Tatts Group. Earnings and target price revision. Price catalyst. Action and recommendation. Maintain Underperform on valuation grounds.

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1 AUSTRALIA TTS AU Price (at 8:37, 23 Aug 212 GMT) Underperform A$2.79 Volatility index Low 12-month target A$ month TSR % -6.8 Valuation - Sum of Parts A$ GICS sector Consumer Services Market cap A$m 3,83 3-day avg turnover A$m 14.5 Number shares on issue m 1,363 Investment fundamentals Year end 3 Jun 212A 213E 214E 215E Revenue m 3, , , ,933. EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x TTS AU vs ASX 1, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, August 212 (all figures in AUD unless noted) 23 August 212 Macquarie Securities (Australia) Limited McIlwain delivers in farewell result Event Tatts reported FY12 results with revenue and EBITDA growth of 6.3% and 5.5%, respectively. NPAT of $319.1m was in-line with the $315-32m guidance range issued in early August and represented 15.9% growth vs the pcp. A final dividend of 12cps was declared, in-line with expectations. Impact After more than 2 years at the helm of Tatts and previously UNiTAB (now TattsBet), Dick McIlwain s final set of results as CEO of Tatts read very well. Revenue and EBITDA in each of Tatts key divisions Lotteries, TattsBet and Pokies was up and NPAT grew by 16%. The standout result was from the Lotteries business which delivered EBITDA growth of 14% and saw margins expand 5bps to 12.7% despite $3m of restructuring costs booked in the second half. Growth rates were boosted by a favourable calendar (53 Saturdays vs 52 in FY11), as well as the $75m OzLotto jackpot during the June half. The result from Tatts wagering division was also robust, with underlying EBITDA growth (ex. Tote Tasmania impacts) of 7.1%. For FY13, the guidance statement in the media release was somewhat confusing, but the bottom line is that management are comfortable with market forecasts for FY13 EBITDA and NPAT of $49m and $21m, respectively. Adjusting for the expiry of the Vic pokies licence, FY12 EBITDA for the continuing businesses was $444.4m, so should Tatts deliver to market expectations in FY13, underlying EBITDA growth will be north of 1%. The key drivers here are (a) full year contribution from an integrated NSW Lotteries business, (b) full year contribution from Tote Tasmania, and (c) the ~$11m reduction in restructuring costs in FY13 when compared with FY12. Despite there being only 7 weeks until his retirement, there was no mention of a replacement for outgoing CEO Dick McIlwain. With the transition period closing rapidly, current CFO Ray Gunston remains the favourite to be elevated to the CEO role from October. Should Gunston be promoted, his involvement in the business for an extended period of time would mean there is unlikely to be any material change in Tatts overall strategy, in our view. Earnings and target price revision FY13-6.3%, FY14-2.6%, FY15-3.3%. Underlying downgrades driven by broad modelling adjustments across all divisions. FY13 downgrade inflated due to $7.5m of costs relating to relocation of head office to Brisbane that will be incurred in the next 12 months. TP increased to $2.45/sh (from $2.4/sh), following the incorporation of a 5% risk-weighting to Tatts being the successful acquirer of SA Lotteries. We estimate this transaction would create ~$ m (9-13cps) of value for Tatts and have incorporated 5cps into our target price. Price catalyst 12-month price target: A$2.45 based on a Sum of Parts methodology. Catalyst: New CEO announcement (imminent?). Action and recommendation Maintain Underperform on valuation grounds. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 The good, the not so good and the interesting The good... The not so good... The interesting... The FY12 result was delivered in-line with the early August guidance of $315-32m. NPAT of $319.1m was up 15.9% vs the pcp. Management are comfortable with consensus estimates for FY13 EBITDA and NPAT of $49m and $21m, respectively. Our updated forecasts are $49.1m and $211m, respectively. The dividend payout ratio will be maintained around current levels. The FY12 payout ratio was 97% and we assume 95% going forward. D&A came in at $1.5m, lower than the $15m Tatts guided to in February. In FY13, D&A is expected to be below $9m. An agreement has been reached with Betfair that will see Tatts provide tote wagering products to Betfair customers. This agreement was originally in place between Tote Tasmania and Betfair, and has been extended under Tatts ownership of Tote Tasmania. Tatts doesn t have any stranded corporate costs that need to be reallocated from the Gaming division now the licence has ceased. There are some IT costs that will remain, however these amounts are immaterial. Bytecraft is on track to generate $115m of annual revenue from FY13. This was above our previous expectations of $95m. Talarius is seeing signs of sales growth after three years of decline. TattsBet wagering turnover (ex. the impacts of Tote Tasmania) declined by.5% vs the pcp. This is despite a wet weather impacted pcp and the hosting of the Euro212 soccer tournament throughout June. Tatts will incur $5-1m of costs in relation to the relocation of its head office to Queensland in FY13. Active player card members in Tatts Lotteries declined by 3.5% to 2.12m. Tatts is yet to announce a replacement for CEO Dick McIlwain. When questioned on the turnover declines in wagering, management responded that turnover growth doesn t matter! While we agree that revenue is the more important metric, it is clearly a function of turnover growth in the long term unless Tatts believe they can continually increase their average wagering win-rate. Tatts CEO Dick McIlwain believes Maxgaming is well placed to retain the NSW monitoring licence when it is up for renewal in 216. McIlwain cited the unique protocol used by Maxgaming, as well as the monitoring transition issues being experienced in Victoria as factors that favour the incumbent retaining the licence. Tatts view is that there is no incentive for them to make a payment to extend the exclusivity of the Queensland race wagering licence past 214 if no assurance can be given against the potential threat of bet-boxes being installed. Tatts continues to have interest in the SA Lotteries business, which is planned to be sold in late 212 / early 213. We expect a sale price of $325m, which would create ~$ m of value for Tatts. We have incorporated this value accretion in our target price on a 5% risk-weighted basis, which adds 5cps to our target price. Four US lottery acquisition opportunities have been reviewed recently. Tatts elected to pass on each of the opportunities due to the structure of management agreements. 23 August 212 2

3 FY13 outlook: Management comfortable with EBITDA forecasts of ~$49m Overall earnings will clearly decline in FY13 as the earnings from the Vic pokies business drop off, however the outlook for Tatts continuing businesses in FY13 is robust. Management are comfortable with earnings estimates of ~$49m EBITDA and ~$21m NPAT. Our updated forecasts are $49.1m and $211m, respectively. On a divisional basis, the key growth drivers will be: Lotteries: full year benefit from the complete integration of NSW Lotteries from April 212. We estimate the cost savings from the replacement of the legacy NSW Lotteries business to be ~$7.5m in FY13. Add to this the $2.9m of restructuring costs booked in FY12 that will not re-occur in FY13, plus some organic growth and Tatts Lotteries is well placed to generate an additional $16.3m EBITDA in FY13. Wagering: full year benefit of the Tote Tasmania acquisition and absence of restructuring costs booked in FY12. Pre the restructuring costs, we estimate Tote Tasmania contributed $2.8m EBITDA to the wagering result in FY12. We see this contribution growing to $15m in FY13. Coupled with the $12.2m restructuring costs booked in FY12, we forecast TattsBet will report 19.3% EBITDA growth in FY13. Corporate/unallocated: Tatts will relocate its head office from Melbourne to Brisbane during the next 12 months, which will result in $5-1m of one-off costs. We have incorporated $7.5m relating to this into our FY13 EBITDA estimate of $49.1m. Fig 1 EBITDA reconciliation - FY12 to FY13 A$m Reported FY12 Vic Pokies* Adjusted FY12 Lotteries Tote Tas** Other Maxgaming Bytecraft Other FY13e wagering * Net impact of removal of Vic pokies licence. FY12 EBITDA of $234.6m less FY13 EBITDA of $29m. ** Represents the delta from FY12. FY12 EBITDA contribution of Tote Tasmania including $12.2m of restructuring costs was -$9.4m. We forecast FY13 EBITDA of $15m. Source: Company data, Macquarie Research, August 212 Non-operational guidance for FY13 is as follows: D&A expected to be under $9m; Cash capex of $76m including $8.6m for the replacement of lottery terminals throughout the Queensland network that was committed but unpaid at 3 June 212; Net interest expected to be in-line with FY12 (~$1m). Tatts has received ~$66m proceeds from the disposal of its gaming machines following the expiry of the Vic Pokies licence last week. We estimate the disposal will result in a one-off gain of ~$33m being booked in 1H13. Both these factors are already incorporated into our forecasts. 23 August 212 3

4 FY12 results analysis Tatts reported FY12 results with revenue and EBITDA growth of 6.3% and 5.5%, respectively. NPAT of $319.1m was in-line with the $315-32m guidance range issued in early August and represented 15.9% growth vs the pcp. A final dividend of 12cps was declared, in-line with expectations. Fig 2 Tatts FY12 results summary $m 1H12a % ch vs pcp 2H12a % ch vs pcp FY12a % ch vs pcp % var vs MRE Revenue Wagering % % %.4% Lotteries % % 1, % -1.7% Tatts Pokies % % 1, %.3% Maxgaming % % % -.8% Bytecraft % % % -1.2% Talarius % % % -5.5% Other revenue % % % -5.3% Total revenue 1, % 1, % 3, % -.7% EBITDA Wagering % % %.1% Lotteries % % % -6.1% Tatts Pokies % % % 1.9% Maxgaming 33.2.% % % -.2% Bytecraft % % % 2.5% Talarius % % % -13.1% Other EBITDA % % % 3.7% Total EBITDA % % % -1.8% D&A % % % -4.6% EBIT % % % -1.3% Share of Associates Net Interest Expense % % % -4.5% Tax Consolidated % % % -3.4% Adjusted Profit % % %.6% Adjusted EPS % % %.5% DPS % % %.% Source: Company data, Macquarie Research, August 212 Takeaways from the key divisions for 2H12 include: Lotteries: revenue growth of 13.6% was driven by a 24.8% increase in Powerball/OzLotto revenue following the $75m OzLotto jackpot in May. Tatts largest revenue contributor the Saturday Lotto also delivered 1.7% revenue growth in 2H12. The Lotteries business remains on track to deliver $24m of EBITDA in FY13. Wagering: adjusting for the $5m turnover acquired from Tote Tasmania, underlying wagering turnover declined by.5% during the June half. Despite this, revenue growth was 4.2% as the 16% tote commission cap was removed. The removal of the commission cap will continue to support revenue growth higher than turnover growth for the next 6 months, however on a medium term view we see turnover and revenue growth re-aligning. Tatts Pokies: revenue performance was above market growth and the EBITDA margin expansion was encouraging, however this licence has now expired and therefore has no valuation impact. 23 August 212 4

5 Fig 3 2H12 lotteries boosted by strong Powerball / OzLotto results Fig 4 as OzLotto jackpot peaked at $75m in May % ch vs pcp 3% 25% 24.8% 8 7 $m 2% 15% 1% 5% % 13.2% 1.7% 2.9% 1.5% % 2-1% -7.3% Saturday Lotto Powerball/OzLotto Instant Lotteries 1H12 2H12 1 Jul-1 Sep-1 Dec-1 M ar-11 Jun-11 Sep-11 Dec-11 M ar-12 Jun-12 Fig 5 Lotteries EBITDA margin continues to grow % margin 16% Fig 6 Lotteries EBITDA on track to hit $24m in FY13 A$m 3 15% 14% 13% 12% 11% 1.6% 11.5% 11.3% 12.1% 12.3% 12.1% 12.5% 12.8% % 9% 1 8% 7% 6% 1H9a 2H9a 1H1a 2H1a 1H11a 2H11a 1H12a 2H12a 5 FY1a FY11a FY12a FY13e FY14e Fig 7 Wagering turnover growth (ex. Tote Tas acquisition) went backwards in 2H12 Fig 8 but wagering revenue continues growing. We question the sustainability of this trend. % ch vs pcp $m % ch vs pcp 3.5% 3.% 2.5% 2.% 1.5% 1.% 2.9% 1.2% % % 4.2% % 4% 3% 2% 1%.5%.3% -.8% %.% -8-1% -.5% -1.% -.5% 1H11 2H11 1H12 2H H1 2H1 1H11 2H11 1H12 2H12 Wagering revenue (ex. other & Tote Tas) % ch vs pcp -2% Source: Company data, Macquarie Research, August 212 Source: Company data, Macquarie Research, August August 212 5

6 Cashflow/gearing Net debt (adjusted for cash held for prize reserves and derivate financial instruments) ended the period at $1,199m, broadly in-line with our expectations of $1,171m. Gearing ended the period at 1.8x net debt/ebitda. Taking into account the drop-off in earnings from the Vic pokies licence in FY13, we estimate gearing will peak at 2.3x ND/EBITDA in 2H13 and drop to back to 2.1x by the end of FY14. Tatts has indicated it will bid for the SA Lotteries licence when the sale process is conducted later this year or early in 213. Assuming it is successful in that process and an acquisition price of $325m, we estimate gearing metrics would increase by ~.3x ND/EBITDA if the purchase was fully debt funded. Fig 9 Free cashflow to equity vs DPS Fig 1 Tatts gearing profile cps cps A$m 1,4 1,2 1, 8 6 $1,111m 2.3x 2.x 1.8x $1,34m 2.1x $942m 1.9x x EBITDA 3.x 2.5x $841m 2.x 1.5x 1.6x x x FY11a FY12a FY13e FY14e FY15e FY16e FCFE p/s DPS FY11a FY12a FY13e FY14e FY15e FY16e Net debt ND / EBITDA.x Source: Company data, Macquarie Research, August 212 Source: Company data, Macquarie Research, August 212 TP increased to $2.45/sh, incorporating potential SA Lotteries acquisition We have increased our target price to $2.45/sh (from $2.4/sh). As discussed on the following page, we have incorporated a 5% risk weighted amount of 5cps into our target price to represent the expectation that Tatts are likely to be the successful acquirer of SA Lotteries. Overall we see this acquisition creating ~$ m (9-13cps) in value for Tatts shareholders. Fig 11 Tatts SOTP valuation range of $ /sh A$m EBITDA EV/EBITDA EV Per share FY13 Low High Low High Low High Wagering TattsBet x 6.4x 1,92 1, Wagering consolidation upside (67% risk-weighted) Total Wagering x 7.x 1,27 1, Lotteries x 1.8x 2,587 2, Maxgaming/Bytecraft 81 8.x 9.x Talarius 1 8.x 9.x Unallocated costs & capex x 1.x Enterprise value x 9.1x 4,79 4, Total net debt -1,111-1, Other Risk weighted compensation Victoria (3%) Risk weighted SA Lotteries acquisition (5%) Total other Equity value 3,142 3, Source: Macquarie Research, August August 212 6

7 One horse race for SA Lotteries to allow 9-13cps of value creation for Tatts shareholders The sale of the South Australian Lotteries business is expected to be a one-horse race, with Tatts the only obvious bidder for the asset. Other bidders are likely to view SA Lotteries as being too small in the context of an entry point into the Australian lotteries market, and Tatts existing scale will allow them to generate substantial synergies not available to other bidders. The absence of a competitive bid process is therefore likely to make the acquisition value accretive for Tatts shareholders. We see Tatts paying $325m for $29m of pre-synergies EBITDA, which would represent a pre-synergy multiple of 11.1x. Based on the SA Lotteries annual report, we estimate Tatts could generate $13m of synergies, made up of employee costs ($7m), IT costs ($3m), marketing ($1.5m) and other opex ($1.5m). Fig 12 SA Lotteries to deliver Tatts $43m EBITDA A$m FY9a FY1a FY11a Revenue Gross margin Gross margin % 12.4% 12.6% 12.2% Reported EBITDA EBITDA margin 7.7% 7.5% 7.5% Estimated synergies 13.3 Tatts EBITDA 42.7 Estimated purchase price 325. EBITDA multiple (pre-synergies) 11.1x EBITDA multiple (post-synergies) 7.6x Source: SA Lotteries, Macquarie Research, August 212 On a post-synergies basis, we see Tatts earning EBITDA of $43m, making the transaction look attractive at a post-synergy multiple of 7.6x. Assuming the market values the SA Lotteries business in a consistent manner to the existing lotteries business, we estimate a transaction on these metrics would create ~$ m (9-13cps) in value for Tatts shareholders. Fig cps of value accretion for Tatts from acquisition of SA Lotteries at $325m EBITDA Multiple Valuation $m Low High Low High Market valuation for SA Lotteries under TTS ownership x 11.5x Less: estimated purchase price Implied value accretion to Tatts ($m) Implied value accretion to Tatts (cps) Source: Macquarie Research, August 212 To reflect the value accretion from this transaction and our expectation of Tatts being the successful acquirer, we have increased our target price to $2.45/sh (from $2.4/sh). This incorporates 5cps or 5% of the potential value creation from this transaction. A formal bid process for SA Lotteries is expected to take place in late 212 or early 213. To be clear, we have not reflected any aspect of the potential acquisition into our earnings or balance sheet forecasts at this stage. 23 August 212 7

8 TATTS GROUP (ASX: TTS) Current share price: $2.79 Year End 3 June Profit & Loss 1H12a 2H12a 1H13e 2H13e FY11a FY12a FY13e FY14e Revenue Wagering $m Lotteries $m ,65. 1, , ,893.4 Tatts Pokies (Victoria gaming) $m , , Maxgaming $m Bytecraft $m Talarius $m South Africa $m Internal revenue $m Sales revenue $m 3, , , ,865.1 Other revenue $m Total revenue $m 1, , , , , ,92. 2, ,873.6 EBITDA Wagering $m Lotteries $m Tatts Pokies (Victoria gaming) $m Maxgaming $m Bytecraft $m Talarius $m South Africa $m Other EBITDA $m Total EBITDA $m Depreciation $m Amortisation $m EBIT Consolidated $m Non-recurring $m Share of associates $m EBIT $m Net interest $m EBT $m Tax consolidated $m Tax on NRIs $m Total tax expense $m Profit after tax $m Minority interests $m Reported Profit $m Adjusted Profit $m Cashflow analysis 1H12a 2H12a 1H13e 2H13e FY11a FY12a FY13e FY14e EBITDA $m Increase in Working Capital $m Net Interest Paid $m Tax Paid $m Other $m Net Operating Cashflows $m Proceeds from Sale of PP&E $m Capex $m Acquisitions and Investments $m Other $m Net Investing Cashflows $m Dividends Paid $m Equity Movements (inc. DRP) $m Debt Movements $m Other $m Net Financing Cashflows $m Net Cashflow $m Net Exchange Rate Differences $m Change in Receivables $m Cash Balance $m Key ratios 1H12a 2H12a 1H13e 2H13e FY11a FY12a FY13e FY14e DPS cps EPS cps Adjusted EPS cps PER x 11.1x 12.4x 13.3x 21.4x 13.2x 11.7x 16.4x 17.8x Adjusted PER x 11.1x 12.4x 15.8x 21.4x 13.2x 11.7x 18.2x 17.8x Dividend Yield % 3.9% 4.3% 2.9% 2.5% 7.7% 8.2% 5.4% 5.4% EV / EBITDA x 7.3x 7.9x 9.1x 11.2x 7.9x 7.6x 1.1x 1.x EV / EBIT x 8.6x 9.3x 9.6x 14.x 9.8x 9.x 11.5x 12.2x Net debt / EBITDA x 1.8x 1.9x 2.x 2.5x 2.x 1.8x 2.3x 2.1x Gross debt / EBITDA x 1.9x 2.1x 2.2x 2.7x 2.1x 2.x 2.5x 2.3x Performance analysis FY11a FY12a FY13e FY14e Cash $m Cash Receivables FY12 EBITDA by Division $m Receivables Other $m Other Total Current Assets $m Total Current Assets Property Plant & Equipment Bytecraft Talarius $m Property Plant & Equipment Goodwill Maxgamin 1% 1% $m Goodwill 3, , , ,326.8 Intangibles g $m Intangibles Wagering Other 1% $m Other % Total Non-Current Assets $m Total Non-Current Assets 4, , , ,366.8 Total Assets $m Total Assets 4, ,944. 4, ,831.6 Payables $m Payables Short-term Debt $m Short-term Debt Other $m Other Total Tatts Current Liabilities $m Total Current Liabilities ,91. 1,35.7 1,53.1 Long-term Pokies Debt $m Long-term Debt 1, Other (Victoria $m Other gaming) Total Non-Current Liabilities $m Total Non-Current Liabilities 1, , ,11.8 1, % Total Liabilities $m Total Liabilities 2, ,28.4 2, ,77.5 Lotteries Net Assets $m 33% Net Assets 2, , , ,754.1 Share Capital $m Share Capital 2, , , ,542.9 Retained profits/reserves $m Retained profits/reserves Total Shareholders Funds $m $m Total Shareholders Funds 2, , , ,754.1 Source: Company data, Macquarie Research, August August 212 8

9 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie First South - South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 6 1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 3 June 212 AU/NZ Asia RSA USA CA EUR Outperform 55.67% 61.% 53.43% 42.58% 69.23% 46.6% (for US coverage by MCUSA, 9.5% of stocks followed are investment banking clients) Neutral 3.5% 22.11% 36.99% 52.41% 28.2% 33.69% (for US coverage by MCUSA, 8.14% of stocks followed are investment banking clients) Underperform 13.83% 16.89% 9.59% 5.1% 2.75% 19.71% (for US coverage by MCUSA,.45% of stocks covered are investment banking clients) Company Specific Disclosures: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. Macquarie Bank Limited makes a market in the securities in respect of Limited. Important disclosure information regarding the subject companies covered in this report is available at Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. 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