Jumbo Interactive: Updating estimates after FY22 preliminary results

About the author:

Author name:

By Alexander Mees

Job title:

Head of Research

Date posted:

18 July 2022, 7:00 AM

• We have updated our estimates for FY22 to align with the preliminary headline numbers provided by Jumbo Interactive (ASX:JIN) this morning. Our EBITDA estimate falls by 2% to $54.0m.
• We have also updated our estimates for FY23 in light of forward guidance provided around margins and costs. Our EBITDA estimate falls by 4% to $65.1m.
• We see the 15% fall in the share price today as an opportunity to build a position in this resilient and growing business. JIN delivered double-digit earnings growth in FY22 and we expect it to do so again in FY23. The proportion of lottery tickets sold online continues to rise steadily. JIN is a play on this inexorable structural dynamic, as well as the non-cyclicality of consumer demand for lottery tickets. The investment case is further enhanced by the large (and largely untapped) opportunity in the provision of SaaS and Managed Services to charity lotteries. In our opinion, this is a great business to own in challenging economic times.

Event

Updating estimates after FY22 preliminary results.

Analysis

Double-digit earnings growth in FY22: Ahead of its full results on 26 August, JIN provided an update indicating its underlying EBITDA in FY22 would be $54.0m, 14% higher than the underlying EBITDA in FY21, albeit 2% lower than our forecast, which itself was 2% below consensus.

There were 43 Powerball/Oz Lotto jackpots >$15m in the year (FY21: 38), which drove TTV (total transaction value) growth. The mix of lottery sales (more Powerball and Oz Lotto) meant JIN’s revenue margin was down to 19.3% (FY21: 20.6%).

This flowed down to an underlying NPAT of $31.6m, 16% higher than the pcp and 3% lower than our forecast. JIN reiterated its dividend payout ratio for FY22 of 85% of statutory EPS, which we estimate implies a full year DPS of 43c.

And double-digit earnings growth again in FY23: We believe the strong growth of the SaaS and Managed Services divisions will help deliver growth in FY23. The performance of the Lottery Retailing division will rely, as always, on the number of large jackpots, but recent changes to the Oz Lotto format should support growth in this regard.

Offsetting this, the commission charged by TLC will increase from 2.5% to 3.5% in FY23 (note: this is not new news today). Helping growth, however, underlying operating costs (excluding lottery retailing marketing which will run at 1.5-2.0% of lottery TTV), are expected to increase at a lesser rate of 20-22% in FY23, compared with 32% in FY22.

This all leads JIN to guide to an underlying EBITDA margin of 48-50% (FY22: 52%) in FY23.

Forecast and valuation update

Our EBITDA estimates fall by 2% to $54.0m in FY22 and by 4% to $65.1m in FY23. Our NPAT estimates fall by 3% to $31.6m in FY22 and by 5% to $40.4m in FY23.

The changes to our estimates reduce our target price from (login to view).

Investment view

We reiterate an ADD rating and encourage investors to take advantage of the excessively negative share price reaction to today’s statement as an opportunity to build a position.

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.