Jumbo Interactive: 1H23 earnings - Pulling the levers
About the author:
- Author name:
- By Alexander Mees
- Job title:
- Co-Head of Research and Senior Analyst
- Date posted:
- 27 February 2023, 6:30 AM
- Sectors Covered:
- Gaming and Retail
- Jumbo Interactive's (ASX:JIN) underlying EBITDA was $30.4m, up 7% on the pcp, but 5% lower than our forecast.
- We have lowered our EBITDA estimates by 2% in both FY23 and FY24.
- We retain an Add rating with a reduced target price of (login to view).
Organic EBITDA growth was flat in 1H23 as steady growth in TTV (total transaction value) and improved operating cost efficiency offset the effect of the step-up in service fees payable to The Lottery Corporation (TLC) on gross margins.
Group underlying EBITDA was $30.4m in 1H23, 7.4% higher than in 1H22, though 5.5% below our forecast of $32.2m. TTV grew by 27%, driven by 8% growth in Lottery Retailing, 20% growth in SaaS and the inclusion of 6 months of Stride and 2 of StarVale in Managed Services.
Underlying NPATA was up 8.8% to $18.2m, 4.3% below our forecast. The interim dividend was 23c, in line with our forecast and with a payout ratio of 84.2%, at the upper end of JIN’s 65-85% target range.
Morgans comment #1: Digital penetration trend isn’t going to reverse
As indicated by TLC in its 1H23 result yesterday (see note), the digital penetration of lottery tickets in Australia was 38.4% in 1H23. This was 10 bps below 28.5% in 2H22. We are not accustomed to seeing this number decline in what we consider to be a structurally growing part of the lotteries market. Even slightly.
We think it is unlikely that the longer-term trend towards the rising digital penetration of lottery sales is poised to reverse. We regard 1H23 as an aberration driven by a reversion of consumer traffic to physical venues following the COVID disruptions of the past two years.
It may also have been distorted by the $160m Powerball jackpot in 2Q23, which may have enticed casual lottery players to impulse buy tickets from retail outlets. We model penetration rising to 39.7% for the full year FY23.
Morgans comment #2: Cost efficiencies mitigate impact of higher service fees
The step up in service fees to TLC from 2.5% to 3.5% of the subscription price of tickets purchased impacted the cost of sales by an estimated $2m in 1H23.
The effect on JIN’s profits was mitigated by pulling the lever of marketing expenditure, which was reduced to 1.5% of TTV, at the lower end of the 1.5-2.0% guidance range for FY23.
JIN also achieved some opex efficiencies in 1H23 and, although opex will step up in 2H23, it has changed its guidance for FY23 underlying opex growth (excluding Lottery Retailing marketing costs) to 16-18% from 20-22%. We note that JIN is ‘considering its options’ for when TLC increases the subscription price of Powerball.
When a price rise was put through for Oz Lotto, JIN passed this through and increased its own fee by 5c at the same time.
There appears to have been no discernible customer pushback to this and it may go down the same path with Powerball, which we estimate would increase JIN’s revenue margin on Powerball from around 17.7% to around 19.0%.
Morgans comment #3: Cash conversion impressed (but timing played a part)
Free cash flow (FCF) was 5.3% higher than 1H22 at $25.7m, implying cash conversion (FCF/NPAT) of 149.3%, 80 bps above the pcp.
Conversion was impressive, although we note that the timing of the New Year’s Eve draw had a positive impact on operating cash flow.
Nonetheless, the unrestricted cash balance was $65.5m at 31 December and drawn debt $15m. JIN paid down $10m of this debt balance after the year-end.
Changes to earnings estimates
We have lowered our underlying EBITDA estimates by 2.4% to $63.3m in FY23 and by 2.1% to $73.4m in FY24. EPSA declines 2.3% to 60.5c in FY23 and by 1.9% to 72.4c in FY24.
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.
We retain an Add rating, though our lower earnings estimates reduce our target price to (login to view).
- 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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