Jumbo Interactive (ASX:JIN) - Short-term pain for long-term gain
About the author:
- Author name:
- By James Lawrence
- Job title:
- Date posted:
- 01 July 2020, 2:30 PM
- Sectors Covered:
- Gaming, Professional Services, Fixed Interest
- Jumbo Interactive (ASX:JIN) has extended its reseller arrangement with Tabcorp (ASX: TAH) through to 2030. JIN will pay an upfront fee of $15m to TAH, in addition to paying TAH a service fee which ramps up to 4.65% of TTV in FY24. The extension will give the market comfort in the relationship between the two businesses but it has come at a cost.
- Due to strong ticket sales at lower jackpot levels JIN has reaffirmed its FY20 guidance for EBITDA in the range of $38.7-$40.0m.
- We upgrade our recommendation to Add following today's developments and set our new target price (Morgans clients can login to view detailed reports and price targets).
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Extending the reseller arrangement
Jumbo Interactive (ASX:JIN) has extended its partnership with Tabcorp (ASX: TAH) to 2030 for its reseller operations.
JIN will pay TAH an up-front fee of $15m and a new service fee will become payable by JIN on the value of subscriptions. This will cap out at 4.65% in 2024 but scales up from 1.5% in FY21, 2.5% in FY22, and 3.5% in FY23 for amounts up to $400m. Above the $400m, JIN will pay TAH 4.65%.
This is a completely new cost for the group and will result in revenue margins declining from ~20% to ~16.3% in FY24. Management has stated it would rather focus on growing the Group's top-line than strip costs out of the business and we believe this makes sense in the current environment when demand is strong for lottery tickets and digital penetration continues to grow sharply.
Lotterywest negotiations are ongoing
JIN is in discussions with Lotterywest regarding the signing of a reseller agreement which would allow JIN to sell directly to its WA customer base. In FY19, JIN sold approximately $33m, 10.5% of total group sales, to WA residents.
JIN stated that it hopes to reach an agreement with Lotterywest over the next 30-45 days and we forecast an agreement to be signed on similar commercial terms to the TAH agreement.
We estimate that if JIN were unable to reach a reseller agreement, and the company is prohibited from selling tickets in WA, the company's FY21 NPAT would fall to ~$25m.
Changes to forecasts
We have made several changes to forecasts to incorporate the new reseller agreement.
These changes in isolation have resulted in significant EBITDA margin compression over the forecast period. Offsetting this however has been a lift to our lottery TTV expectations due to the strong performance of lotteries during the current environment. The overall net changes to our FY21 and FY22 EBITDA forecasts are -5.1% and -5.6%, respectively.
Upgrading to an Add rating
We believe the extension of the agreement with TAH is positive for JIN and provides the group with certainty as a reseller of national games and allows it to focus on growing the Powered By Jumbo (SaaS) business.
With 17% upside potential to our revised target price (Morgans clients can login to view detailed reports and price targets), we upgrade to an Add rating.
Key risks include national game lottery sales in Australia, digital sales penetration rates as well as the uptake of the charity lottery and Powered By Jumbo products.
Morgans clients can login to view our detailed report and revised share price target for Jumbo Interactive. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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