Feature ArticleCentrebet Limited: Initiation of coverage -...

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.