Australia | Feb 27 2023
This story features LOTTERY CORPORATION LIMITED, and other companies. For more info SHARE ANALYSIS: TLC
The Lottery Corp posted an impressive first half, with initiatives laid out to support higher earnings over the medium term.
-A better than expected first half result from The Lottery Corp
-Price increases should support further earnings growth over the medium term
-Enhancements set to impact in FY24
By Danielle Austin
Despite impressing analysts with the first interim result since its demerger, the market is largely focused on opportunity ahead for The Lottery Corp ((TLC)).
Having split from Tabcorp Holdings ((TAH)) last May, the company reported ongoing strong performance from its core lotteries business and a better than expected boost from its keno business over the first half of the fiscal year. The interim result from Lottery Corp has widely been described as better than expected by analysts, and has led to a number of brokers lifting their valuations on the stock.
The company reported a year-on-year underlying earnings increase of 16%, with the lottery division, which accounts for 85% of group earnings, lifting earnings 12% year-on-year to $350m and its earnings margins by 90 basis points to 19.7%.
Having announced an interim dividend of 9 cents, comprised an 8 cent per share interim dividend and a 1 cent per share special dividend, the company has lifted its targeted dividend ratio payout to 80-100% of net profit after tax, from a previous 70-90%.
Upgrading its stock valuation by 7% following the result, Ord Minnett (Hold, target price $4.70) highlighted the majority of the increase was driven by performance from the company’s keno operation. While the keno division accounts for a smaller percentage of group earnings than lottery, the segment did deliver earnings of $60m, up 46% year-on-year, with the broker noting the previous period had been impacted by venue closures. Even so, the rebound was better than Ord Minnett had anticipated.
On the heightened dividend payout target, Ord Minnett notes it found the previous target conservative and has accordingly lifted its own expected payout ratio to 95% from FY24. The broker expects Lottery Corp to continue to dominate the domestic lottery industry, and lifts its full year earnings forecast 15%.
Price increases to drive more frequent jackpot activity in coming years
The first price increase for Powerball games in five years is set to be implemented in late May, lifting game prices 9%. This will see prices increase to $1.20 from $1.10, with the increase expected to drive more frequent large jackpots. Macquarie (Outperform, target price $5.50) predicts a 2.5 percentage point annualised benefit to domestic lottery volumes from the price increase and subsequent improved jackpot activity.
Also in the company’s pipeline are enhancements to its Monday and Wednesday lottery games coming in FY24, and continued exploration of opportunity for new licences and enhancements to existing licences. According to Macquarie, the more interesting story is already how Lottery Corp’s FY24 is shaping up. This broker highlights a 2 percentage point commission increase will take full effect in the coming fiscal year, likely adding around $30m in incremental earnings. Alongside evidence that the keno business can continue to deliver $115m in annual earnings, Macquarie anticipates Lottery Corp delivering a more than 7% compound annual growth rate through to FY25.
Credit Suisse (Neutral, target price $5.05), Morgans (Add, target price $5.60) , and UBS (Buy, target price $5.70) all largely echoed similar sentiments around the result being stronger than expected. UBS expects further share price upside exists after some positive movement in the last week.
While acknowledging the beat delivered by in the first half, Goldman Sachs (Sell, target price $3.90) found some key underlying factors failed to alleviate its concerns around the lottery industry outlook. This broker highlighted the OzLotto business failed to demonstrate strength from a price increase, and its forecasts factor in little significant uplift in Powerball performance from the impending price increase in May. The broker’s valuation implies a -20.5% return, with Goldman Sachs describing the lottery industry as having “inherent volatilities”.
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