Jumbo Interactive: Not leaving its growth outlook to chance

About the author:

Kurt Gelsomino
Author name:
By Kurt Gelsomino
Job title:
Former Analyst
Date posted:
30 August 2021, 1:00 PM
Sectors Covered:
Building Materials, Industrials, Gaming

  • While JIN’s FY21 result was in line with our forecasts and consensus, the stock was sold off heavily, which we attribute to some specific reasons below.  
  • JIN has expanded its Managed Services business into the Canadian charity lottery market through the bolt-on acquisition of Stride. Further bolt-on M&A in the UK is possible and the US commercial iLottery market remains a further opportunity.   
  • We remain attracted to Jumbo Interactive's (ASX:JIN) long runway of potential growth, structural industry tailwinds and net cash balance sheet position. Add rating maintained.

FY21 result in line, but stock sold off

JIN’s FY21 result was in line with our forecasts and consensus, with group TTV +37.0%, revenue +17.1%, underlying EBITDA of A$48.9m (+14.7% yoy) and NPAT of A$28.3 (+7.1% yoy). Cash conversion was strong and its 85% dividend payout ratio maintained (but remaining subject to future growth opportunities).  

We attribute the stock’s sell-off to the following: 1) no earnings beat following a strong run into the result; 2) Lottery Retailing Cost Per Lead +42.2% and active players  rising just 1% (explained by 23% fall in cumulative jackpots); 3) SaaS annualised TTV of A$132m (+10% on A$120m at 1H21), with no new contract wins and a potentially more gradual ramp-up with Lotterywest (LW); 4) a flagged step-up in FY22 opex growth (i.e. >12%); and 5) no prior year comparatives following its changed operational structure (consistent with the 1H21 presentation).  

Still plenty to like about the story

With the improvement in the 2H21 jackpot sequence, Lottery Retailing posted 2H underlying TTV growth of 28.8%. JIN saw a 10.4% increase in average customer spend in FY21. Digital lottery sales penetration rose to 32.8% (from 28.0% pcp) and we estimate 2H21 was ~33.5% (vs. 32.1% 1H), providing strong momentum heading into 1H22. FY22 YTD (to 27-Aug) we estimate Australian national lottery sales are up 6.2%.

The upcoming Oz Lotto game refresh (likely 4Q22) should also increase customer engagement (full benefit in FY23).     

The company also expanded into the Canadian charity lottery market through the acquisition of External Lottery Manager (ELM),  Stride. The acquisition  extends JIN’s Managed Services (MS) exposure to ~337k registered charities across the UK (~194k), Canada (~85k) and Australia (~58k).

We view the  acquisition favourably and consider it a cost-effective (A$11.7m purchase price; 4.8x NPBT) foothold into a new market from which it can leverage its digital expertise across existing and new clients.  

While organic SaaS contract wins could scale slower than previously anticipated, the successful execution of its St Helena Hospice contract (going live in Oct-21) should prove its capability in the UK market and stimulate new opportunities.

We also still see scope for an expanded share with LW over time and pleasingly, JIN’s initial performance has been encouraging. Importantly, JIN retains a strong net cash balance sheet, which it can leverage to make further bolt-on ELM acquisitions in the UK/Canada or use to establish a presence in the US commercial iLottery market.

A potential US expansion could also take the form of a JV/partnership with an incumbent operator, with US listed iLottery services provider NeoGames’ (~30x EV/EBITDA) JV with Pollard Banknote, an example of such arrangement.

Forecast changes; we incorporate Stride into our forecasts

Following a change in lead analyst, we have reviewed key modelling assumptions. The primary change has been a slight moderation in the rate of near-term organic SaaS contract wins and increasing FY22 opex growth. While regulatory approval is  still  pending,  we  have  incorporated  the  Stride  acquisition  into  our  forecasts (MorgansE 6-month FY22 contribution).

The net result of these changes is a minor reduction in FY22/23 NPAT of -0.5%/-1.0%. We forecast FY22 NPAT of A$30.4m (+7.4% yoy) and an acceleration in FY23 (NPAT +19.4%) underpinned by the full 12-month benefit of the Stride acquisition and Oz Lotto game refresh, an ongoing increase in digital sales penetration and new SaaS contract wins supported by greater opex investment. 

Investment view: Add maintained

We remain attracted to JIN’s high quality digital lottery product offering, structural industry  tailwinds  and  strong  cash  generation  of  its  core  LR  business.

While organic B2B/B2G contracts can take time to execute, we continue to believe JIN is well placed to grow its SaaS/MS businesses over time, which remain exposed to large, global addressable markets affording a long runway of potential growth. Add rating maintained.  

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