Jumbo’s FY25 Growth Potential Under A Cloud

This story features JUMBO INTERACTIVE LIMITED, and other companies. For more info SHARE ANALYSIS: JIN

Jumbo Interactive has been benefiting from a run of big lottery jackpots, but is this a trend or a blip? Citi has concerns, initiating coverage with a Sell rating.

-March quarter jackpots boost Jumbo Interactive’s earnings
-Analysts lift jackpot forecasts through FY25
-Forecasting jackpots is risky business
-Citi sits below consensus forecasts

By Greg Peel

Online lottery marketer Jumbo Interactive ((JIN)) enjoyed a cracking March quarter this year, with lottery markets seeing twelve jackpots of over $15m, up from seven in the same period last year. The quarter included a $150m Powerball draw and $40m for Oz Lotto. The $150m found a sole winner. An earlier jackpot of $200m was split between two winners, hence $150m stands as the biggest single jackpot win in Australian history.

Jackpots of such a magnitude bring in the punters. The bigger the jackpot, the greater numbers of players. Don’t tell them this increases the already near-impossible odds. Some first-time players stay on as customers, some scoff at mere $4m pocket-change jackpots that follow big wins and only play the big numbers. Either way, Jumbo does very well out of big jackpots, which, of course, only grow big when nobody wins.

Jackpot games are a big driver for Jumbo in terms of sales and new customer acquisition, Morgan Stanley (Overweight) noted late last month. Year to date total implied jackpot game sales saw 22% growth for the first 50 weeks of FY24. Assuming this accounts for two-thirds of the company’s portfolio and the remaining sales see low single-digit growth, that implies mid-teens growth in volumes, Morgan Stanley estimates.

In addition, Jumbo increased pricing on Powerball by around 20c per game, and the broker expected online migration and Jumbo’s market share’s positive correlation with jackpots to be further tailwinds. After ten months, total transaction value (TTV) was up 22% year on year. Consensus had, at the time, FY24 growth of 19.5% and FY25 growth of 24.3% up on FY23.

Morgan Stanley believes it’s possible Jumbo gets close to FY25 consensus volumes in FY24, making the path to FY25 estimates much more achievable.

“We see few stocks offering more conviction into reporting season than Jumbo Interactive’s implied ticket sales,” said Morgan Stanley last month, referring to the upcoming August reporting season.

“However cycling favourable FY24 draws in FY25 is clearly a concern. We feel the hurdles are manageable, with tailwinds from a larger customer base, product extension and further online migration”.

The Risks

Was the March quarter just a one-off jackpot blip? Surely forecasting jackpots is about as accurate as forecasting the winning numbers themselves? Morgans (Add) nevertheless gave it a shot at the end of May, lifting its large jackpot forecast for both Lottery Corp ((TLC)), with which Jumbo has a licencing agreement, and Jumbo Interactive, to 60 from 48 in FY24.

In mid-June, Macquarie (Neutral) suggested consensus earnings upgrades were expected given recent Australian lotteries jackpot activity. Forecasting both Powerball and Oz Lotto jackpots through June, this broker anticipated volume growth at around 15% in FY24 (up from 10%),which implies 40% second half growth. Macquarie expected this growth will support digital penetration.

Analysts have little choice but to forecast jackpots. The market can choose, nonetheless, and the market pushed Jumbo shares up around 35% from the beginning of 2024 to late February. But there the price stalled, and the shares have since drifted back some -9%.

Cycling strong FY24 jackpots is clearly a risk, but Morgan Stanley’s view is much of the heavy lifting to get to FY25 expectations will be done in FY24 and starting FY25 with more than 20% more customers is a significant tailwind.

But Jumbo Interactive isn’t simply a local lottery reseller. The company operates through three segments, being Lottery Retailing, Software-as-a-Service, and Managed Services, and is involved in the retail of digital lottery tickets through Oz Lotteries, licenses Powered by Jumbo, a digital lottery platform solution to government and charity lottery operators, as well as lottery management services, including prize procurement, lottery game design, campaign marketing, and customer relationship, plus draw management services to charities. It also provides turnkey digital lottery solutions.

Jumbo has grown through M&A, and in terms of proving the value-add of managed services M&A, the market is clearly focused showing a return on invested capital ROIC uplift, Morgan Stanley warns.

Then there’s the upcoming (2030) licence renegotiation with The Lottery Corp. Fears of another reduction in net commission in 2030 are already being debated, Morgan Stanley notes. Jumbo offers very cheap customer acquisition and support at a -62% commission discount to other retailers for The Lottery Corp’s most valuable customers – digital customers.

The Naysayer

The task for Jumbo Interactive to cycle a record FY24 looks challenging given the strong jackpot runs, Citi believes. This broker estimates Jumbo generates 9-11x more ticket sales on jackpots in excess of $100m, which will account for around 48% of TTV in FY24.

Citi is positive on The Lottery Corp’s ability to skip steps in the sequence to create more large jackpots, but views it as more likely to mitigate potential falls in TTV rather than drive growth, and sees consensus FY25 forecasts as too “auspicious”.

To that end, Citi sees the long-term growth opportunity for Jumbo in the Charity and Lottery (Lotterywest in WA and iLottery in North America) markets, and views near-term growth as more challenging.

Jumbo manages lottery services for charities and for governments. Last year Jumbo extended its lottery agreement with Western Australia’s state-owned Lotterywest for four years, effective from November.

Charities in international markets move at glacial speed, Citi notes, and a Lotterywest request for proposal regarding its digital operations is more of a FY27 story. While the broker sees upside to Jumbo’s FY24 result given the strong jackpot run in the second half FY24, which could result in positive momentum, Citi views consensus as too optimistic on earnings in FY25 and sits -6% below.

Citi has initiated coverage of Jumbo Interactive with a Sell rating and a $15.50 target price.

Citi joins Ord Minnett with a negative rating (Lighten), with the latter last reporting in early May. Ord Minnett has a $13.10 target, although strictly this is a “fair value” calculation.

Morgan Stanely leads with a $20.80 target, followed by Morgans on $19.20, then Macquarie on $17.45.

Jarden is the most recent of the brokers not monitored daily by FNArena to report on Jumbo (mid-May), and a has a $15.90 target with a Neutral rating.

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