Morgan Stanley has taken the knife to Tabcorp's earnings forecasts due to ferocious online competition, but thinks it could revive its fortunes by expanding its recent UK fantasy sports deal with Rupert Murdoch's News Corporation into the Australian market.
The broker said Tabcorp has been steadily losing online market share since 2010 when UK bookmaker giants including Paddy Power, William Hill, Bet 365 and Ladbrokes raided the market.
It estimates the wagering giant's share of online turnover in Australia will fall to 23 per cent by 2018 from 30 per cent in 2010 leading the broker to trim its earnings per share forecasts by up to seven per cent over the next three years.
Morgan Stanley expects EPS of 23¢, 26¢ and 28¢ in the 2016-18 financial years respectively compared with 24¢, 27¢ and 30¢ previously. The investment bank has also cut its price target for Tabcorp to $5.05 from $5.50 while retaining an overweight rating.
"Our previous view was that Tabcorp was in a position to slow this market share loss because of the strong investment it made in this area resulting in flat share over the next three years," said Morgan Stanley analyst Mark Goodridge. "We have now reduced those forecasts to show that Tabcorp continues to lose online share in three years down to 23 per cent."
However, it says Tabcorp could turn the threat of the fast-growing daily fantasy sports industry into a positive for the company by tapping its recently signed UK deal with News Corp to create a powerful presence in its home market of Australia.
Fantasy sports, where punters assemble a virtual team from players in actual sporting events, has achieved rapid growth particularly in the US where sports betting remains illegal in most states. Morgan Stanley reckons there are 46 million fantasy sports players in the US generating $US2.3 billion in annual turnover in 2015 from a minimal base in 2010.
Given Australia's huge appetite for gambling and its love of sports, there is an expectation some of the leading players such as FanDuel and DraftKings may look to expand into the local market.
While that could potentially further erode Tabcorp's under pressure online presence, Morgan Stanley said it also represents an opportunity for the wagering giant to set up a new division targeting the fantasy sports market which could slow its online losses.
"If Tabcorp was to launch its own daily fantasy sports site this could be used as another subscriber acquisition tool which would allow Tabcorp to start to monetise this new subscriber with racing products," said Mr Goodridge. "This is exactly what Tabcorp currently does with its sports products."
The broker argues that if Tabcorp could win 304,000 new subscriptions and achieve $1462 per player of turnover a year, it could boost Tabcorp's valuation by 20¢ a share.
It estimates there are 1.4 million fantasy sports players in Australia dominated by News Corp-run rugby league and soccer competitions.
"News Corp in Australia runs the largest NRL fantasy league and also the soccer fantasy leagues, hence we do not think it unreasonable that Tabcorp could partner with News Corp in Australia for daily fantasy sports."
While Tabcorp could launch a new fantasy product via its Luxbet venture which is licensed in the NT, it is thought the wagering operator would require regulatory reforms to include such a product within its NSW or Victorian TAB businesses.
Kerry Stokes' Seven West Media and the James Packer controlled Crownbet are also rumoured to be looking at entering the fantasy sports market.