Today's run not only reflects an excellent FY18 result but the...

Today's run not only reflects an excellent FY18 result but the growing expectation for another big year ahead. Despite a massive run, I don't think it's finished just yet.

My high level back of the envelope thoughts capture info from both TAH and JIN, obviously specific to digital lotteries (the best part of the TAH business and the only part of the JIN business, i.e. pure play)

TAH noted digital share of sales was up 3.2 ppts to 17.7% for the year. This means the online channel grew by about 22% over year, and has approximately doubled over the past 5 years. Keep in mind this is growth within a growing total pool as well - total lottery prize pool growth has outstripped GDP growth over the past 20 odd years (average ~4% p.a.).

JIN's TTV grew at 26% in FY18 and I think it will probably do at least the same again in FY19, though probably closer to 30% TTV growth. This reflects ongoing structural growth of online, a remarkable start in terms of jackpots (which means growth in customer acquisition as well as average spend per customer) and continuing strong growth in charities (a $1bn market in Aus, according to management). JIN's Ozlotteries app downloads have never been higher than recent weeks. Also of interest is that JIN's app is 5 star rated vs thelott (TAH) at 2.5 stars. They are killing it in mobile.

If TTV does indeed grow at 30%, it would approximate $235m to $240m in FY2019 ($183m FY2018) . In recent years, TTV translates to revenue at a rate of about 22%, hence revenue forecast would be about $52m to $53m (pre interest and other income). The beauty of this business, and a feature of the FY18 result, is the way the business scales without further significant investment. Amazing operating leverage.

So while revenue could grow at 30%+, costs may escalate at between 8% to 10% (~+9% in FY18), though management can pull different levers (marketing, development spend) depending on opportunities. If costs continue to grow at about this rate, total expenses for FY19 would be about $23m to $24m.

The above drives EBITDA of $28m to $29m. After D & A of ~$2.5 to $3m, we get EBIT of about $26m. With an average cash balance that will exceed $50m (note TAH option exercise added $8.2m cash post balance date), there should be interest income of nearly $1m.

So we are looking at forecast profit of between $18.0m and $19.5m for FY2019, well above prior expectations. With only two analysts covering, I think the 'consensus' was at about $14.5m pre today's release. So FY19 earnings upgrades of 25% could be coming, before any new potential broker initiations (who knows?). After backing out cash, despite growing earnings at ~50%, JIN is trading on an ex cash P/E of less than 16x, broadly in line with the market. I would suggest one final possibility in the near term would be a further special dividend. Unless an acquisition is imminent (unlikely), there's no need to hoard so much cash.

I've probably missed a few nuances but thought it would be worthwhile cross checking my broad thinking. FWIW, I think JIN is worth closer to $6.50 per share, even after probability weighting longer term risks around reselling arrangements.

Enjoy the weekend guys. After re-reading the above, I think I will.