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Lotto operations offer a strong and growing income stream

• JONATHAN WILSON
• The Australian
• 12:00AM May 2, 2017
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Playing Tatts Lotto is a favourite pastime with annual ticket sales of close to $4 billion. Sales have risen slightly faster than population growth for decades, and this doesn’t look like it will change.
Yet even Lotto must get with the times: today, 13 per cent of lottery ticket sales in Australia are online, more than double in 2012. This is expected to reach 25 per cent as consumers become more aware of online channel convenience, namely automatic number check, prize payments and auto play.
Which brings us to Jumbo Interactive (JIN). There’s a good chance you, or someone you know, has had a brush with Jumbo and its orange elephant mascot, as it has a database of more than two million verified accounts. Jumbo operates the website ozlotteries.com.au, which sells about a quarter of online Tatts Lotto tickets and is the only licensed lottery ticket e-retailer in Australia.
Jumbo was a first mover in the online channel and its extensive database is the result of 15 years of marketing effort and establishing trust as a secure provider. Last year, Jumbo sold tickets to 376,000 “active” users at an average annual spend per user of $335.
The stock is interesting because cash flows are set to surge over the next two years and this would not appear to be priced into current levels of about $2.30. Revenues should grow strongly as online sales penetration increases with costs falling because of Jumbo’s exit from international markets at the end of last year.
International losses over the past two years masked strong growth in Australia.
Putting these factors together, free cash flow could almost triple from $3 million in FY16 to about $9m in FY18. This compares well with Jumbo’s enterprise value of $82m, which is the company’s market value of $101m adjusted for $19m of company cash. With a strong balance sheet and growing cash flow, JIN is primed for a change in dividends. If the company adopted a payout ratio of 75 per cent, say, it could be paying a dividend of 15c per share, equating to a 6.7 per cent yield (fully franked).
Recently, Tatts’ nemesis, global lotteries waging provider Lottoland, acquired 7 per cent of Jumbo’s shares, but it needs a database of qualified leads to get traction in Australia. For obvious reasons, Tatts can’t allow that to happen.
Jonathan Wilson is an analyst for the Clime Smaller Companies Fund www.clime.com.au/cscf

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