Consensus community valuation
Chart Update 26th Sep
I have been waiting patiently for an entry on JIN however the 3 Day chart looks ugly. Note the green circle on the Stochastic indicator. The white line (current action) is way ahead of the longer term (yellow line) indicator. Also the 1day stochastic indicator will be nearing its top in the next day or 2 (if not there already) which may mean it still rises to around the $12.50 however Im not hopefull. Im expecting to see a drop down to the 12.15 - 13.06 in the coming weeks.
Noted the earnings trend staggering about also.
Difficult for buy full conviction here:
TNE: The Earnings trend could be better
Strong results as expected given the favorable jackpot run:
Finally step up in TLC fee now in the results, UK growing well, Canada a bit soft but appears to be a focus.
Hard to fault the results in any way and FCF of just under $53M. $68M in cash and about a billion-market cap. Accelerating buyback when sensible.
Not overly cheap but still results given results and execution - issue would be a slowing jackpot outlook. Interesting to see if digital penetration continues in Australian lotteries and how SAAS and managed service growth looks in a year or 2.
Chart Update Mon 29th July24
Jin had broker updates over last couple of days (Jefferies & Morgans) re affirming my wave 3 target to come. After this drop completes at my adjusted target box (14.90 - 15.08).
Macquarie also came in with the target up the top of the chart. I dont take much note of targets that far away, anything could happen between then and now. I like to work on the closer targets to see it play out the way we want, not hope for way down the line, even if it is possible. Small steps will confirm the longer term PT's.
Overall zoomed out
Zoomed In
Chart Update 11th July 24
Once this C wave down has completed, Jin should have some decent dollars to be made up to my W3 target box and also 2x brokers targets
Jumbo is giving a presentation at a Macquarie event today.
Included is a trading update for the first 10 months of the financial year:
Good growth is continuing, with increased service fees being somewhat offset by price increases.
If you pro-rata ytd performance, you get a FY24 TTV of $534m. They told us to expect a better revenue margin (last year was 20.3%, but based on the 2nd half to date that's more like 22.5%), so FY revenue should be around $120m, giving an EBITDA estimate of ~$59m (based on 49% EBITDA margin) -- both of which are only marginally ahead of FY23 results. Still, as we saw last year, volatile jackpot results can really move things around.
In FY23, they went from $72m in revenues for the first 10 months and then added $45m in the last 2 months!
So it's hard to know, but my best guess is that shares are on a forward PE of something like 22x, which isn't excessive given the nature of earnings and their momentum.
Not sure it's a level where a buy back is really warranted (they have the capacity to buy back another $25m if they choose). To be fair, for the first half they only bought back $3.2m at an average price of $12.74, so as long as they are disciplined and opportunistic, it's not a worry for me.
Held.
I always wonder about Morningstar analysts (broad brush). Maybe it is just a value tilt that hasn't worked for years or some other reason they always seem so far off on value - or how share prices perform - XRO etc as well.
JIN they're still at $13.10. Get a bit overheated at the moment but still.
Not that Morningstar Australian analysts have seen to be very good analysts over the years they have initiated with a fair value of $12.90 for JIN.
Jumbo results solid with a few call outs to monitor moving forward
- Revenue growth overall of 18.1% to 62,389 million.
- Jackpots in Q2 helped drive this growth with number of jackpots for the half being 23 but the value of each of them up 10.3%, driven predominantly by 160m powerball. These jackpots are key to driving the growth in the lottery TTV and revenue.
- Number of active players up to 4million in the half, up from 333k in 2015 . Online ticket purchases are now at 38.4% of total tickets.
- Oz Lotto price increase of 15c or 10% on a ticket made no impact to sales . RPPU has risen 17%
- Comments on this acceptance by Mike and David on the call were all around reasonable increases in this inflationary environment with consumers understanding and willing to pay.
- Mike (CEO) and David (CFO) outlined Jumbo are looking to do this with powerball in second half 2023
Not sure if one can call this defensive but management were quick to highlight the resilient nature of the lottery business (see graph below).
NPATA, CF and dividends all saw increases in the half by 8%, 6% and 5% respectively
Watch
- Underlying EBITDA margins compressed to 48.8% from 53.7% in 2022. This was expected predominantly due to fee increase from lottery devision 2.5% to 3.5% which will rise again in 2024 to 4.65%.
- Gatherwell in UK saw turnover (TTV) fall by 9.6% in the half to 10,428m from 11,367m. EBITDA was impacted consequently due to rising cost which came in at 423k or 22.3% down from 545k. One segment of the business to monitor moving forward.
- Costs were up 28.1% to $22,544m driven by employee and other admin costs which each rose by $3,074m and $1,960m respectively
Overall need to admire the ability of Mike and the team to continue to execute over a long period in terms of CAGR, EBITDA and cashflow generation.
Disc Top 5 position in RL not on SM
Looks to be another $100M jackpot next thursday, a string after months of nothing. Not sure it'll get the same attention given Christmas and New Years.
Looking at Semrush for ozlotteries.com.au and looks like steady traffic but not great.
Obviously the Lott dominates. Hopefully we get some good news on JIN partnering further with lotterywest.com
Should be a relativley good read through into JIN - benefit from the $160M powerball. Hopefully JIN captured a fair share of that 2% increase in digital share.
I like the business but no idea how Jumbo makes it to Mogan Stanly's list of a wide moat business - think you need to put The Lottery Corp on it if either of them.
Good results from $JIN today and steady progress on acquistions: past, presents and to come.
Their FY22 performance highlights
Strong double-digit growth reported across key performance metrics:
− TTV up 36% to $659.9 million
− Revenue up 25% to $104.3 million
− Underlying EBITDA1 up 13% to $55.1 million
− Underlying NPAT1 up 14% to $32.2 million
− Underlying EPS1 up 13% to 51.5 cents per share.
The Board has declared a fully franked final dividend of 20.5 cents per share, taking the total FY22 dividend to 42.5 cents per share, up 16% on FY21. In addition, the Board has approved an onmarket share buy-back of up to $25 million.
A few of my notes from the call:
Share buy-back: there was some discussion on the call about why a $20m buyback, when they are continuing to screen bolt-on acquisition opportunities as part of the strategy of accelerating the leverage of their lotteries SaaS platform internationally. But I think it makes perfect sense. 2022 was a standout year driven by higher than normal large lottery prizes. From a capital management perspectives, buy-backs are a good way of managing windfalls, as they allow the dividend progression to reflect the overall prgress of the business. It also signals capital discipline: $JIN are not hoarding all the cash to splurge on future acquisition. So a solid "A" on the report card from me on capital management.
Operating Expense/Margin: Some pressure here, due to the higher fees in the Lottery Corporation Service Fee, which is well-understood by the market and which will max-out in FY24. But there were also other increases in staff expense, staff turnover, expanded management team and marketing expense. This undermined the operating leverage I'd expect to see, Not a major concern at this stage, but something to watch. CEO Mike Veverka made it clear that this is a priority for the management team as well. On marketing expense, customer acquisition metrics still look very favourable, so there is headroom here and it makes sense for them to be spending more.
Outlook
Finally, one interesting chart to address questions investors might have about potential impact of a recession. Key message: don't worry! However, given greater discretionary capacity during COVID period (for all the reasons covered before), might there be a negative post-COVID effect? This was not discussed on the call.
We are barely two months into FY23, however, it was noted that there have been fewer >$20m jackpots so far - indicating FY23 might not be a bumper year. This might lead to SP weakness as the year unfolds, with H1FY22-H1FY23 comparison providing even better buying opportunities. If so, I will consider increasing my position at that time. Happy to hold for now.
Disc: Held on SM and IRL (3%)
Trading Update
Looks like a miss on analyst consensus from TIKR - though higher margin.
There was some postive broker commentary yesterday.
Share price has come off a bit (with everything) so will be interesting to see the SP reaciton - pointing to a decent rally on CommSec.
The JIN share price fell following the release of their H1FY22 report, which resulted in a decrease in margins. This also followed a full FY21 report which resulted in a 37% increase in D&A.
With respect to the former, Jumbo blamed the deterioration on the product mix sold as the cost of selling goods rose.
The company indicated the latter was due to:
- 1.3m amortisation of the 15m capitalised Tabcorp extension fee – being amortised over the 10-year term of the agreements.
- 414k amortisation for 12 months of the Gatherwell intangible assets that arose in the business combination on acquisition.
- 805k increased amortisation of capitalised website development costs relating to the proprietary software.
FY22 H1 shows D&A came in at 4.2m for the reporting period – another 5% increase. Nothing major, but something to keep an eye on in upcoming reporting periods.
Despite margin deterioration in H1, Jumbo’s SaaS segment reported a narrow increase in margins which helped partly offset loss elsewhere. I think this is also why management – and investors like myself – want to see Jumbo expand their SaaS offering. The blue sky here also represents the bulk of my investment thesis.
What else do I like? Lots! I am a fan of management, who are tidy capital managers and have plenty of skin in the game themselves. In the last 12 months there has been lots of insider buying, including by the founder/CEO. Jumbo also pay a reasonable dividend – who doesn’t love a dividend?! Add to that a warchest of funds (75m), no debt, growing revenues and favourable tailwinds – with a focus on digitalising what is very much an ‘old school’ industry (only a very small portion of lottery tickets are sold online). There is lots of blue sky.
Despite being lumpy, the business has consistently produced millions in FCF since FY18 – see below (FY18 starts left, moving right to FY21).
When you consider management’s excellent ROE, which exceeds 30%, I become increasingly confident that management will continue to use FCF to grow the business and subsequently reward shareholders. I think this will continue into the future.
I will estimate FY22 revenue of 110m and a conservative NPAT of 33m. That gives me EPS of around 0.53c. Noting the business strengths I have just mentioned, I think a PE of 35 is reasonable. This gives me a current price around $18.50.
Jumbo reported a 9% lift in revenue for the half year FY21, which came in at $40.9m. Not great, but there's a lot context needed here.
The demand for lotto tickets is very much tied to the size of the jackpot on offer. The large jackpots (eg $100m Powerball) draw in a lot of extra volume, whereas the saturday $2m is far less popular. TTV and revenues for Jumbo can be lumpy as big Jackpots arent consistent in their timing.
So the result wanst too bad when you consider large jackpots were down 35% in the 6 months period. Despite this, revenue for the reselling business was up 2.3%.
And this is by far the largest segment -- it captures over 90% of revenue for the business.
So this hides the really encouraging result, which was a 25% lift in Total Transaction Value (TTV) and a 200% increase in external SaaS revenues (albeit off a very small base).
Importantly, the run rate for TTV at the end of December was $120m pa, compared to the $39m they reported for this half. This will grow as already signed customers are onboarded.
So expect even more growth in this segment in the current half.
The new Managed Services division is also seeing some good early growth, and there seems some good potential there. I think it's a very neat offering that levereges off the company's know-how.
Moving further down the income statement, Jumbo reported only a 3.7% rise in underlying EBITDA and a 5.8% drop in NPAT.
The reduced margins were to do with the new Service Fee to Tabcorp (that added over $2m in cash and non-cash costs), and also establishing expenses for the Managed Lottery Services business.
In regards to the former, although less ideal than the previous agreement, it's still a very good source of revenue for the business and one that now has a lot more certainty for the long term.
Overall, i think the dynamics of the industry are very supportive, and Jumbo is well placed to capture an increasing stake in it.
32% of all lottery tickets are now sold online, up from 28% last year. You have to assume that figure has a lot further to rise.
But the key thing to watch is for the growth in new SaaS business. That's the real growth engine.
Disc: held
Jumbo has signed a new 10 year reseller agreement with Tabcorp for the sale of their lottery products.
This will cost $15m in an upfront extension fee, and a higher service fee per ticket sold, which will be 4.65% phased in over the next three years.
Full details here
It represents a higher cost, but is the longest reseller agreement ever signed and provides a lot of certainty (removes a good deal of counterparty risk) and still leaves Jumbo with very high net margins. The move should be seen as a temporary step down in earnings, rather than a sustained loss of growth in my opinion.
Jumbo also reaffirmed guidance for the full year, which is expected to see ~6% rise in revenue. It is hoping to roughly triple ticket sales by the end of FY22.
Shares are presently on ~9x sales for FY20.
