Wednesday, 1 March 2023

CRITERION: Are recession-hit Aussies willing to punt their kids for ASX gambling stocks?

by Berkeley Lovelace

The gambling industry’s reputation as being recession-proof has been reinforced by a broker survey that found that householders would sell their children on the dark web before they renounce their weekly lottery ticket or horseflesh ‘investment’.

Strictly speaking, the recent UBS survey didn’t gauge the willingness of suburban battlers to monetise their offspring. But it did show that 31 per cent of Australians buy a lottery ticket once a week, and fewer than 10 per cent never buy one.

Of the 75 per cent that buy a ticket at least once a month, 40 per cent said they would continue to do so if prices rose by 10 per cent, while fewer than five per cent of respondents said they would stop altogether.

A similar question about sports betting yielded similar results.

When it comes to ASX gambling exposures, recent dramas show there’s no such thing as a dead-cert winner. But lotteries have enduring appeal, probably because (a) upstanding households don’t see it as a form of gambling (b) the outlay is relatively modest and (c) a seven-figure jackpot is life-transforming while a win on the nags isn’t.

Having demerged from Tabcorp (ASX:TAH), The Lottery Corp (ASX:TLC) on Thursday pleased investors with a special dividend of one cent per share, over and above the interim maiden div of eight cents per share.

Given the company’s policy is to pay out 80-100 per cent of net profits as dividends, this stock is emerging as a veritable cash cow.

Conversely, the mantra at Tabcorp – now a pure-play wagering and racing media operation – is more about reducing costs and bolstering its digital market share.

Tabcorp’s newly-unveiled TAB25 drive includes slashing capex by $600-620 million by 2023-’25, along with an ambitious target to increase its digital market share from 25 per cent to 30 per cent (Tabcorp is currently second biggest, behind Sportsbet).

Otherwise, Tabcorp’s performance looked solid but unspectacular – like that of an ageing stayer.

In the casino sector, things have got messier than Kerry Packer on a winning streak, although the trashed valuations (very arguably) make for a recovery case.

The owner of the Sydney money den, Star Entertainment Group (ASX:SGR) on Thursday posted a chunky $1.26 billion loss (as forewarned) and launched an $800 million capital raising, at a deeply discounted $1.20 a share.

At face value it’s easy for existing holders to pass up on their three-for-five rights entitlement, given Star’s well-aired struggle with money laundering probes, shareholder class actions and a vaunted increase in NSW pokies taxes.

Then again, Bruce Mathieson has quietly been building up a stake in Star. Given he’s the country’s biggest pokies operator via Endeavour Group (ASX:EDV), his judgment has to count for something.

The only listed pure-play sports bookie, Pointsbet (ASX:PBH) has incurred huge losses – $58 million in the last quarter – to support its pioneering beachhead into the US sports betting market.

Still, Pointsbet’s $467 million valuation is intriguing, given it still has $387 million of cash. Allowing for the value of its Australian operations – which are subject to sale negotiations – and Pointsbet’s US business could well be valued at zero.

Perhaps it’s better to stick with the companies that sell the metaphorical pots and shovels to the miners, rather than doing the digging.

In this vein there’s a lot of love for electronic gaming machine makers Aristocrat Leisure (ASX:ALL) and Ainsworth Game Technology (ASX:AGI), which supply the flashing contraptions without the burden of operating venues and complying with responsible gaming rules.

With a $24 billion market cap Aristocrat is far from being a small cap. But Ainsworth – founded by Aristocrat founder Len Ainsworth, now aged 99 – is an intriguing ‘mini-me’ proposition with a $330m valuation.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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