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#3 – $TAH - Despite knowing it is cheap (<5x forward EV/EBITDA) their ailing digital penetration, NSW licence uncertainty & mixed choice of a new CEO makes it a riskier investment than the valuation seems
Unlike some of the other companies covered in these articles, $TAH immediately screens cheaply on forward cash flow and EBITDA metrics, noting that amort of licences & recent impairment charges do materially swing profits.
New CEO - The skills he has & what he doesnt
Given his role as CEO of AFL - everyone knows Gill McLachlan.
To summarise, I see him having the following positive impacts:
Reputationally he is well regarded for a company which is poorly regarded. This will help in working with major sporting codes and State wagering licences
He is likely welcoming of change given his ability to push Womens AFL
He has admitted he has shortcomings in wagering and will lean on the team
The LTIP is structured ok with reasonable alignment but the fixed rem is high
However, this is offset by several weaknesses:
There is genuine algorithmic disadvantages which $TAH has (e.g. Sportsbet has same game multis) and he won't be able to understand/pursure
Whilst Gill would definitely understand advertising, it is fair that gambling is super reliant upon online advertising spend as you can see from Sportsbet growth in Aus advert $ below
Finally, I don't think he would be particularly in-tune with what younger demographics are chasing as opposed to operators like Stake that have grown through Crypto gambling.
What has he done since being in the Chair
Since coming into $TAH he has lowered the bar for himself on all fronts:
removing all TAB25 targets
further impairment of NSW/SA wagering assets and goodwill (FY24 pre-tax impairment A$1.532bn)
Reduced FY24 proforma VIC license EBITDA A$115mn (from FY23 pro-forma A$140mn).
Generally I think "taking a bath" is well known by investment communittee so there's limited alpha in this
Why valuation is a bit pointless here
Valuation is always important, however, there are a few areas which make this tough:
A good result for $TAH in the next 3-years, following a disastrous FY24 financials (excluding the impairment) would be if the company generated
3-year Revenue CAGR of c.4.5%
Pushed EBITDA margins from 14% to 15%
Opex for Wagering could be capped at c.$600-650m
Held a 7% ROIC
Ran down their net debt balance
Maintained a 26% market share
So as you can see, the hurdles they have to achieve are really just stasis but that would be an incredible achievement given how things have been
Instead, the key items which I need to see $TAH to be interesting formulate clear messaging on the following
Costs: Greater clarity on their opex management plan:
What the true split out costs now TLC has been demerged (e.g. Victorian Racing is now included)
When they will have completed the rightsizing of the firm (Project Genus)
What the future payments are required in NSW
Digital Penetration: A genuine strategy change which will stop Sportsbet/Stake's dominance
App functions: Becoming a leader in stats/content or social betting (noting that live betting is banned in Aus)
Deleveraging: A clear focus on paying debt and not persuing M&A
Overall, I think $TAH is an ok company (if Flutter is $REA, they are $DHG) but I must confess the valuation is better than $DHG (5x forward EV/EBITDA in this case).
Instead of racing into buy the dip for $TAH I think there is patience which can be applied to see:
Monitoring if product improvements & a better advertising strategy gives them growth in digital gaming
Whether Gill chases M&A despite their relatively high leverage
How negotiations go with NSW licence
Whilst I know this company is cheap, I think it is operationally too ordinary to buy today.
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