todays editorial for TTS from morgan stanly city, pls DYOR, good luck... :-)
Tatts Group Ltd (TTS.AX): Declared the winner on Lotteries
TTS Has Successfully Bid for NSW Lotteries ? $850m to be paid for the 40-year License, in a 100% debt and cash funded deal, to settle in March 2010. Guidance is that EBITDA in TTS Lotteries division will grow from $119m in FY09 to $240m by FY14e, and will be eps accretive, before $14m of restructuring costs. We understand TTS expect the transaction to be significantly cashflow accretive.
Earnings Revised ? Based on guidance and deal metrics, core eps falls by 1.5% in FY10 to 21.4cps, rises by 2% in FY11e to 23.4cps and rises by 5% in FY12e to 25.8cp. Target price has increased to $2.80, Buy recommendation retained.
Sticker Shock Driven by Price ? TTS's sell-off after the announcement was driven by "sticker shock", as the mooted price had been c$600m, and we had valued the "base case" of $526m. We understand that the terms of the final deal delivered additional value over what had initially been proposed. We also believe it is appealing for the NSW Government to deliver an "upside surprise" on the price achieved, and the granting of additional concessions to achieve this possibly suited both buyer and seller. Our previous ?Upside Case? (see Gaming 2010, 29 Jan 2010) was $1,049m, and on the guidance given, our valuation is now $1156m, so the transaction adds to value.
TTS Track Record on Lotteries Is Reliable ? TTS acquired Qld Lottery Operations at end June 2007 for $542m, and guided for EBITDA uplift of low to mid $50m's; however in the first year, Lotteries division EBITDA improved by $70m.We believe that the market is yet to fully understand the appeal of Lotteries as a gaming business, particularly given the very long-term license TTS has secured. TTS ownership of both Qld and NSW Lotteries for extended periods improves likelihood of renewal in Victoria in 2017, although this is not in our forecast or valuation.
Buy ? The market's reaction to the deal was driven by the higher-than-expected price, without understanding where additional value may have been achieved. The guidance given is above our previous "Best Case" valuation and we believe, as the market understands the drivers, the value will be reflected.
TTS Price at posting:
$2.39 Sentiment: Buy Disclosure: Held
