Big Things Ahead For Jumbo

This story features JUMBO INTERACTIVE LIMITED. For more info SHARE ANALYSIS: JIN

 – Jumbo Interactive a major player in Australian online lottery market
 – Company enjoys solid margins in a growth sector
 – Overseas growth is also possible
 – Moelis initiates coverage on Jumbo with a Buy rating

By Chris Shaw

Jumbo Interactive ((JIN)) is an Australian online lottery business, the group reselling for state governments under long-term agreements. Jumbo operates in a market in which it is one of the two main players along with Tatts Group ((TTS)), the company enjoying a market share of around 40%.

As part of its initiation of coverage on Jumbo with a Buy rating, Moelis notes there are significant barriers to entry in the online lottery market, these stemming from regulatory, system and brand recognition issues. 

This offers the company significant longer-term upside potential in the view of Moelis, as at present internet lottery penetration stands at only about 7% of what is a $3.6 billion market in terms of annual sales.

Analysis by Moelis suggests Jumbo generates a solid gross margin of about 19%, as each $1 lottery ticket is effectively purchased from the government at $0.91 and on-sold to customers at $1.10. Jumbo at present has more than one million domestic customers, though less than 10% are regular players with an average spend of around $20 per week.

Evidence of Jumbo's growth potential are apparent in the recent interim result, Moelis noting net profit before tax grew by 58% and EBITDA (earnings before interest, tax, depreciation and amortisation) by 56% on a 32% increase in revenue.

Further solid earnings growth is expected, as Moelis is forecasting earnings per share (EPS) of 14.3c this year and 18.3c in FY13, which compares to the 10.7% achieved in FY11. With a market capitalisation of only around $63 million at present there is no coverage of Jumbo by brokers in the FNArena database.

In terms of additional growth opportunities, Moelis notes management at Jumbo sees potential in the US market given late last year the US Department of Justice approved internet lottery sales for the first time. 

The lottery industry in the US is a more than US$50 billion market, notes to Moelis, and 43 of 50 states currently conducting lotteries. About six of these states are expected to introduce internet lottery sales within the next 12 months.

Given the upside potential on offer for Jumbo, Moelis sees scope for an earnings multiple re-rating in coming months from what is currently an undemanding multiple of less than 10 times for FY12. Aside from the growth potential, Moelis suggests the current multiple is too low given Jumbo's strong market position in what is a structurally driven online segment of the market.

In a slightly stronger market shares in Jumbo today are down 1c at $1.39 as at 12.00pm, which compares to a range of $0.225 to $1.75 over the past 12 months. Moelis has a price target on the stock of $1.75.

Investors in Jumbo would also receive a modest boost to total returns from dividends. The forecasts of Moelis suggest a fully franked yield on Jumbo if 1.4% this year, rising to 2.2% in FY13.

 
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