Jumbo’s FY25 Growth Potential Under A Cloud

Small Caps | Jul 10 2024

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%.

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