Jumbo Interactive: JIN and Tonic - Takeaways from Investor Forum

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By Alexander Mees

Job title:

Head of Research

Date posted:

09 June 2022, 8:30 AM

• The primary takeaway from Jumbo Interactive’s (ASX:JIN) first ever Investor Forum was that the business has multiple growth opportunities open to it as it looks to leverage its powerful proprietary technology platform and strong reputation in the lottery sector. These opportunities include expansion of its SaaS business in the profitable charity sector, as well as medium-term penetration of the large US iLottery market.
• Our positive view on the investment prospects of JIN was reinforced and we reiterate an ADD rating.
• We have lowered our EBITDA estimate for FY22 by 2% to take account of reduced large jackpot activity in recent months. Our estimates for FY23 are unchanged.

Event

Jumbo Interactive (ASX:JIN) has hosted its inaugural Investor Forum in Brisbane.

Analysis

A major opportunity in charity lotteries. JIN has established a strong competitive position in the provision of SaaS to charitable lotteries. The model provides JIN with steady, recurring and profitable income.

It is a part of the market often overlooked by global lottery technology companies but represents a large addressable market in all JIN’s territories. We believe further penetration of the charity sector will be an important driver of growth in the SaaS division and may facilitate JIN’s entry into the US market.

USA calling? In our opinion, it appears not to be a matter of ‘if’ JIN enters the US market, but ‘when’. The US lottery market is huge, around US$100 billion in size and has been growing steadily. iLottery sales, though a small and ‘underdeveloped’ part of the market, are around US$5 billion.

We don’t think it will be a matter of very many years before JIN believes the time is right to enter the US market.

Lottery sales are resilient to economic cyclicality. Lottery sales are resilient to economic cyclicality. They do not represent a large proportion of the personal budgets, hovering around 0.5% of household discretionary income in Australia.

We think this resilience makes an investment in JIN particularly appealing in markets such as these.

JIN’s proprietary tech platform is its key competitive advantage. It would be costly and time-consuming to replicate JIN’s technology platform. A platform rebuild in 2013 made it more manageable and scalable.

It was recently stress tested with a large spike in demand during the $120m Powerball jackpot in February 2022 and maintained 100% uptime.

Large jackpot activity has been quieter since February. In the wake of February’s $120m jackpot, large jackpot activity has been more subdued in Australia. The peak jackpots in March and April were only $20m.

New customer acquisition is always most active when the jackpots are large, piquing the interest of the public and the media. These dynamics tend to mean-revert. We also expect large jackpot activity to trend higher in the years ahead following the recent revamp of the Oz Lotto game.

Forecast and valuation update

We have trimmed near-term estimates slightly to reflect a lower number of large Division 1 jackpots since February. Our FY22 EBITDA estimate reduces by 2% to $54m. Our estimate for FY23 is unchanged.

We have applied a higher weighted average cost of capital to our DCF valuation (9.7%, up from 9.0%). This causes our 12-month target price to fall to (login to view).

Investment view

We reiterate our ADD rating. We believe JIN offers excellent strategic growth opportunities, both in Australia and overseas, supported by a steadily expanding domestic market for digital lottery retailing.

The business is cash generative and has a low requirement for ongoing capex.

Risks

Lower lottery ticket sales than forecast, either due to jackpot variations or a greater than expected impact from reduced consumer confidence.

Failure to win meaningful additional contracts in SaaS and Managed Services and/or failure to penetrate target markets such as the USA.

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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.