Tatts Group extends reseller agreement and takes a placement
Tatts Group (TTS) has extended its relationship with Jumbo Interactive (JIN) and extended the reseller agreements for five years (with the potential for them to continue beyond 2022). Additionally, TTS purchased 6.6m JIN shares at a price of $2.37/share and TTS was granted a 12-month option to acquire a further 3.47m JIN shares (at $2.37/share). We expect the option to be exercised by TTS in FY18 at which point TTS will become a 15% shareholder in JIN.
Plenty of cash, now what to do with it?
The recent A$15.7m cash injection into JIN was not needed (in our view) given the current strong cash position but it is of strategic importance. JIN has cemented its relationship with TTS (following a move by Lottoland to acquire approximately 7% of JIN on market in late April) and we view the announcement positively.
We have upgraded our dividend payout ratio and now forecast a 2H17 dividend of 7.5cps (70% FY17 payout ratio). We also believe there is further scope for higher ordinary dividends, special dividends or additional buybacks going forward.
Will Lottoland remain a shareholder?
We believe Lottoland's ~7% purchase of JIN was a pre-cursor to trying to leverage the JIN customer base and selling Lottoland to existing users. With JIN choosing TTS over Lottoland, we question whether there is any benefit in Lottoland remaining a JIN shareholder. Given the current ~20c premium to their purchase price we would not be surprised to see Lottoland exit the register and redeploy the proceeds from the sale toward growing their Australian lottery wagering business. Note that this business is in direct competition with JIN.
With a substantial cash balance, minimal capex and an attractive earnings outlook, we continue to see upside in the JIN share price. Key upside risks to our valuation include higher traditional lottery sales in Australia, improved penetration rates in online rates and the stronger uptake of charity lottery sales.
We increase our share price target in-line with our updated DCF valuation and retain our Add recommendation.
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