@SudMav i think the CEO flagged an issue with the buyback, as when JIN engages in M&A negotiations, too easy for trading on inside info. Of course, the deal could fall through, as he said at least one has. so my read is they are negotiating a deal, no guarantee of an outcome, or a good one, but let's see

Yes @SudMav and @Solvetheriddle I caught up with CEO Mike Verveka at a recent Investor Conference and asked him about this. They are still working on a US acquisition - that's been mentioned before and of course a deal isn't done until it's done but the lack of current buybacks does suggest they are optimistic at this point...

Mike has been a good capital allocator to date in my view, so let's hope he gets this one right either way.

Ask and you shall receive :) 

This morning JIN announced their acquisition of Dream Car Giveaways, further advancing their focus on the B2C market. A small cap private giveaway company which offers good prizes with low entry fees to attract customers.

A summary of the deal and the call is as follows:

• Jumbo won the competitive market process to acquire the business, with the Purchase Price of A$109.9m broken down into:
• an upfront cash payment of A$75.2m (Existing cash $17.9m and $81m drawdown from ANZ Bank facility)
• An equity stake of A$10.2m in JIN Shares (1,012,161 new shares);
• and cash earn-out of up to A$24.5m payable post 31 December 2026.
• Implied acquisition multiple of 6.5x adjusted EBITDA, and expected double digit EPS accretion in the first 12 months post completion. DCG’s pro forma FY contribution is 20% of the overall EBITDA post completion.
• Opportunity to leverage Jumbo’s proven IP (technology, marketing, and operational capabilities).
• The current DCG founders and management team will oversee the transition process and remain in place until the earn-out period ends on 31 December 2026.
• DCG management will report into Tam Watson and its business performance will be reported separately in the Group’s financial results
• DCG expected to have A$22m in cash at bank on the transaction date.
• A voluntary code of Practice for prize draw operators will come into effect later this year, and JIN will be looking to use their experience in other markets to help further position DCG as a market leader. JIN are expecting further regulations to come in over the coming years (similar to other precedent locations) which will likely impact viability of smaller operators in this space.
• They flagged that similar businesses are already operating in Australia, and JIN are also looking at opportunities in North America.  The increased debt facility was to provide flexibility for further M&A opportunities available in the market, albeit smaller opportunities that the DCG acquisition.
• The dividend payout ratio to be brough up for discussion at the AGM on 11 Nov, expecting a reduction in the overall ratio to reflect the current market.

My take on the call and the Q&A at the end is that JIN are looking to move quickly into the giveaways style market to take advantage of the opportunity at hand. Another acquisition is likely to be coming in the short term along with the issuance of new shares.

Overall, a good acquisition that with a decent payback period once you factor in the additional cash component post sale. My thesis remains intact on this one, along with some further protections if the TLC revenue is not continued in 2030.

Valuation:

Expecting FY NPAT to be in the range of $45-50m once you take into account the integration costs and finance costs are considered. Expecting the price to remain in my target band of $11.5 to $14, noting that where it eventually will land could depend on the changes to the dividend distribution policy and what future M&A Activity (if any) occurs over the next 6-12 months.

Held IRL (5%) and SM, topping up in the last week or so with the softer price and McNiven valuation reflecting a return >10%.

@SudMav im a shareholder but a bit more cautious. obviously, the easy share grab from TLC is over, its now a harder game. so it becomes gaining other ct work, like WA or acquisitions. so the outlook is more complex than it was several years ago.

as for the acquisition, well, i hope MV has learnt his lesson from the lower quality acquisitions in the past, and i think he has, although still attempting to get a bargain. JIN has paid 6.5X (on their numbers), vrs JIN at 8.6X historic. so good so far, is DCG the same quality as JIN, i didn't think so. why are they selling? Didn't hear an answer to that, but maybe i missed it. That's important, it was a competitive tender, engaging for about a year. the charts below tell the story

note the big pickup in actives over the last two years. Whether this is a good acquisition or not depends on that continuing. JIN mentioned that marketing has increased to high single digits (think that is reasonable--not overcooking it--sustainable level), and DCG remains profitable, so that is good. Digital, B2C, profitable and growing, as MV previously indicated, an acquisition would be.

its a pretty big bite, JIN said that DD was rigorous, as you would hope. JIN indicated double-digit accretive, the market will like that until proven otherwise. Time will tell if the numbers keep improving, let's see.

I agree with you there @Solvetheriddle that this is a big swing.

I got the sense from the announcement and the slide deck that the owners were looking to sell the business given the increase in competition and the introduction of regulations in the market.

Personally I think the regulations in the UK are a welcome change and will probably start to get stronger if more shifty lotteries (i.e. https://www.bbc.com/news/articles/c745ql143xvo) start to increase over time.

Having a trusted lottery provider with validated software will help demonstrate the legitimacy of their offering, and make them a point of difference from a significant proportion of the market.

I am still cognisant of this risk of bad actors in this space and I am continuing to monitor and this business and the market intently to see if I need to make a strategic exit at any point in time, especially if the increase in bad actors is prevalent.

And now we have the US acquisition, with Dream Giveaway. Similar name to the UK company but totally seperate businesses apparently. They have paid a higher multiple than the UK but still supposed to be EPS accretive within a year. It also fits with their stated goal of controlling the whole experience going forward - lottery, software, marketing etc.

Tuning into the call today, my guess is the dividend will be cut for the next couple of years as they pay down the debt that's been used to fund some of both these new businesses. But assuming the DD has been OK and they manage the integrations well, these two new businesses materially add to the current level of profit and EPS. Plus they further reduce reliance on the TLC contract.

Mike has been a good capital allocator to date and their team is very supportive and engaged, so I'm happy to back them in and the current multiple looks very attractive now assuming these both go well. In addition it was good to hear COO Brad Board speak on the call...I suspect we will have more of that as Mike starts to expose the talent under him to the market.

Firstly thanks for the summary @karmast. I had a listen to the call last night and echoed your thoughts. The commentary was quite interesting, especially with Mike and Brad both sharing excitement and drawing similarities to the Manaccom purchase in 2007.

From here, their main focus will be digital penetration and trying to drive further ticket sales to younger players, with the lure of more frequent draws in the US than currently being offered.

From my calculations it appears that the ANZ facility has almost been fully drawn, and I’m  expecting that interest alone is close to $9m at current rates .Depending on how quickly they want to pay these off, the repayments could be anywhere from $17.5m to $30m per annum for a 10 year and 5 year scenario respectively. This figure would be different if they wish to pursue a more aggressive

From last FY, the net increase in cash was $8.8m at the end of the year, which included approx. $40m in dividends and share buybacks. Working backwards from here and extrapolating I believe that a 50-60% payout ratio would probably be the sweet spot if they want to pay back within 7-10 years.

Basic back of the envelope calculations at this range would work out to a reduction of around 10 to 15% in the dividend paid, working out to approx. 45 to 49c per share annually after dilutions (all things going to plan).

Still thinking that my $11.5 to $14 per share valuation is still fair for JIN over the next few years, and will revise my calculations a bit more thoroughly after the AGM announcement. Likely to be thinking on the lower end of that range given the increased debt, reduced dividend and delivery risk.

Will definitely consider topping up on some more shares in the coming months if they fall below the $10 to $10.5 mark again.

Disc: Held IRL and SM