Jumbo Interactive: Strong foundation set to keep the run going
About the author:
- Author name:
- By Kurt Gelsomino
- Job title:
- Former Analyst
- Date posted:
- 23 February 2022, 11:00 AM
- Sectors Covered:
- Building Materials, Industrials, Gaming
- We viewed the market’s reaction to JIN’s cost investment as overdone and expect the impact to be recovered from stronger top-line performance.
- We continue to believe JIN has laid a strong foundation for FY23 and we remain attracted to the company’s long-term growth potential, structural tailwinds and strong cash generation. ADD rating maintained.
Increased cost investment dampens 1H22 operating leverage…
While JIN’s 1H22 result beat our expectations on the top line (TTV 7% ahead), higher than expected opex investment saw the result come in 5%/7% below at the EBITDA and NPAT lines.
However, strong (entirely organic) growth was still delivered across all P&L lines, with TTV +40.9%, revenue +29.1%, underlying EBITDA of A$28.2m (+16.9% yoy) and underlying NPAT of A$16.5m, up 18.2%.
Operating cashflow was strong (+43% to A$27.5m) and the balance sheet remains in solid net cash position of A$69.6m (will fund the Stride/StarVale acquisitions).
But provides a strong foundation for the business going forward
Unpacking opex investment:
The opex outlook (1H22 +35.9% to A$17.5m) was materially higher than our previous FY22 forecast (16.3% growth) and reflects the combination of two factors. Firstly, JIN accelerated its customer acquisition strategy over the 1H22 (marketing costs TTV +60bp to 2.0%; +80% yoy) and this level of investment is expected to continue at ~1.8% in the 2H, subject to the jackpot environment.
We note the 1H22 Cost per Lead (CPL) of A$20.02 was consistent on the FY21 result (A$20.31). With 198k new players added (+39% yoy) and ~5- months for JIN to recover the cost of acquisition, we expect this investment will deliver benefits from the 2H22 onwards.
Secondly, ~30% growth in employee costs was driven by new employees added (~8 of 24 target), wage inflation across its existing employee base and increased staff turnover.
JIN will look to add an additional ~8 roles in the 2H22 and will then review its staffing needs. We now forecast FY22 opex growth of 39% to A$36.6m (A$19.1m in 2H22), however this investment is expected to drive continued strong growth over FY23/24.
The outlook for LR remains positive, with 8 large jackpots seen 2H to date (cycling 12 in 3Q21) and an upcoming A$120m PB draw on Thursday. We estimate 2H22 Australian national lottery sales (to 21-Feb) are up 2.9% yoy.
While the rate of growth in digital lottery sales penetration (+460bp to 36.7%) will likely moderate over the 2H22, we still think this dynamic will provide an ongoing structural tailwind for the business. JIN will look to recover an additional 5c on top of the 10c price increase for the upcoming Oz Lotto game change (May-22). With Oz Lotto comprising ~20% of LR TTV, JIN thinks the game change (in isolation) could drive mid-single digit LR revenue growth in FY23.
2Q22 was A$43.4m and implied an annualised run-rate of ~A$173m pa, up from A$132m at 4Q21 and A$152m at 1Q22, which places the business well on track to deliver our FY22 TTV forecast of A$165.1m (post 8% upgrade).
Following encouraging initial results from its 2Q22 marketing trial with Lotterywest, JIN will shift to a 1-year jointly funded and managed acquisition program. We continue to see the medium-term opportunity for JIN to meaningfully expand its share of LW’s digital customer base (currently A$140-150m TTV) and improve digital penetration in that market (~18.0% in FY21).
The Stride and StarVale acquisitions are still expected to receive regulatory approval by the end of FY22. We continue to forecast these businesses to deliver A$6.7m PBT in FY23 (~14.5% PBT growth). In Australia, JIN has signed a new contract with LifeFlight, which is expected to launch in May 2022 and could generate medium-term TTV of ~A$10m pa.
While we have materially increased our opex assumptions over FY22-24, the impacts have been largely offset by stronger top-line assumptions following the 1H22 beat. As a result, our EBTIDA forecasts are unchanged over FY22/23 and are just 0.7% lower in FY24. NPAT changes (-0.6%/-0.1%/-0.7%) reflecting marginally higher D&A and net interest assumptions.
We view investor concerns around JIN’s increased opex investment as overdone and expect it will deliver meaningful benefits for the group over FY23/24.
We continue to see recent M&A as providing a strong foundation for the business heading into FY23, which should further benefit from the Oz Lotto game change, ongoing improvement in digital penetration and further growth in SaaS and MS.
We maintain an Add rating, (login to view) target price.
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