ASX: BUY HOLD SELL – Jumbo Interactive (ASX: JIN)

Jumbo Interactive (JIN) had an impressive run in 2019 with most of the country under the impression they were going to win the lottery. The stock was up 285% in 206 days. It fell 75% into March last year and has since tracked modestly higher in a narrow range into results.

Underlying profit was flat on the year with revenue missing consensus. Total transaction value (TTV) revealed an improvement on FY20 although the dividend fell 0.5c to 18c. The market was disappointed by the half-year update.

The company noted tailwinds from COVID with people locked up making it easier to purchase lottery tickets. It did, however, point to several one-off factors that hurt results in the half, most notably, the new service fee it pays under the Tabcorp Agreement in exchange for a 10-year licence to resell its product. Lower interest rates on its significant cash balances were another headwind. No guidance was provided, management did highlight a pleasing start to the second half.

JIN also decided to ‘make lotteries easier’, according to the glitzy tag line for its strategic change, expanding into new geographies and enlarging its product offering. The core product range has moved from an online lottery reseller to three operating segments: Lottery Retailing, Software-as-a-Service (SaaS) and Managed Services.  I have provided a link to the media release which explains them in more detail. Essentially, they are trying to lift results in periods when jackpot cycles are low. The scaling up of its SaaS business segment and establishment of its new Managed services segment buoying results when the number of jackpots was down 35% over the half.  

Main Observations:

• ROE is rather impressive at 34.6% and expected to climb higher up to FY23. Consensus estimates see the number falling a touch in FY24.
• Revenue growth is pleasing with double-digit improvement anticipated up to FY23. Again, FY24 is forecast to be weaker. As we have said before, the further out the estimate the less accurate it is likely to be.
• EPS growth is solid with high single-digit to double digit growth anticipated in the next three years.
• It is sitting on a PE multiple of 32.2x. Peers in SKC and TAH trade on multiples of 26.8x and 26.5x respectively, so it is in the more expensive range of its peers.
• A gross yield of 3.6% is below the market average. TAH has a 4% gross yield and SKC has a 1.9% gross yield. The dividend was cut slightly to 18c with stock trading ex-dividend on March 4.
• The current dividend policy is to pay out 85% of statutory profit.
• Of the brokers surveyed by Reuters, 60% have a BUY rating, with the remaining 40% a HOLD.
• It is trading at a 5.6% premium to the average broker target price and a 37% discount to the consensus intrinsic value calculation.

WHAT SORT OF INVESTMENT IS JIN?

JIN orientates itself as a growth play. Yield below the market average. The business now trying to kickstart earnings when jackpots cycles are low, with the separation into the three segments. Managed services, the most impacted by COVID. SaaS looking promising with the segment achieving key milestones in the half. Bedding down a government partner, LotteryWest, and signing its first UK partner St Helena Hospice. Lottery Retailing remains the main breadwinner. Signing long-term contracts with Tabcorp to 2030. Management hopeful about growth prospects. Pointing out that only 32.1% of tickets sold in Australia are online. Up from FY2017 when only 13.7% of Australian lottery ticket sales were online. Performance going forward likely to be reliant on attracting new customers and signing new partners both domestically and offshore.

TECHNICAL VIEW

JIN was up ~115% from its March low but came off its year high in the lead up to results. The initial reaction was positive, but the bears won the day. Currently down ~8% since its half-year accounts. There appears to be some support around the 1350c level. RSI just starting to tick up. 

BROKER STUFF

Brokers all with bullish price targets. Morgans says the result was consistent with expectations. It was pleased by a jump in total transaction volume (TTV) and SaaS business strength and sees a normalisation in jackpot activity although made note that TTV growth was inferior to Tabcorp’s growth (TAH). UBS happy with the progress of its software division. Strategic promotion decisions assisting the bottom line as well (essentially not making much effort to shout about small jackpots). Morgan Stanley said they envisage growth in SaaS and managed services from new and existing customers.

TOP INVESTORS

While it’s not reflected in the table, Tabcorp sold its 11.6% stake in JIN back in September for $98m. Tabcorp took a 15% interest back in 2017 for $15.6m.

SHORTING

CONCLUSION

Not a company that gets you overly excited after looking under the hood. If you want exposure to lotteries and gambling JIN is an investment in the move to online lotteries. TAH is the dominant player and JIN is its online reseller. Speculation around TAH and a possible divestment of its Wagering and Gambling services providing more opportunity in the short term. While JIN’s new business strategy is encouraging for existing shareholders, it doesn’t induce that much enthusiasm for an investment case. Brokers see some small upside potential and the fundamentals paint a solid picture. HOLD.