HIGH COURT LOSS AND UK POKIES SALE HURT TATTS PROFIT

TATTS group (ASX: TTS) reported a 7.2 per cent drop in statutory net profit after tax to $233.8 million for the 2016 financial year today.

It comes after a major loss in the High Court of Australia, which saw the company miss out on $540 million in pokies compensation, and the sale of the UK slots operator Talarius for an accounting loss of around $50 million.

The company had not booked the $540 million pokies compensation, so its balance sheet was only affected by interest charges on the amount and legal fees associated with the court case.

Tatts put a positive spin on the full-year announcement, saying that the group's underlying profit grew 3.8 per cent to $263.4 million and revenue was up 4.4 per cent to $2.93 billion. EBIT increased 11.3 per cent, reaching a high of $320 million.

Tatts' lotteries operation posted a record-breaking year, with revenue up 8.2 per cent to $2.14 billion, boosted by the strong jackpot run in Oz Lotto and Powerball, which peaked with 45 jackpots at or above $15 million, compared to 34 the previous year.

Tatts CEO and MD Robbie Cooke says the lotteries business achieved record-breaking performances with revenue, EBITDA, EBIT, operating margins, digital sales, and jackpots, all at all-time highs.

"This outstanding performance was the result of the many innovations put in place over the past three years, including new products, game re-configuration and positioning, focus on the digital channel, improved customer relationship management actions, and excellent brand, promotional and retail positioning of all Tatts' lottery products."

The business also grew its digital users, with digital lottery sales up 32.2 per cent and digital wagering sales up 22.5 per cent. The group now boasts 30.2 per cent of its wagering sales and 13.5 per cent of its total lotteries sales on digital channels.

The acquisition of UBET helped Tatts' wagering section return to turnover growth for the first time since the purchase of Tote Tasmania, with 4.1 per cent growth in the year. The company also won the rights to around 97,000 gaming machines in NSW until 2032.

Tatts group has rebranded its gaming division under the name MAX from August 2016, with a view to transform it into a "pure B2B business", providing gaming services to operators.

"We have been carefully assessing opportunities to extend our gaming operation's B2B footprint," says Cooke.

This includes Tatts' plan to buy gaming monitor Intralot's Victorian and New Zealand operations, and it is currently undertaking due diligence into this business.

Despite the loss made on Talarius, Cooke talked up the work Tatts did on turning around the business.

"With a single-minded focus, we turned this long-term loss making operation around, achieving a first-time positive contribution in FY14, and building on this performance over the following two years," says Cooke.

"Our strategy and patience in repositioning this business created a highly attractive asset in the extremely competitive UK gambling market. This ultimately provided a path to maximising shareholder value, with net proceeds of £111 million being released on divestment."

The group is not providing guidance for the coming year, however, Cooke stated that trading in the first month of FY17 is positive, despite $15 million jackpots and average jackpot values lower than the numbers reported in FY16.

The merger with Tabcorp is reportedly on ice, after a disagreement over value and potential issues with the competition regulator regarding Western Australia's TAB network.

Cooke explained the decision to chase the merger in today's release, saying it was part of a quest for shareholder value and efficiencies.

"The additional attraction from the merger was the potential for the enlarged entity to embark on meaningful business expansion activities outside the Australian marketplace," he says.

The company will provide a final dividend of 8c per share, taking the total FY 16 dividend to 17.5c, an increase of 6.1 per cent on the previous year. This is a 97.3 per cent payout of continuing operations profits.

Tatts is trading down 0.37 per cent today, at $4.00 per share.