Investsmart have ceased coverage at this SP level. Upgraded TAH...

Investsmart have ceased coverage at this SP level. Upgraded TAH to a BUY.

per their recco dated 1st July......

" Tabcorp currently pays Jumbo a 9% sales commission on the ticket price, and Tabcorp left that commission in place. But the company has introduced a new 4.65% 'service fee' on ticket sales that Jumbo needs to pay, which lowers the effective commission from 9% to 4.35%. Tabcorp is also charging an up-front $15m extension fee. Jumbo got what it wanted - continued status as an authorised re-seller - but the negotiation had a mafia/shopkeeper tone: 'Sure, we'll watch over your store ... but there's now a monthly 'service fee' ... and we can't guarantee your safety if you refuse.'The service fee will scale up from 1.5% in 2021, to 2.5% in 2022, 3.5% in 2023 and 4.65% thereafter. However, if ticket sales exceed $400m the higher fee kicks in straight away. Jumbo's management expects to sell $335-341m worth of tickets in 2020, so there isn't much room for growth before the full 4.65% starts.

The new agreement won't have any effect on ticket sales, so this is purely a re-slicing of the pie in Tabcorp's favour. Jumbo's effective margin on ticket sales is 20% (its 9% commission from Tabcorp and an 11% premium charge, which the ticket buyer pays). But the new agreement lowers that to 15.4% - a 23% revenue cut that will cut profits by 30% or so looking 10 years out. Jumbo could increase its prices to make up the difference, but that would encourage punters to save by buying directly from Tabcorp. We think the premium is more likely to be lowered over time as the company tries to hold onto market share.Accounting for lost future profits, the new agreement reduces Jumbo's valuation by around $300m compared to the status quo. And that's been entirely 'captured' by Tabcorp, though the deal only adds a few percent to the company's intrinsic value, given its larger size. Still, the new agreement shows Jumbo's customers are valuable to Tabcorp - the company could have squeezed Jumbo even more or refused to renew at all, but it would risk losing additional ticket sales. Jumbo clearly has some negotiating power, just not as much as the mobster holding the lottery licence.

This was a good outcome for Tabcorp shareholders. And while Jumbo has given up some future profitability, the added certainty around what that profitability will look like gives us more confidence in the company. It also provides more certainty to pursue other growth opportunities, such as lotteries for charities and overseas lotteries.Jumbo's share price is down 7% since we downgraded to Sell in February and could be slightly undervalued, but there isn't enough margin of safety to warrant an upgrade to Buy. We're removing Jumbo from ongoing coverage until the share price falls below $8.50 when we'll consider upgrading."