In direct contradiction of established copyright rules I have copied their entire analyst assessment below, don't tell anyone.

JIN featured in Baby Giants not so long ago and Andrew/Strawman gave the bull case.

I guess this is the Bear case!

I haven't done any research on the merits of how JIN manage to keep people buying through their portal rather than the directly through the Lottery's. Andrew gave an explanation of this, and may be able to counter the points below. It seems the bear case rests on two issues I have highlighted from the Morningstar's analysis:

• we estimate Jumbo ceded around 2% of its market share to The Lott between fiscal 2020 and 2023, and now holds around 17% of online ticket sales. We view Jumbo’s share largely as a legacy from its first-mover advantage, having entered the digital retailing market around a decade before Lottery Corp. We expect Jumbo will continue to lose share as legacy customers churn out and Jumbo’s price premium drives new customers toward The Lott. We expect 0.5% of share will be lost each year—the historical average in the four years to fiscal 2023—leaving Jumbo with 12% of the market by the end of our explicit forecast period.
• Expiry of the reselling agreement in 2030 presents a material risk of value destruction. Lottery Corp holds the power in this negotiation, and as such, will likely try to extract significant rents from Jumbo on renewal. To reflect this risk, we assume Lottery Corp will raise this service fee materially in fiscal 2030, to 9% of ticket sales from 4.65% currently, thus clawing back the entire 9% retailing commission it pays to Jumbo. However, there is a risk this agreement lapses entirely should Lottery Corp decide to establish itself as the sole digital retailer of its tickets. Although we think it highly unlikely that the agreement is not renewed in some form, such an outcome would have immense ramifications for Jumbo, with the agreement expected to account for around 80% Jumbo’s sales and earnings from operations in fiscal 2030.

Analyst Note | by Angus Hewitt Updated Nov 01, 2023

We initiate coverage of Jumbo Interactive with a fair value estimate of AUD 12.90 per share. Jumbo is predominantly a retailer of government and charity lottery tickets through its Oz Lotteries platform. As a first mover in Australian digital reselling, Jumbo has been a beneficiary of a channel mix shift toward online lottery ticket sales. However, Jumbo’s lottery retailing business has been ceding share to Lottery Corp’s “The Lott” platform, which offers a near-identical product range but without the 10% to 30% markup that Jumbo applies to its tickets. At current prices, shares in Jumbo screen as modestly overvalued. We think the market may be underestimating the difficulty that Jumbo is likely to face in stemming market share losses to The Lott and mispricing the risks surrounding the renewal of the reselling agreement renewal in 2030.

Jumbo lacks durable competitive advantages to support an economic moat. Although Jumbo sells tickets to popular lotteries including Powerball and Oz Lotto, the brand equity of these games remains with Lottery Corp. Jumbo purchases tickets from Lottery Corp under a reselling agreement and pays a service fee in the process. Demonstrating the power imbalance in the relationship, Jumbo’s service fee ramps up to 4.65% of purchased tickets in fiscal 2024 from 1.5% in fiscal 2021, putting Jumbo at a structural cost disadvantage to the supplier, and digital retailing competitor, Lottery Corp.

Jumbo’s Capital Allocation Rating is Standard. Jumbo’s balance sheet is sound, with no debt and a cash position of AUD 41 million as of June 2023. Investment efficacy is fair, and we think distributions are appropriate, with Jumbo targeting a payout of between 65% and 85% of statutory net profit after tax—a justifiably high ratio for a capital-light, cash-generative business. Our Uncertainty Rating of Medium reflects the low cyclicality of Jumbo's revenue, partially offset by the risk surrounding the renewal of the Lottery Corp reselling agreement.

Business Strategy and Outlook | by Angus Hewitt Updated Nov 01, 2023

We expect Jumbo’s core lottery retailing business will keep ceding market share to Lottery Corp’s “The Lott” platform, albeit its continued growth is underpinned by a channel mix shift to more lottery ticket sales moving online. Jumbo is principally a digital reseller of Lottery Corp tickets through its Oz Lotteries platform, generating revenue by charging a premium, typically in the range of 10% to 30%, on tickets sold. Largely a result of its first-mover advantage, Jumbo has accumulated a sizable customer base of around 4 million, on our estimation, although each year only around 1 million customers make a transaction.

Customer acquisition and retention are key to Jumbo’s growth. Jumbo achieves a relatively quick customer payback period of around five months, but speed is necessary given high dormancy rates—around a third of active customers typically become inactive the following year. Although Jumbo has little chance of taking durable share from The Lott, as The Lott’s product offering is essentially the same but cheaper, it strategically spends on marketing when jackpots are large to capitalize on heightened customer interest. Many of Jumbo’s customers may be unaware tickets are cheaper on The Lott or are relatively insensitive to price given the small value of the mark-up in dollar terms. 

Given the power imbalance with supplier Lottery Corp, and the risk this presents when it comes time to renew Jumbo’s reselling agreement in 2030, Jumbo is increasingly pivoting away from lottery ticket reselling. Primarily, this is through increased focus on its software as a service, or SaaS, segment which licenses a version of the Oz Lotteries platform to charity lotteries, and Western Australia’s state-operated Lotterywest. Many of Australia’s largest charity lotteries rely on internally developed software, and Jumbo’s strategy is to win customers by offering a superior, third-party platform. Jumbo has also acquired managed services businesses in the U.K. and Canada, which provide lottery and raffle solutions to charities. Thus far, the strategy behind these acquisitions has been to improve operability of existing platforms and build scale in these regions. 

Economic Moat | by Angus Hewitt Updated Nov 01, 2023

Jumbo does not enjoy an economic moat. Moats for gaming companies and specialty retailers are typically sourced from intangible assets or cost advantages. In Jumbo’s case, we see little evidence of either. However, we still expect Jumbo to boast high returns on invested capital over our explicit forecast horizon due to the capital-light nature of its business. 

Although Jumbo’s lottery retailing business resells tickets for popular Australian lotteries such as Powerball and Oz Lotto, wide-moat Lottery Corp owns the equity in these brands. Jumbo purchases tickets from Lottery Corp under a non-exclusive agreement, expiring in fiscal 2030, and resells at a premium ranging from 10% to 30% depending on the game. Apart from Western Australia, digital lottery retailing is effectively a duopoly in Australia, with the main alternative to Jumbo’s Oz Lotteries platform being ‘The Lott’, owned by Lottery Corp. Because it is owned by Lottery Corp, The Lott offers tickets to Lottery Corp games with no mark-up. Resulting from its higher prices and largely undifferentiated product offering, we estimate Jumbo ceded around 2% of its market share to The Lott between fiscal 2020 and 2023, and now holds around 17% of online ticket sales. We view Jumbo’s share largely as a legacy from its first-mover advantage, having entered the digital retailing market around a decade before Lottery Corp. We expect Jumbo will continue to lose share as legacy customers churn out and Jumbo’s price premium drives new customers toward The Lott. We expect 0.5% of share will be lost each year—the historical average in the four years to fiscal 2023—leaving Jumbo with 12% of the market by the end of our explicit forecast period.

We also see no evidence of a cost advantage for Jumbo’s lottery retailing business. The service fee imposed by Lottery Corp makes up the majority of Jumbo’s costs of goods sold. In turn, this service fee is profit for Lottery Corp, putting Jumbo at a structural cost disadvantage to The Lott. Although Jumbo charges more on its tickets to offset this service fee, any increase in Jumbo’s premium exacerbates the price difference between its tickets and those sold through The Lott, in turn putting pressure on market share. Excluding the service fee, which flexes with sales, almost all the costs of digital lottery retailing are fixed in the short run, largely tied up in employee expenses for sales and development. Lottery Corp has a much larger revenue base over which to fractionalize these fixed costs, with digital transaction volume of roughly AUD 2 billion in fiscal 2023 compared with Jumbo at AUD 450 million. 

Jumbo faces a significant competitive disadvantage in that its main supplier, Lottery Corp, is also its biggest competitor. The trajectory of the service fee makes it clear who holds the power in the relationship: as part of its reselling agreement, Jumbo’s service fee payable to Lottery Corp ramped up to 4.65% of tickets bought in fiscal 2024 from 1.5% in fiscal 2021. Although the fee is now fixed at 4.65% until Jumbo’s reselling agreement expires in 2030, there is a material rollover risk when it comes time to negotiate a new contract. If Jumbo is making economic profit, we expect Lottery Corp would attempt to extract this through a higher service fee. 

The 2030 expiry of the Lottery Corp contract presents the risk of material value destruction should it fail to renew. Jumbo is competitively disadvantaged in this relationship. We estimate Jumbo represents about 7% of Lottery Corp revenue (including both service fee and ticket sales), whereas the contract represents around 80% of Jumbo's revenue. Exacerbating the issue, should games such as Powerball no longer be available on the Oz Lotteries platform, we would expect a significant proportion of customers would find their way to The Lott.

We do not award a moat to Jumbo’s SaaS business. Although Jumbo owns its proprietary lottery software, there are other providers who could offer a competing product. Switching costs may inhibit churn in the existing SaaS customer base, but Jumbo has only secured three of the 10 largest charity lotteries as of fiscal 2023 and we expect SaaS will remain a small part of Jumbo’s earnings mix. The Australian charity lottery market is small, with combined transaction volumes for the largest three charity lotteries only 6% of state lotteries, on our estimation. If this market scales, it could entice operators such as Intralot, which has primarily focused on larger lotteries such state government-owned Lotterywest. Two of Jumbo’s clients, Lotterywest and Mater, are responsible for a significant proportion of revenue, presenting key account risk for the SaaS business. 

We are also yet to see evidence of a moat in the managed services segment. Jumbo’s managed services business is predominantly made of three recently acquired international businesses, Gatherwell, StarVale, and Stride. These businesses provide software and game management services to small-scale lotteries and raffles in the U.K. and Canada. We do not see these services as hard to replicate, given other lottery operators already have expertise in providing these services for their own lotteries. Thus far, Jumbo’s strategy has been to acquire existing lottery management businesses and improve the user experience and advertise the business more widely. It is yet to be seen whether this strategy will allow Jumbo to carve out a dominant position in managed lottery services, but we expect this will remain a relatively small part of the business. 

Fair Value and Profit Drivers | by Angus Hewitt Updated Nov 01, 2023

Our fair value estimate for Jumbo is AUD 12.90 per share. This implies a fiscal 2024 P/E ratio of 19 and an enterprise value/adjusted EBITDA ratio of 10.

We expect Jumbo’s revenue will grow at a 7% CAGR over the next 10 years. Revenue for Jumbo’s core lottery retailing business is a function of online Lottery Corp ticket sales, Jumbo’s share of these sales, and Jumbo’s mark-up. We assume the percentage of Lottery Corp tickets sold online will increase by 3% per year, from a base of 38% in fiscal 2023. Due to its higher prices and near-identical product offering, we expect Jumbo will continue to cede share to The Lott at around 0.5% per year. We expect future price increases will be modest, as a higher premium widens the wedge between Jumbo’s tickets and tickets sold through The Lott, driving away customers. 

On the profitability front, we expect Jumbo’s operating margin will hold at around 47% between fiscal 2024 and fiscal 2030 before stepping down in fiscal 2030 when Jumbo’s reselling agreement comes up for renewal. We think Lottery Corp will try to extract further rents from Jumbo by imposing a materially higher service fee, which would see the EBITDA margin fall to just under 40% from fiscal 2031. Although SaaS and managed services become a larger part of Jumbo’s business over our forecast horizon, we expect lottery retailing will continue to generate the bulk of Jumbo’s earnings, accounting for around 80% of midcycle operating EBITDA after stripping out intersegmental transfers. 

Risk and Uncertainty | by Angus Hewitt Updated Nov 01, 2023

We assign Jumbo a Morningstar Uncertainty Rating of Medium. Lottery retailing is largely detached from the economic cycle, with a closer link to the size of jackpots, which in turn is governed by probabilities. Although Jumbo is competitively challenged and market share losses to The Lott have been persistent, this has historically been offset by an increasing number of lottery ticket sales moving online. 

Expiry of the reselling agreement in 2030 presents a material risk of value destruction. Lottery Corp holds the power in this negotiation, and as such, will likely try to extract significant rents from Jumbo on renewal. To reflect this risk, we assume Lottery Corp will raise this service fee materially in fiscal 2030, to 9% of ticket sales from 4.65% currently, thus clawing back the entire 9% retailing commission it pays to Jumbo. However, there is a risk this agreement lapses entirely should Lottery Corp decide to establish itself as the sole digital retailer of its tickets. Although we think it highly unlikely that the agreement is not renewed in some form, such an outcome would have immense ramifications for Jumbo, with the agreement expected to account for around 80% Jumbo’s sales and earnings from operations in fiscal 2030. 

The main environmental, social and governance risk for Jumbo is the social impact of its core product, lottery tickets. However, we view lotteries as an ESG-light form of gambling, with revenue gained from small ticket sales to a large volume of customers, versus other forms of gambling where only a small number of consumers participate but their average spending is much greater. Consequently, lotteries are mostly removed from conversations around problem gambling because individual losses are much smaller—particularly at the higher end—and we think tighter regulation around gambler harm minimization specifically targeting lotteries is unlikely.

Capital Allocation | by Angus Hewitt Updated Nov 01, 2023

We assign Jumbo a Standard Capital Allocation Rating based on our assessment of balance sheet risk, investment efficacy, and shareholder distributions. 

Jumbo’s balance sheet is sound. Lottery ticket volumes are largely detached from economic conditions and are instead correlated with jackpot size. As a result, Jumbo’s sales and earnings have proven relatively resilient during economic downturns, such as the COVID-19 pandemic. Jumbo is a capital-light business, carrying no debt and maintaining a cash position of AUD 41 million in fiscal 2023, excluding customer account balances. 

We view investment efficacy as fair. Given the maturity of the digital reselling business and Jumbo’s structural competitive disadvantage compared with The Lott, we see little argument for major investments in the lottery retailing business beyond maintenance and incremental improvements. The more recent acquisitions of U.K. and Canadian managed service providers Gatherwell, StarVale, and Stride are yet to be proven, but diversify earnings away from lottery reselling. 

Shareholder distributions are appropriate. A relatively high payout policy of between 65% and 85% of statutory NPAT is justifiable given the capital-light nature of the business and the lack of obvious superior investment opportunities in the core lottery retailing business. In the three years to fiscal 2023, dividends have been paid at the top of this range, and we assume a payout ratio of 85% over our explicit forecast period. After dividends, Jumbo’s remaining earnings are directed toward incremental acquisitions and share buybacks.