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Treasure Chest: The Bull Case For Jumbo Interactive

Treasure Chest | May 30 2022

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

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Morgan Stanley sets a higher target price and outlines its bull case scenario for Jumbo Interactive.

By Mark Woodruff

Whose Idea Is It?

Analysts at Morgan Stanley.

The subject:

Assessing the likelihood of Jumbo Interactive ((JIN)) achieving an ambitious FY26 target.

After analysing management’s goal of achieving software earnings that will comprise 50% of overall earnings by FY26, (from 18% in FY23), the Outperform rated-Morgan Stanley lifts its 12-month price target to $25.50 from $22.00.

While the target price relates to a base case scenario, the broker also assigns a 20% probability to its $46.00 bull case scenario playing out.

The company is an internet lottery business that currently sells national lottery games via its website and app and has a Software-as-a-Service (SaaS) product – “Powered By Jumbo” – which provides other lottery operators globally a software system to power ticket sales and leverage their existing customers.

The analysts estimate the optionality of Jumbo Interactive's software growth has not been incorporated into the share price at all, and suggest there's currently a compelling entry point for such a long-term compounding business.

Shares have fallen by more than -20% year-to-date and are trading on an attractive multiple, according to Morgan Stanley.

The broker also likes the company’s defensive demand characteristics, leverage to digitisation, strong EPS growth, as well as cash flow conversion of around 100% of earnings.

More info:

Software earnings for Jumbo interactive comprise the SaaS and Managed Services segments. The analysts believe it is a plausible goal by management to grow these earnings to the same size as Lottery Retailing by FY26 and achieve its 50% target.

Among the key drivers for Morgan Stanley’s bull case scenario is SaaS expansion which may derive from becoming the sole vendor to a major existing customer or selling the solution to novices in the online lotteries space. Expansion may also occur by displacing a legacy online solution for a lottery business.

Further, Managed Services acquisitions and subsequent cost synergies also helps support the bull case.

The flagship Oz Lotteries consumer business is the lowest cost external distributor of lottery tickets, explains the broker, due to a favourable reseller arrangement with the Lottery Corp ((TLC)). It’s thought the company has exposure to an early-stage online migration of lottery sales. In addition, there are favourable shifts in consumption habits, including more social (Lotto Party) and more convenient solutions, via autoplay, mobile and voice.

Neutral-rated Goldman Sachs, not one of the seven brokers updated daily in the FNArena database, agreed on positive domestic lottery trends when it lifted its target price to $18.00 from $17.40 in early May. Upside for Lotteries was anticipated due to a shift toward higher-margin digital and an upcoming OzLotto game change. 

Macquarie also initiated coverage of Jumbo Interactive in March with an Outperform rating and highlighted recent UK and Canada acquisitions have allowed for geographical diversification of earnings. The broker expected further acquisitions to support international growth and set a $20 target price.

The FNArena database has three broker Buy ratings (or equivalent) and one Neutral rating, with an average target price of $21, which suggests 34.8% upside to the latest share price.

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