Tatts Group Full Year Result: TTS profits held back by merger costs & drop in jackpots

CommSec

Gaming group, Tatts (TTS) posted a weaker than expected $220.5m net profit for the 12 months to 30 June 2017. The near 6% slide in earnings was driven by merger costs, fewer jackpots and bad weather which hurt its wagering business.

TTS will pay investors a fully franked $0.08 per share final dividend on 3 October 2017. This matches last year’s distribution, takes the payments over FY17 to $0.175 and gives the company a ~4.5% yield.

Earnings in its Lotteries business fell by almost 9% due to a substantial drop in jackpots above the key $15m level, which tends to generate a spike in customer interest. Over the year there were 31 jackpots (the lowest in five years), compared to the record 45 in FY16. This resulted in a $137.8m hit to revenue in FY17. Its digital Lotteries business continues to grow, with almost 15% of lottery ticket sales now carried out online, while the number of digital lottery customers has lifted by 21% over the year to 1.7 million. TTS made a one-off $120m payment to renew its exclusive licence to conduct lotteries in Victoria for an additional 10 years starting 1 July 2018. This division accounted for 66% of total earnings; making it by far its biggest earner.

Wagering was held back most by bad weather which led to ~350 races being cancelled over the year, which in turn held back its earnings. Around 700 thoroughbred and an additional ~700 greyhound races were lost due to the weather. Its second biggest business unit (accounts for 20% of EBIT). Online wagering sales accounted for 31.7% of turnover, a slight lift on last year’s 30.2%. Downloads of its UBET app have lifted and there has been more than 240,000 visits to the website on a monthly basis.

While remaining the smallest of its divisions, its Gaming business (involved in gaming machine monitoring) was the only unit to improve its earnings. EBITDA lifted by for the fourth straight year, rising 4.6% to $67.7m. TTS rebranded this business from Maxgaming to MAX. The result was boosted by contracted increases in monitoring fees.

Earlier this month TTS and Tabcorp (TAH) decided to defer the release of the Scheme Booklet (which contains details of the proposed merger) to September 2017 and a shareholders’ vote to October. In recent months, TTS has had issues with the ACCC which appealed the Federal Court’s decision to approve the merger. The Full Court of the Federal Court will hear the ACCC and CrownBet’s application on ~28-29 August. It expects the deal to be completed in the last quarter of 2017.

As is usually the case, TTS has not provided FY18 guidance (the company’s profit expectations). However it has enjoyed a strong start to FY18 thanks to a strong Oz Lotto jackpot run ($50m jackpot on 18 July 2017 and 3 jackpots at or above $15m). This has generated ~$200m in revenue and has helped the group lift profits in July by 25%.

TTS shares have initially improved on the result but is underperforming the broader market this calendar year.

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