Small Caps | Mar 01 2022
This story features JUMBO INTERACTIVE LIMITED. For more info SHARE ANALYSIS: JIN
Bigger jackpots are feeding into higher growth numbers for Jumbo Interactive, negating creeping up costs.
-Greater lottery earnings push Jumbo Interactive profits up 18%
-Lottery customers jump, bigger jackpots to draw more
-Revenue margins contract as expenses rise
-Higher costs don’t alter strong profit outlook for 2H
By Nicki Bourlioufas
Margins contract on higher costs
Jumbo Interactive's ((JIN)) underlying net profit after tax jumped 18% to $16.5m for the six months ending 31 December 2021, powered ahead by its increased lottery customer numbers and big jackpots, with last week’s $120m Powerball jackpot to draw even more customers. However, margins contracted on higher costs.
Underlying earnings before interest, taxes, depreciation and amortisation (EBITDA) rose 25% to $28.3m, while revenue jumped 35% to $52.8m. Group total transaction value (TTV) rose 41% to $327.9m, up from $232.8m a year earlier. Underlying operating expenses jumped 35.9%, driven up by increased acquisition and marketing costs (+82.0%) and employee expenses (+27.8%).
According to UBS, the highlight of Jumbo’s first half was the strong growth within the lottery retailing business, its biggest division, with revenue benefitting from an improving jackpot run. However, higher-than-anticipated costs saw margins fall. But according to UBS, approximately 70% of the cost increase (excluding marketing and advertising) related to higher staffing costs, and this investment “should set the business up for growth in FY23 onwards.”
The lottery division enjoyed 23 Powerball/Oz Lotto jackpots greater than or equal to $15m in 1H22, compared to 15 in 1H21. The lottery division delivered total transaction growth of 26% and revenue growth of 24%, with lottery EBITDA rising to $15.8m, though the margin fell to 33.9%, down from 40.7% a year earlier. The company reported 198,912 new lottery players in the six months, a 41% jump from a year earlier.
The company’s two other divisions also performed well, including its software as a service (SaaS) business, whereby Jumbo licences its “Powered by Jumbo” lottery platform to governments and other larger charity operators. The company posted strong underlying revenue growth of 36.0% in SaaS and 40.8% in lottery managed services.
Brokers views Jumbo’s earning potential as strong given the company has laid the foundation for growth and invested heavily in marketing ventures and its staff.
Morgans is attracted to the company’s long-term growth potential and strong cash generation. It has maintained its Add rating with a target price of $20.50. “We viewed the market’s reaction to JIN’s cost investment as overdone and expect the impact to be recovered from stronger top-line performance.”
The outlook for lottery retailing is positive, with eight large jackpots seen over the second half to date. Morgans estimates second half Australian national lottery sales to 21 February were up 2.9% year-on-year. While the rate of growth in digital lottery sales penetration will likely moderate, “we still think this dynamic will provide an ongoing structural tailwind for the business.”
Jumbo CEO and Founder Mike Veverka said he was very pleased with the growth achieved in the first half, across all operating segments.
“Lottery Retailing continues to perform exceptionally well, underpinned by the improved jackpot cycle and our focus on player engagement and retention. Our SaaS and Managed Services segments continue to demonstrate good organic growth.
“We are successfully executing on our strategy and planning is underway to ensure we efficiently and effectively integrate the Stride and StarVale acquisitions post completion. The global lottery industry is in the midst of a digital change and our Powered By Jumbo software platform will be key to supporting lotteries through this change.
“Our balance sheet remains strong and, when combined with our new debt facility, provides additional headroom for further strategic growth.”
Brokers agree on positive outlook
While no trading update was provided for the second half, UBS analyst Suthesh Jeyakandan said the period has started well with a $120m Powerball jackpot last Thursday (24 February) and he forecasts EBITDA of $53m, $64m and $68m for FY22 to FY24, up 2% over the medium term. UBS has upgraded its target price to $18.00 from $17.30.
Jumbo has several potential catalysts for growth, including the Stride and StarVale acquisitions and further contract wins in the UK, he notes.
Morgan Stanley also has an Overweight recommendation on Jumbo with a price target of $22.00. The strong jackpots posted, a lack of leverage debt, with a rise in service fees and an increase in proactive marketing spend has pushed revenue up more than it expected. Morgan Stanley also notes 15% active customer growth and says bigger jackpots will driver higher spend in coming months.
Goldman Sachs says value is beginning to emerge in Jumbo shares following a sell-off after its results were released, “an over-reaction in our view”. It has a price target of $17.43 on the shares and is bullish on revenue forecasts. However, Goldman is concerned about costs, which it will closely monitor over the next six to 12 months.
According to FNArena’s database, the consensus target price for Jumbo Interactive is $20.17, suggesting 13.9% upside to the last share price.
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