Jumbo Interactive: Balance sheet continues to provide optionality

About the author:

Kurt Gelsomino
Author name:
By Kurt Gelsomino
Job title:
Former Analyst
Date posted:
16 December 2021, 8:30 AM
Sectors Covered:
Building Materials, Industrials, Gaming

  • Jumbo Interactive's (ASX:JIN) International update flagged that regulatory approval on its Stride acquisition is expected to be received in 4Q22 (vs. CY21 before) and its first UK SaaS customer recently went live in late November.
  • We expect regulatory approval for the Stride acquisition will be received in line with JIN’s revised target and we have removed our previous 2H22 contribution.
  • However, stronger-than-expected jackpot activity and a likely larger new player base have seen our FY22/23/24 group NPAT forecasts rise 6.6%/5.1%/4.4%.
  • We remain attracted to JIN’s long-term growth potential, structural tailwinds and net cash balance sheet position; Add rating maintained.

Stride acquisition now targeting 4Q22 completion

Jumbo Interactive (ASX:JIN) has provided an International update and noted that its conditional acquisition of Canadian lottery management provider, Stride, is now expected to receive the necessary regulatory approvals from the Alberta and Saskatchewan Gaming Regulators to settle the transaction during 4Q22.

JIN had initially targeted the receipt of regulatory approval by the end of CY21. We understand the delay reflects a more extensive application and review process from the respective regulatory bodies than initially anticipated, with JIN’s entire KMP team required to provide detailed information as part of its submission.

We remain confident JIN will receive the necessary regulatory approvals and continue to view the conditional acquisition of Stride favourably, which will provide its Managed Services business an initial foothold into the Canadian charitable lottery market (~A$1.3bn size) at an attractive price (~4.8x LTM NPBT).

The experience gathered from the current application process should assist JIN’s preparations as it looks to expand the Stride business into Canada’s larger markets of Ontario and British Columbia.

First international SaaS customer now live

JIN also announced it went live with its first UK SaaS customer, St Helena Hospice, on its Powered by Jumbo (PBJ) platform in late November.

The ~A$10m TTV contract is split across St Helena’s two weekly lotteries ‘Make a Smile’ (live) and ‘Your Hospice Lottery’ (live in early CY22), with the latter the larger of the two.

We continue to view this launch as an important milestone for JIN’s SaaS business, which should provide the foundation for further UK contract wins over the next ~12 months as it proves up the benefits of the PBJ platform.

We note JIN reported in August that selected existing SaaS clients had seen ~25% higher TTV and ~21% greater customers per draw on its PBJ platform.

JIN’s AGM update highlighted a positive start for the SaaS business, with 1Q22 TTV +58.7% to A$38.1m and annualised TTV of A$152.4m (+15.5% on 4Q21). We remain comfortable with our existing FY22F SaaS TTV of A$155.2m (+48.0% yoy).

Strong jackpot activity more than offsets delay to Stride settlement

We have removed our estimated 6-month contribution from the Stride business from our FY22 EBITDA forecasts (A$1.3m EBITDA) and retain our assumption of a full 12-month contribution in FY23 (A$2.5m EBITDA).

We have also reviewed our estimate of Australian national lottery sales (overleaf), which we estimate are up ~12.5% 1H22 YTD driven by a strong level of large jackpots (21 YTD vs. 15 in 1H21) and cumulative jackpot value (+40% yoy).

We note growth in the jackpot games (MorgansE OzLotto +13%; PB +28%) have outpaced the base games, with JIN’s customer base/sales mix more skewed to the jackpot games and likely to have benefitted from further digital penetration.

Consequently, upgrades to our Lottery Retailing (LR) forecasts have more than offset the delay from the Stride settlement and seen our FY22F underlying EBITDA rise 5.5% to A$55.0m.

While we are cognisant not to capitalise the benefit of a solid jackpot environment, current conditions should support JIN’s customer acquisition and provide an enlarged player base to incentivise in future periods. As a result, our FY23/24 underlying EBITDA forecasts have increased 4.6%/4.1%.

The Oz Lotto game refresh should provide a further tailwind for LR in FY23.

Investment view

While JIN has recovered strongly since its August result, we remain attracted to the strong cash generation and balance sheet optionality afforded from its core LR business (+ Oz Lotto refresh upside) and long-term growth potential of its SaaS and Managed Services business, which remain exposed to large, global addressable markets.

We maintain our Add rating, with forecast upgrades and valuation roll-forward driving our (login to view) target price.

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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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