Jumbo Growth In Sight for Jumbo Interactive

Australia | Jun 16 2022

This story features JUMBO INTERACTIVE LIMITED. For more info SHARE ANALYSIS: JIN

Overseas expansion could be a lucrative growth opportunity for Jumbo Interactive, if the company can overcome barriers to enter the market.

-US iLottery business presents a sizeable growth opportunity for Jumbo Interactive
-The US market appears a logical opportunity, but a number of entry barriers remain
-Domestic market continues to grow, opportunity remains with LotteryWest

By Danielle Austin

Leveraging its software-as-a-service offerings should allow Jumbo Interactive ((JIN)) to further penetrate the charity lottery sector, according to the company. At its inaugural Investor Forum, Jumbo Interactive highlighted multiple growth opportunities, including potential to enter the US lottery market through further penetration of its proprietary software in existing markets. Jumbo provides software-as-a-service to the lottery sector, and already holds a competitive position with its tried and tested technology platform that would be costly and time-consuming to replicate.

While the US lottery market is valued at around US$100bn, and continues to grow steadily, its iLottery sector is comparatively under-developed, analysts point out, and thus offers real opportunity for early movers to take market share. Currently, US iLottery sales account for around US$5bn of the total lottery market but have been growing at a 6.2% compound annual growth rate since 2016. While the US online gaming market generated US$15bn in 2021 it is anticipated to exceed US$40bn by 2025.

With only 14 jurisdictions having legalised iLottery products, compared to the 46 US jurisdictions where legacy lottery is operational, significant potential remains in the space. Having only recently legalised iLottery, both Connecticut and West Virginia’s iLottery are not yet operational but are expected to launch within the coming year.

For Jumbo investors, there are a couple of things to note. While entry to the US lottery market appears a logical expansion opportunity, it is important to note that market analysts consider this a long-term opportunity and value creation is not anticipated in the near-term. Some analysts have also highlighted a lack of detail on the company’s path to the US market at this point.

Additionally, while there appears to be room for growth in the US market, analysts have noted that the growth outlook for iLottery sales has moderated recently, and there is possibility for other online gaming products such as iGaming and Wagering to take share in key markets.

The tendering process for US iLottery licences is also competitive, and analysts note the market is skewed to instant products rather than the draw-based products that Jumbo has expertise in. Contracts for draw-based and iLottery licenses are exclusive, and although generally short-term, they tend to have high renewal rates which presents a barrier to new market entrants.

Closer to home, there remains opportunity to acquire the full Western Australian LotteryWest digital contract, where online sales account for 18% of the current total $1.1bn sales.

Lottery sector performance during economic downturns

While consumers are already tightening spending as inflation increases, market analysts note lottery sales are largely resilient to economic cycles. Market data have suggested Jumbo will receive cumulative benefit as trends demonstrate new player spend has increased spending over time. Further, market analysts have noted a global shift in consumer preferences, with consumers showing a preference for digital in major markets.

Three of four FNArena database brokers covering Jumbo have updated forecasts in the last month, and all have Buy (or equivalent) ratings, with an average target price of $21.27.

According to Morgans, Jumbo Interactive’s entrance into the US market is inevitable. The broker likes the company’s strategic growth options both domestically and internationally, and its low capital expenditure model.

Morgans analysts also find the resilience of the lottery sector appealing in the current economic climate, and anticipate large jackpot activity to increase in coming years given the changes recently made to the Oz Lotto game, which typically drives new customer acquisition. Morgans retains an Add rating and decreases its target price to $18.30 from $20.50 given an expectation of higher capital costs.

Analysts from Macquarie noted real near-term value creation opportunities exist for Jumbo Interactive in an expanded LotteryWest contract and ongoing acquisition moves. The analysts consider the US iLottery a long-run opportunity lacking clarity.

Given the competitive nature of the US iLottery licence tendering process, Macquarie suggests Jumbo could seek out a reseller agreement with an existing iLottery operator, but notes this path does inhibit the company’s growth in the market. Macquarie is Outperform rated with a target price of $20.00.

Goldman Sachs — not a database broker — anticipates the next twelve months will be a period of product and growth investment for Jumbo Interactive. The broker likes the company’s economic resilience and that new player spend appears to be trending higher over time.

While Goldman Sachs analysts see opportunity in the US market, the broker noted lottery typically lags online sports betting legislation by as much as 18 months and predicts the company can achieve a total transaction value of $50m from the US sector in FY25.

The broker retains a Neutral rating and decreases its target price to $17.33 from a previous $18.00, accounting for softer recent domestic lottery trends and higher offsets.

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