RP iGaming Index: will gambling LUV recovery?

The merger of Flutter and Stars and DraftKings’ addition helped the Index rebound by 31% vs. the Nasdaq’s 17% during last month, but much remains at stake, writes Paul Leyland. Tabcorp is this month's stock in focus

As the reconstituted Regulus Partners iGaming Index approaches its second anniversary, few could have predicted the profound changes that have been wrought on the global gambling sector.

April was the first full month of lockdown for much of the world, which has reduced retail gambling in most jurisdictions to zero.

Similarly, with the vast majority of mainstream sports disrupted, online betting has been dealt a significant blow and revenue is down c. 60-90% depending upon product mix.

Online gaming is proving considerably more resilient, up c. 20-30% overall according to our estimates, with poker especially performing very strongly (+ c. 75%).

This resilience and the channel shift should not be overstated, however. Online gaming is only soaking up c. 10-15% of displaced demand where it is allowed, and inevitably far less where it is not (although black and ‘dark grey’ market gambling is  likely to be spiking in the US and Australia especially).

However, the Index will also be profoundly shaped by more positive forces from May.

The merger of Flutter and Stars, which combined represents nearly 40% of the current index, and the addition of DraftKings, which will be the second largest constituent (online weighted market capitalisation) from next month. In many respects, online gambling is getting bigger.

The market has largely recognised this trend also, with the iGaming Index rebounding by 31% vs. the Nasdaq’s 17% rally – with every stock but one (Nektan went into administration) up double digits.

Some of the strength of the rally was a reaction to oversold retail stocks compared to a tech-rich Nasdaq (the market realised that Amazon might do rather well immediately).

However, much of it was also the market digesting positive trading statements from key players (e.g. Stars, Gamesys, Kindred) and pricing in resilience.

Indeed, even beleaguered US sports operators can take comfort from the strength of online gaming in NJ and PA (assuming exposure) as well as lockdown occurring in mostly a seasonally quiet period (post March Madness).

Given the likely ongoing requirements of social distancing, santization and avoidance of crowds in many jurisdictions, combined with likely reduced traffic from older, more vulnerable customers, retail gambling is likely to have a U-shaped recovery (where growth returns, but not to its previous level).

Indeed, for some, the recovery might be dangerously L-shaped (where there isn’t much recovery), with businesses structurally weakened.

This creates billions of ‘lost’ gambling revenue at the same time that many older customers are being forced to become tech savvy (staying in touch with loved ones, ordering groceries, installing pandemic data monitoring apps etc.)

These drivers, which when combined with online gaming’s current resilience, suggest an easy V-shaped recovery for online gambling (where growth quickly returns to previous levels).

Indeed online gambling might even see growth accelerated as older customers channel shift a bit faster and more structurally than they would in normal times – an outcome especially likely if sports start up again (or didn’t stop) before retail opens up again (fully or at all).

Unlike retail gambling, which is seeing potentially structural pain, online gambling is therefore seeing a partial bump in the road (betting), strong resilience (online gaming) and could benefit from increased channel shift and this is being recognised by equity markets.

The key risk to this is regulation, in our view. For jurisdictions like US and Australia, the shift to illegal supply is a big problem for governments, consumers and the iGaming Index since more legally constrained businesses lose all the business.

However, perceptions that online gambling might be ‘unduly’ benefiting from lockdown, or worse, that elements may be encouraging more gambling than those that cannot afford it or may exhibit harmful play is creating regulatory pressure in a number of jurisdictions (e.g. UK, Spain, Belgium, Portugal).

Equally, online gambling may be seen as an easy fiscal target when the bill for lockdown arrives. Therefore, while online gambling might be seeing significant commercial resilience and causes for medium-term optimism, it has also never been more vulnerable.

How a critical mass of constituents behave during this global crisis – and how they are seen to behave, is likely to shape sector performance for a decade. So despite the recovery of share prices, much remains at stake.

Stock in focus: Tabcorp
What could be the worst corporate positioning for a global pandemic which causes retail lockdown? How about a company that has paid for a retail betting monopoly, but competes on more equal terms online (against perfectly legal competitors).

A company that still has its core betting product operating, meaning that retail customers have every reason to switch into a far more competitive online environment, thus structurally weakening market share.

A company that cannot offer online gaming because it is illegal, but is seeing a profitable retail gaming business shuttered.

Even lottery sales are suffering due to footfall constraints. This is nearly OPAP, but that business ‘benefits’ from soccer being the country’s betting staple (heavily disrupted) and access to a strong online acquisition (Stoiximan).

Tabcorp has neither of these mitigators – it is exposed on nearly every front, including from a balance sheet perspective (with A$3.8bn of net debt, albeit liquidity has been extended and nearly A$1bn is available in cash and facilities).

It is unsurprising therefore that Tabcorp has been unable to give guidance for FY20 or FY21 (June Year End) and that its stock has underperformed the index by 7ppts.

It has perhaps been dealt the worst hand of all the index’s constituents in the crisis, especially factoring in what accelerated channel shift may do to recovery prospects.

By showing both sides of the channel coin so graphically, it might also valuably show to retail-led or retail-only operators and jurisdictions what they are missing…

Disclaimer: the narrative provided represents the opinions of the authors. Any assessment of trends or change is necessarily subjective. The information and opinions provided are not intended to provide legal, accounting, investment or policy advice, nor should they be used as a forecast. Regulus Partners may act, or has acted, for any of the companies and other stakeholders mentioned in this article.