Feature Article Centrebet Limited: Initiation of coverage - BUY CIL Last traded: $1.31 Sector: Consumer discretionary Market cap: $114m BUY/OUT PERFORM Valuation: $1.93 Summary of previous report dated 23/06/08 What’s new? We initiate coverage of Centrebet (CIL) with a BUY/OUT PERFORM rating, a DCF valuation of $1.93, and a 12-month price target of $2.16. Our earnings forecasts imply a CAGR of 9.6% over the next five years from FY07-FY12. A good bet at these odds Despite the potential for a downturn in the Australian economy and the subsequent effects this would have on Australian companies that rely on the patronage of the Australian consumer, CIL is a leading operator in an industry with good growth prospects. Regulatory change in CIL’s key markets should ultimately be positive for the company, leading to greater market share and value accretive consolidation opportunities. In short, the company is a leading player in an industry with good growth prospects, despite signs of a downturn/softening in the Australian economy. CIL is the second-largest player in sports wagering in the Australian market, and has a strong foothold in Europe, namely Scandinavia and the UK. The company is also well placed to take advantage of looming changes in the regulatory landscape for racing and sports wagering in Australia. Following the landmark decision in the Betfair case (the High Court held interstate trade is to be free in accordance with the Federal constitution), CommSec expects there will be effective deregulation in the industry including the removal of advertising restrictions on corporate bookmakers such as CIL. commsec.com.au �� 13 15 19 Research Insight 26 June 2008 Potential upside not factored in Our valuation does not include potential upside from possible reforms in the Australian racing wagering industry following the High Court’s recent decision in the Betfair case (27 March, 2008). If there is a shake-up of the industry – and arguably one has already begun – our valuation for CIL increases to $2.31 per share. Our base-case valuation gives an implied PE multiple of 14.8 times versus the company’s current prospective FY08 PE multiple of 8.8 times. Our implied PE multiple is in line with the current weighted average multiple for the small ordinaries index (XSO) excluding financials, materials, mining and energy, of 15 times, and gives investors an opportunity to acquire growth at a discount to intrinsic value. Key risks – government regulation and win rates The government giveth, and the government taketh away: As Tabcorp (TAH)1 and Tatts Group (TTS) 1 recently discovered, the longevity of a gambling business is often at the whim of government regulation. On balance, however, we suggest the risk is to the upside for CIL, with regulatory changes more likely to unveil opportunities than threats in the mid to long term. Win-rates: The company’s earnings and valuation are particularly sensitive to its win-rate on wagering turnover. Our FY08 and long-term forecast win-rates are below the long-term win-rate forecast by the company, however win-rates can be volatile leading to variability in earnings from period to period.
CIL Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
