Relieved of Key Risks

Jumbo Interactive: Relieved of key risks

• JONATHAN WILSON
• The Australian
• 12:00AM February 20, 2018
• Save
• • Share on Facebook
  • Share on Twitter
  • Share on email
  • Share more...

Jumbo Interactive
ASX code: JIN
Share price: $3.84
Industry: Consumer services
Forecast FY2019 ordinary dividend: 21.5c
Forecast special dividend: 20c
Jumbo Interactive, the online lotteries ticket e-tailer, has announced another strong result with earnings for the half year of $5.3 million, beating the company’s upgraded guidance from last month by 6 per cent.
Back in July, when JIN last appeared in Dividend Detective, the scene was set for a much improved FY18. The company had finalised exits from loss-making international business six months prior and this was followed by the consolidation of state-based contracts with Tatts (now Tabcorp, TAH), which were extended until 2022.
Then in December, the Northern Territory government prohibited NT-licensed betting operators from taking wagers on Australian-based lotteries, eliminating the threat of NT-licensed Lottoland to JIN and Tatts.
Relieved of these key risks, JIN’s cash generation and strong balance sheet attracted attention. As a result, shares are up over another $1 or 30 per cent, even after paying 20c of fully franked dividends in the period.
Investors have enjoyed sustained strong returns, but there remains more than satisfactory opportunity in JIN.
Taking stock using 1H18 figures, JIN’s balance sheet is flush with $34m net company cash. Including 2H cash flow and the expected cash injection from TAH exercising its remaining 3.7 million options, JIN’s net cash position will grow to about $45m by June 30.
Given investments in platform improvements and new product lines such as charities lotteries are largely complete, there is a strong case for excess cash funding another special dividend this year. On this basis, JIN could comfortably fund the payment of a further special dividend of about 20c a share, fully franked.
Adjusting for estimated net cash at June 30, and additional shares to be issued to TAH in May, JIN’s implied enterprise value of $155m is less than 12 times FY19 free cash flow: this is a modest multiple to pay for a high-quality, capital-light business growing at above-average rates. We believe intrinsic value lies above $4.
Online retailing of official government lotteries is effectively a duopoly (with TAH). This means that two players absorb the migration of customers from newsagents to the online channel within a market totalling $4bn of sales. In Australia, online penetration has more than quadrupled since 2010 to 16.5 per cent, whereas in some offshore markets the percentage exceeds 40 per cent. JIN’s growing database of more than two million verified accounts supports ongoing engagement with customers in a low-cost manner. Meanwhile, the charities lotteries are proving a valuable addition.
Jonathan Wilson is an analyst for the Clime Smaller Companies Fund.