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Lottery Company Demerger Gamble Pays Out

Australia | Aug 26 2022

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The Lottery Company’s first result has seen it win further favour with the market, with brokers largely in agreeance that the stock offers resilience to a volatile market with capital management benefits in its future.

-The Lottery Company’s maiden result has reaffirmed the stock’s favour with the market
-Lotteries proved the main pillar of the result, accounting for over 85% of group earnings
-Market analysts assume continued performance will equate to stronger dividend payouts

By Danielle Austin

Delivering its maiden result as a separately listed company following its split from Tabcorp Holdings ((TAH)) earlier in the year, The Lottery Company ((TLC)) reported group earnings of $694m, spurred on by a strong contribution from its Lotteries division.

Accounting for more than 85% of group earnings, Lotteries delivered 10% earnings growth and an 18.4% earnings margin, with favourable jackpot activity and digital penetration supporting the result. Division one jackpot value across Powerball and Oz Lotto rose 33% year-on-year.

The Keno division delivered 15% year-on-year digital turnover growth, necessary to offset a -9% decline in retail turnover as the company battled the impact of covid-driven venue closures, in particular a 16-week shut down in New South Wales. Digital now accounts for just under 20% of total Keno turnover.

Costs did increase 10% in the year and drove a -$20m impact to earnings, with nearly half of this attributed to one-off payments related to the company’s split from Tabcorp, and the rest to investment in technology and promotional spend.  

Capital management in line of sight for market analysts

Four of FNArena’s database brokers have updated on The Lottery Company following the release of its full year results. Of these, three are equivalent Buy rated and one is equivalent Hold rated, and between them these brokers have an average target price of $4.99, ranging from $4.65 at the lower end to $5.50.

Macquarie (Outperform rated and with a target price of $4.65) sees The Lottery Company as a good choice for investors looking for a defensive, high-quality stock. The broker noted strong jackpot activity, notably driven by more Powerball jackpots at or above $60m, will drive challenging comparables in the coming year, particularly in the first half. According to the broker’s prize pools tracker, lotteries prize pools are down -21% in the first seven weeks of FY23, and Powerball is yet to see a division one jackpot exceeding $20m, but Macquarie warns investors not to draw conclusions from this short-term trend.

The Macquarie analysts also noted balance sheet leverage should leave room for capital management in the coming year, particularly given a lack of near-term licensing renewals. The broker has reduced its earnings forecasts -5% and -3% for FY23 and FY24 respectively, and anticipates the company can achieve a 4% earnings compound annual growth rate through to FY25.

Noting the resilience of lottery ticket sales to economic cycles, Morgans (Add rated and with a target price of $5.50), described The Lottery Company as "one of the highest performing lotteries businesses in the world". The broker noted the company has exclusive licenses to operate lotteries across all Australian states and territories, excluding Western Australia, and has steady and predictable cash flow and low ongoing capital expenditure needs. The broker anticipates these drivers will see the company continue to pay down debt in the coming half, and allow it to deliver a dividend at a high payout ratio.

Morgans highlighted potential to be unsuccessful in renewing licenses poses risk to the company’s outlook, noting the next major expiry is Victoria in 2028. The broker lifted its earnings forecasts 1% and 6% for FY23 and FY24 respectively.

Credit Suisse (Neutral rated and with a target price of $4.65) notes the stock now offers better value following a recent share price decline, and describes it as a potential safe haven for investors in a volatile market given the company’s defensive characteristics. The broker also believes patient investors can benefit from future capital management.

Credit Suisse downgrades its earnings per share estimates -5-10% over the forecast period to account for depreciation and amortisation guidance from the company.

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