Jumbo Optimism Relies On Lottery Resilience

Small Caps | Sep 07 2022

This story features JUMBO INTERACTIVE LIMITED, and other companies. For more info SHARE ANALYSIS: JIN

With exposure to resilient lottery markets, and ongoing growth in its digital penetration, analysts find Jumbo Interactive a sustainable option for investors seeking long-term growth.

-Market downturns have done little to hamper lottery activity across global markets
-Soft jackpot activity domestically year-to-date should largely normalise over the first half
-Deeper digital penetration, international markets, and acquisition strategy to drive further growth

By Danielle Austin

With economic downturns across markets appearing to have little impact on the performance of lottery industries, market analysts view Jumbo Interactive ((JIN)) as offering investors exposure to sustainable and long-term growth. The company grew earnings 18% year-on-year through FY22 to $54m, with its Lottery retailing business reporting a record $91m revenue result, up 27% year-on-year.

Lottery reselling in Australia contributes more than 90% of Jumbo Interactive's earnings, leaving it exposed to subdued volumes in the domestic market in the early weeks of FY23. While buoyant jackpot activity in both Powerball and Oz Lotto drove strong lottery volumes in the last year, softer jackpot activity in the new financial year appears to have dampened volumes.

Analysts estimate lottery volumes have declined around -21% in the new year. In the last year there were 43 instances of jackpots at or above $15m, leaving a challenging year to cycle off.

The company has guided to a 20% increase to underlying costs in the coming year, but has advised it will reduce marketing activity during weaker jackpot periods.

Analysts also noted Lottery Corp ((TLC)) service fees look to remain a headwind over the next year, warning margins may not improve until service fees are capped in FY24. Jumbo has also announced a $25m share buyback given its current net cash position.

Acquisition strategy continues despite announced buyback

Jarden, who this week initiated coverage on Jumbo Interactive with an Overweight rating and a target price of $15.41, believes the company can deliver sustainable and long-term growth. The broker expects Jumbo is capable of generating sufficient free cash flow to fund its acquisition strategy, with the company interested in pursuing global government and charitable lottery industries.

The Jarden analysts see upside potential for Jumbo in the US iLottery, which offers a $25bn total addressable market, and in the consolidation of the global charitable lottery industry.

Despite these positives, the broker notes Jumbo Interactive's business model does leave it exposed to jackpot activity, which leaves it reliant on factors outside of the company's control. Jarden expects Jumbo Interactive can deliver an earnings per share compound annual growth rate of 10% through to FY26.

Within FNArena's database coverage, all four of the brokers covering the company have reported on the company's FY22 results (Jarden is not monitored daily, so not included). Of these four, three are equivalent Buy rated and one is equivalent Hold rated. Between them they have an average target price of $16.66 with a range of $15.10-18.05.

Macquarie (Outperform, target $18.05) believes subdued activity in the new financial year is likely temporary, and expects growth will largely normalise over the coming year to result in a total -2% decline in volumes. The broker predicts Jumbo Interactive's digital operations can deliver 8% volume growth given ongoing penetration.

Given Jumbo's acquisition strategy, Macquarie was surprised by the announcement of the buyback, but still sees scope for acquisitions for the company. The broker is forecasting 12% year-on-year earnings growth in the coming year to $60m, and an 11% compound annual growth rate through to FY25. Macquarie continues to consider Jumbo a defensive and high-quality business.

Given guidance for higher costs and lower margin acquisitions, UBS (Neutral, target $15.10) anticipates group margins to settle at around 46% in the coming year. The broker noted growth in the first half will be challenging given the already weak jackpot activity.

UBS expects acquisitions, including Gatherwell, the recently completed Stride, and Starvale, which is expected to receive regulatory approval in the September quarter, to supplement growth.

This broker estimates Stride and Starvale will contribute an incremental 10% to group earnings in the medium-term. UBS also anticipates the announced buyback to be 3% accretive, and leave the company in a $30m net cash position. UBS downgraded medium-term earnings forecasts 2-7%.

Of the other daily monitored brokers, Morgans rates the stock Add (equivalent of Buy) with a price target of $17.50 while Morgan Stanley has an Overweight rating with $16 target.

FNArena's consensus price target of $16.66 suggests upside of 23% from yesterday's closing price.

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