Jumbo Interactive: International expansion continuing

About the author:

Kurt Gelsomino
Author name:
By Kurt Gelsomino
Job title:
Former Analyst
Date posted:
28 January 2022, 12:00 PM
Sectors Covered:
Building Materials, Industrials, Gaming

  • Overall, we view Jumbo Interactive's (ASX:JIN) acquisition of StarVale Group favourably and consistent with management’s strategy of expanding its presence in the UK (and North America).
  • We have incorporated the acquisition into our forecasts, which has seen our FY23F/24F EPS rise 5.5%/4.5%.We forecast FY23F PBT growth of 24.3%, with 14.4% acquisitive (StarVale + Stride) and 9.9% through organic means.
  • JIN has laid a strong foundation for FY23. We remain attracted to the company’s long-term growth potential, structural tailwinds and balance sheet position. ADD.

Announces acquisition of StarVale Group

JIN has entered into an agreement to acquire leading UK based External Lottery Manager (ELM), StarVale Group. The acquisition is subject to UK Gambling Commission approval, which JIN expects to achieve prior to the end of FY22.

StarVale is one of the UK’s largest ELMs, which has been in operation for >25 years and provides services to >850k active lottery players across 45 charities and NFPs. StarVale has a sticky, high-quality customer base, with its largest client representing ~11% of turnover (top 10 account for ~2/3 of the business).

The acquisition also includes digital payments business, DDPay Ltd, which facilitates Direct Debit payments and provides cost effective Direct Credit payment solutions to StarVale’s clients.

Consistent with its bolt-on M&A strategy; DPR lowered to preserve flexibility

The purchase price is comprised of upfront cash of ~A$32.1m (GBP 17.0m) and deferred consideration of A$7.5-8.5m (GBP 4-4.5m), which is payable in FY23. The lower end of the earn-out is based on FY23 PBT of ~A$4.2m (GBP 2.2m) and the remaining GBP 0.5m is paid (on a sliding scale basis) on PBT above this target. 

Excluding surplus cash acquired (GBP 5.0m), the implied acquisition multiple is 7.3-7.5x FY23F PBT. While a premium to the ~4.8x PBT JIN recently paid for Canadian ELM, Stride, we think the purchase price remains attractive considering the scale of the StarVale business and digital payments capability.

Management continues to believe future acquisition multiples can be maintained in the 6-7x range (subject to any target-specific strategic benefits).

We outline the strategic rationale of the acquisition in greater detail overleaf, which include:

  1. Significantly increased UK scale;
  2. Digital payments solutions capability (internal cost saving and external revenue opportunities);
  3. Potential to leverage the PBJ platform across StarVale’s larger clients;
  4. Strengthened local management expertise; and
  5. Attractive financial metrics, with ‘low to mid-single digit’ EPS accretion expected in FY23.

While JIN exited FY21 with net cash of A$53.8m, the acquisition will be funded through a new 5-year A$50m senior debt facility. An initial A$30m will be drawn to fund the acquisition, with the remaining A$20m to be retained to pursue additional M&A or growth initiatives.

From FY23, the Board plans to lower its DPR to 65-85% (vs. 85% of NPAT currently) in order to repay its gross debt and preserve its balance sheet flexibility.

We expect JIN’s near-term focus will be on integrating the Stride and StarVale acquisitions. However, following its recently strengthened regional management structure we think additional bolt-on acquisitions of ELMs in North America (Canada/US) or the UK will be executed over the next ~6-12 months.

Forecast changes

We have incorporated the StarVale acquisition into our forecasts and have assumed FY23F is JIN’s first full year of ownership. Consequently, our FY23F/24F EPS has risen 5.5%/4.5%, which is in line with management’s accretion guidance.

Given our expectation of further bolt-on M&A, we have lowered our FY23F DPR to ~70% (lower end of the revised range). Post funding the StarVale acquisition and earn-out, we still forecast JIN’s balance sheet to remain in a solid net cash position (FY22F/23F A$18.5m/ A$22.7m).

Investment view

Overall, we view JIN’s acquisition of StarVale favourably and consistent with management’s strategy of expanding its business in the UK and North America.

Recent bolt-on activity has laid a strong foundation for the business in FY23F, which should further benefit from the Oz Lotto game refresh, increased digital lottery sales penetration and ongoing growth from SaaS and Managed Services. We maintain an Add rating and our DCF-based target price rises to (login to view).

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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