TTS

Following the recent spate of attempts by private equity (PE) firms to take over listed entities, Macquarie Research Equities (MRE) have investigated which top 100 stocks have the balance sheet capacity to be re-geared, and what a PE firm could pay as a full price. The aim of this analysis was to gauge what would be the full takeover valuation price a PE firm could pay. This is given the current willingness to re-gear balance sheets and the extremely low risk premium being applied by PE investors to equities and debt at present.

Tattersall's (TTS) have a retained shares recommendation of Hold / Medium Risk and a lifted price target of $4.89 per share from analyst Citigroup Investment Research. The analyst recently met with a number of industry participants in the UK, and they believe the addressable market for consolidation in Adult Gaming Centres (AGCs) will be larger than originally forecast. As a result, they've increased number of sites likely to be acquired by the TTS/MBL JV. Impact is to increase core eps by 5.7% to 26.6 cps in FY08e and 10.4% in 31cps FY09e, with no change to FY07e forecasts. New Act limits the number of jackpot machines to 4 per site. Talarius exposure is limited, as average is 4.3 per site, but the overall industry average of jackpot machines is currently 10 per site. The analyst have seen centres with well in excess of this number. Lower limits will facilitate industry shake-out, as operations will be less profitable for those who have to remove machines. New restrictions on certain venues, plus less favourable machine limits, will likely see these venues convert to Adult Gaming Centres, increasing the addressable market for consolidation. New compliance regime effective from September 2007 under the new Gaming Act will work in the favour of the consolidators in the market, as it will impose a greater administrative burden on all AGC's. Many smaller AGC owners may elect to sell and exit than to attempt to comply.

Last week, global markets stumbled following reports that China was looking to impose controls to curb its rapidly growing economy and concerns that a soft landing for the US economy may be more difficult than first thought. In the background, the Australian reporting season continued its final week, here are analyst Macquarie Research Equities (MRE) observations and thoughts. The HY December 2006 aggregate earnings reported for the market printed 1.5 percentage points below analyst expectations versus those held at the start of this reporting season.

Tattersall's (TTS) have a reiterated Outperform recommendation and a price target of $4.45 per share from analyst Macquarie Research Equities (MRE). They believe that Talarius represents a significant acquisition for TTS. It delivers a growth engine to a group where the existing businesses are maturing. MRE believe that shares in Tattersalls (TTS) have been one of the star performers on the ASX 200 for the calendar year to date, returning over seven percent versus a return of around five–and-a-half percent for the S&PASX200. Part of the reason for this outperformance is the company's recent move into the UK through the acquisition of Talarius plc via the joint venture with Macquarie Bank. This is a relatively simple story with all the hallmarks of a business that could undergo significant re-rating over time. While the business is unlikely to deliver immediately, the undercurrent of a liberalisation of gaming regulation (in the UK and perhaps the European continent) will stand very much in its favour. Talarius has already clearly secured itself a first mover advantage which will provide it the scale and momentum to drive consolidation of Adult Gaming Centres (AGCs) in the UK. There are significant opportunities to enhance revenue in the group, including growing the customer base via refurbishment, machine upgrades and improving the food, beverage and entertainment offering. More specifically, MRE expect a strong lift in revenue as changes to legislation now allow punters to play off a credit meter. Anecdotally, when this was introduced in other jurisdictions revenue increased by ~15–20%. Another opportunity to grow its revenue is through the creation of adjacent venues via subdividing Talarious’s larger centres. This may allow the introduction of four more B3 type (or section 16) machines (ie the more lucrative machines). Roughly 20– 30% of its existing venues exhibit these characteristics. As consolidation drives scale and enhances the ‘cost base leverage’, any incremental revenue will drop generously to the Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) line. The enlarged group will have materially greater purchasing power in terms of negotiating better volume discounts for gaming machine product, as well as the usual ability to reduce fixed costs associated with running a network of centres. After incorporating the Talarius numbers for the first time in the TTS Group model, MRE have lifted their EPS numbers for FY07 by 1.6%, FY08 by 6.1% and FY09 by 8.2%.

Tattersall's (TTS) shares have gained 33% over the past 4 months following a strong year in wagering growth, share analyst Macquarie Research Equities (MRE) maintain their Outperform recommendation for the bookmaker. Yesterday, at the company’s AGM, TTS provided an operational update reiterating this strength. Following the AGM, Macquarie research Equities (MRE) have upgraded their FY07 EPS forecasts by +1.5%..