on getting our excellent portfolio of businesses performing at optimum levels,” ..”Merger and acquisition activity and international moves are off the agenda until we get these businesses delivering better results.”

Given that the company and the CEO and his team spent most of last year trying to win UniTab and then looking overseas (Singapore for example), you have to ask if anyone with any authority in the company was looking at the cash generating heartland in Australia and seeing problems emerging.

Tabcorp says net revenue for the first seven weeks of the second half was up three per cent on a normalised basis but down 1.8 per cent on an actual basis.


“Our focus for the second half and for the 2008 financial year is to lift the underlying earnings performance of our businesses here in Australia,” Mr Slatter said.

“We have a great set of assets with strong cashflows that are not as yet performing at their optimum level.”

That still tells me that he doesn’t understand: assets don’t generate pr

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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