Jumbo Interactive (JIN) - Online lottery ticket seller

2 Nov 2017

 

 

 

 

Jumbo Interactive's biggest shareholders include chief executive Mike Veverka and Forager Funds Management.

 

 

Note JIN goes ex-dividend ($0.15 special) on Monday 21 July (share price will reduce by approximately this amount)

 

After JIN's strong share price gains over the last 18 months (~200%) there could be some investors taking profits at this stage. Obviously big rallies inevitably exhaust value discounts and we’re conscious of this. However we think it’s a case of shares rapidly catching up to value as opposed to pure momentum. The stock remains interesting for the following reasons:

  • JIN occupies a very narrow channel in lottery ticket e-tailing, which faces potentially years of structural growth. About $4 billion of Tatts Lotto tickets are sold in Australia each year, with 13% sold online. The online share has doubled since 2012, and in some European countries such as Norway the online share is as high as 30%. There’s a saying, “a rising tide lifts all boats”, but another one is “competition is for losers”. Only two players in Australia are soaking up structural demand for online lottery tickets, JIN and Tatts, so we have high conviction in JIN’s growth prospects.

  • With lower future costs resulting from JIN’s international business exits and plateuing capex, JIN’s strong revenue growth should produce around $10 million per annum in free cash flow in the next couple of years. Deducting JIN’s $30 million cash from its $150 million market cap, shares are trading on a forward multiple 12 times (on an ex-cash basis). For context, the market’s average price earnings ratio is about 15 times. JIN is no longer extremely cheap but it’s certainly not expensive.

  • The company has recently positioned itself as the online partner to Australia’s charity lotteries, a $1 billion industry that still uses rudimentary technology. JIN’s platform can handle marketing and distribution on behalf of charities, saving them costs, while maintaining JIN's own healthy margins. The charities business launched in mid-2015 and is still new, but it could contribute materially to revenues in the future. It appears to be a free option at JIN’s current share price.

All of this begs the question, why was the business trading at such a large discount in the past? Two reasons, in our view, are (1) JIN’s short term state based licenses gave the impression that JIN was vulnerable to Tatts suddenly ending the relationship, and (2) JIN's venture into Europe and Mexico failed to generate revenues and resulted in significant sunk costs.

 

In May Tatts JIN announced a new agreement with Tatts, with all short-term state-based reseller arrangements extended for five years, conditional on any competitor’s stake in JIN being limited to 10 per cent. Tatts itself took a 15 per cent stake in the company via the issue of new shares, and a Tatts representative was invited to join JIN’s board.

 

JIN’s failure internationally reflects the difficulty in establishing a database. The flip-side is that its domestic database of 2 million qualified leads (including credit card details and 18+ age verification) is very valuable indeed. This was the basis for international lottery wagering provider Lottoland’s brief appearance on JIN’s register this year.

 

In its May 30 guidance JIN announced it will adopt an 85% payout ratio. On our numbers this translates to a fully franked yield of 4.9% (equivalent to a grossed up yield of 7%).

 

 

(https://www.intelligentinvestor.com.au/jumbo-interactive-1866006) - Lottoland's investment makes things very interesting for Jumbo. It has arguably strengthened Jumbo's bargaining power with Tatts, and put it 'in play'; two positives for shareholders (which includes us in our small companies fund).Lottoland wants Jumbo for its user base, which will help them grow in Australia. However, if Lottoland bought Jumbo, Tatts would lose an important sales channel and face heightened competition from a strengthed competitor. So they have an incentive to buy Jumbo on defensive grounds or secure their sales channel with a long-term agreement.This gives Jumbo a better position to negotiate a long-term agreement with Tatts (one of the market's main concerns about Jumbo), so this potentially reduces Jumbo's risk profile and make it worth more (due to a lower discount rate in its valuation).Forager, who are substantial shareholders, have noted they are looking to unlock the value in Jumbo, so it's fair to assume they will support appropriately priced bids for Jumbo.

 

(http://www.afr.com/street-talk/lottoland-raids-asxlisted-lottery-tickets-seller-20170420-gvoswc) - Jumbo Interactive, which bundles together various lotteries draws, including those of Tatts, is an obvious fit for Lottoland given its existing footprint in the market with nearly 2 million customer accounts. 

 

Jumbo Interactive a $3-plus stock

Lottoland raids ASX-listed lottery tickets seller

Tatts invests $15.66M in Jumbo Interactive

 

 

 



 

 

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