Gambling stocks are time-honoured defensive investments in troubled times – such as the odds-on economic downturn the Reserve Bank is engineering.
Still, it’s getting harder to pick the Makybe Divas from the donkeys.
It was easier a decade ago, when Tabcorp (ASX:TAH) and Tatts Group accounted for most racing and lottery activities and Victoria’s lucrative pokies.
A 2008 Victorian government decision stripped the two Ts of their pokies franchise and in 2011 Tabcorp hived off its casino business as Echo Entertainment (now the scandal-ridden Star Entertainment Group).
Ever the blushing suitors, Tabcorp and Tatts merged in 2017.
In an amicable divorce, Tabcorp has now de-merged the lotteries business as The Lotteries Corporation (ASX:TLC), leaving Tabcorp with the nags, sports betting and media (primarily Sky Racing).
For some years Tabcorp has struggled with the emergence of the corporate bookmakers who freeloaded on Tabcorp’s sizeable investment in ‘content’ (horse races).
These inequities are slowly being fixed: NSW and Queensland have just introduced ‘point of consumption’ taxes that impose extra costs on Tabcorp – but are also payable by the corporate bookies.
Still, some investors query the long-term value of the operator’s 4200-plus physical venues in the digital age.
With government lotteries tied up, the Lottery Corporation looks like the most stable of the bifurcated Tabcorp arms.
The high volume, low margin business is expected to generate healthy dividends. But when $100 million jackpots aren’t creating a buzz, the business looks a tad staid.
The sector’s real growth prospects are in the US, where sports betting is only just being legalised on a state-by-state basis.
Founded by Sam Swanell, the force behind Tomwaterhouse.com.au, Pointsbet (ASX:PBH) swooped early and won franchises in New Jersey, Indiana and Iowa.
The heavily loss-making but cash-rich outfit then fell from investor favour, but it’s game on again after US financial group SIG Sports this week injected $94 million via a placement at $2.34 a share – a 15 per cent premium.
Brokers Goldman Sachs expects Pointsbet to have 14 states tied up by year’s end, with the Canadian province of Ontario thrown in for good measure.
Or will the providers of ancillary services come up trumps, just like the merchants who sold pots and pans on the gold fields?
In the case of lotteries, only about one-third of transactions are carried out online. Via its Oz Lotteries arm, Jumbo Interactive (ASX:JIN) has the rights to Tatts’ online sales (among others) and believes this proportion can only grow.
Jumbo also provides the underlying software to run lotteries, enabling charities and such to do so. On the back of recent acquisitions, the company expects revenue from this arm to grow to half of its revenue by 2026.
Goldman Sachs values the stock at anywhere between $9 and $6 (it’s currently trading around $14, for a jumbo $870 million market cap).
Similarly, Betmakers (ASX:BET) provides the requisite software for parties such as wagering operators and race authorities in eight countries.
The company is chalking up close to $100 million of annual revenue, but that hasn’t stopped the heavily short-sold stock from losing 75 per cent of its value from its May 2021 peak of $1.30.
A key risk for the heavily regulated sector is that inexperienced – or simply unethical – operators flout responsible gambling rules.
With its encryption tools, microcap IXUP (ASX:IXU) enables self-excluded gamblers to remain that way.
IXUP’s Marcus Gracey says currently a punter can self-exclude with one provider but there are dozens of other online platforms to tempt them.
IXUP enables the secure sharing of customer information to ensure exclusion across multiple providers and jurisdictions.
The tool can also ensure that sportspeople don’t bet when they shouldn’t be – but it can’t stop them from cavorting in Bali nightclubs.
Think of IXUP as an ethical darling in an industry that often needs saving from itself.
This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision.