Australians love a flutter on the lotteries: we spend about $150 million a week on either hoping that our never-changed lucky numbers come up, or trusting fate in the hands of the retailer’s algorithm to churn out a quick-pick that is going to make us an instant millionaire. It is a potent testimony to human faith, and it’s easy to see why: although anyone with any knowledge of odds knows it is highly unlikely that they will win the lottery, the fact is that someone, somewhere – a person just like us – DOES win it. So, we reason, why shouldn’t that be me?
It’s probably a much wiser option to invest in the companies that clip the ticket on lottery participation. The ASX has two of them, and they’re both great stocks in terms of consistent revenue, profit and dividend growth. Right now, I would probably favour Jumbo Interactive as a total return (capital growth plus dividend income) investment – but there is not much in it, and Lottery Corp should also prove to be a profitable investment, with less business risk than Jumbo, which needs to boost the contribution of its non-retailing side. I’m confident it will do this – and Jumbo Interactive also has good overseas expansion potential.
- Jumbo Interactive (JIN, $15.46)
Market capitalisation: $972 million
12-month total return: 14.4%
3-year total return: 7.2% a year
Forecast FY24 dividend yield: 3.4%, fully franked (grossed-up, 4.9%)
Analysts’ consensus price target: $16.85 (Stock Doctor/Reuters, eight analysts), $18.38 (FN Arena, three analysts)
Digital lottery specialist Jumbo Interactive has three businesses:
- Lottery retailing: Jumbo is an authorised reseller of Australian digital lottery tickets in Australia and the South Pacific through ozlotteries.com., selling the tickets on behalf of The Lottery Corporation, through the Internet and mobile devices.
- Software-as-a-Service (SaaS): Jumbo licenses its ‘Powered by Jumbo’ digital lottery platform as a solution to government and charity lottery operators in Australia and globally.
- Managed Services: Jumbo provides its lottery platform and lottery management services to charities and worthwhile causes (in Australia, UK and Canada) that want to establish a lottery program, or enhance an existing program, for fund-raising purposes.
As of the FY23 result, lottery retailing generates the lion’s share of revenue, at 77% ($91.3 million), with managed services accounting for 16% ($18.7 million) and SaaS 7% ($8.7 million).
In the year to 30 June, revenue increased 14%, to $118.7 million, and net profit rose 7%, to $33.7 million. The full-year dividend was increased by 0.5 cents, to 43 cents. The revenue margin fell from 15.8% in FY22 to 13.9% in FY23. The company suffered from an unfavourable jackpot run: big jackpots boost revenue, and there were not enough of them in FY23 (despite a record $160 million Powerball jackpot in October 2022).
Jumbo says its serviceable available market (SAM) – the current portion of the market that can be acquired based on its existing business model, including existing product set and capabilities – stands at $10.3 billion, within a broader total addressable market (TAM), representing the total government lottery market in Australia and the US plus total individual charitable giving in Australia, UK and Canada, of $685 billion.
Because the lottery retailing segment is Jumbo’s largest revenue source, there is a perception that it has a huge key customer risk. Jumbo has a ten-year contract with The Lottery Corporation (TLC) to resell lottery tickets, to 2030: Jumbo itself does not own a lottery licence.
But set against that, Jumbo has one of the best technology platforms in the lottery business, and that is a big advantage as it looks to grow its SaaS and managed services businesses – something that shareholders definitely need to see over the next seven years. There is a big addressable market for SaaS and Managed Services in the UK and Canada; and Jumbo is probably eyeing the US market, too. All things considered, Jumbo has excellent potential for growth both domestically and internationally, leveraging its position in the digital lottery retailing market in Australia. There is also plenty of room for online penetration of lottery sales to grow in Australia, from the current level of 38%, which is much lower than many comparable markets.
Jumbo is also a relatively defensive stock, given the high level of economic resilience that lottery sales exhibit – as such, it is a sound dividend-yield stock, and that contributes to its ‘total return’ proposition.
Another attribute of Jumbo that works in investors’ favour is that it is a founder-led stock: Mike Veverka, who founded the company in 1995 (as Squirrel Software Technologies) is CEO, so management is definitely aligned with investors. From a 1999 float (as Jumbomall) that raised $11.8 million, Jumbo Interactive is now valued at $930 million: the Veverka family owns 14.1%.
Analysts like Jumbo Interactive’s growth prospects: broker Morgan Stanley is the most bullish, with a price target of $20.80.
- The Lottery Corporation (TLC, $5.02)
Market capitalisation: $11.2 billion
12-month total return: 15.3%
3-year total return: n/a
Forecast FY24 dividend yield: 3.5%, fully franked (grossed-up, 5%)
Analysts’ consensus price target: $5.41 (Stock Doctor/Reuters, 12 analysts), $5.47 (FN Arena, six analysts)
The Lottery Corporation is the country’s largest provider of lottery, Keno, and instant scratch products. The company’s brands include The Lott, NSW Lotteries, Golden Casket, Keno, Tatts and SA Lotteries. It is a high-quality business, with an effective monopoly over lottery sales in all states other than Western Australia (it outsources some of its digital sales to Jumbo Interactive, in competition with its own digital sales channel, through thelott.com., for a fee.) The Keno business is licenced to provide Keno products to venues in NSW, Victoria, Queensland, South Australia and the ACT: the Keno products are distributed in over 3,000 venues and there is also a digital platform.
The business has grown revenue, earnings and dividends steadily over the past decade, and has come to be considered almost as an infrastructure-like earnings profile. Lottery Corp has significant scale and reach, with the equivalent of almost half of the Australian adult population purchasing a lottery ticket in the past year. It has an extensive retail footprint, of more than 7,200 outlets including one of Australia’s largest retail franchise networks, as well as its digital sales channels. Almost one-third of its lotteries business, and 15% of Keno, is transacted online.
In FY23, Lottery Corp had 9.7 million total active Lotteries customers, including 4.2 million active registered customers. Revenue rose 7.2% in FY23, to $3.5 billion, while reported net profit was down 9.1%, at $339 million. Lotteries turnover fell 0.7%, to $3.23 billion, on the back of fewer jackpots – it was a 1-in-20-year unfavourable jackpot run in Oz Lotto – but Keno revenue rose 11%, to $280.5 million. In the lotteries business, Powerball generates the lion’s share of turnover, at 37.5%, with Saturday Lotto next on 26.9%, followed by Oz Lotto on 13.3%.
Lottery Corp was created following its demerger from Tabcorp Holdings Limited in May 2022, which stripped 80% from the market value of Tabcorp. After the split, TLC opened at $4.64; Tabcorp settled at $1.04. With Lottery Corp trading at $5.02, and Tabcorp at $1.01 (equivalent to market capitalisations of $11.2 billion and $2.3 billion respectively), it appears that the market has greatly appreciated the ability to assess – and invest in – the Tabcorp lotteries business on a separate basis.
Lottery Corp has a lot going for it. It has exclusive and/or long-lasting licences and approvals, with the average concession running to 2043. It has an extensive national distribution network of thousands of lottery outlets and Keno venues that would be very difficult for competitors to replicate. And lottery revenue is relatively unaffected by economic downturn; investors can see the likely pattern, of earnings that they can reasonably expect to grow in the high-single-digits range for the foreseeable future.
The business can show innovation: its “store syndicates online” product, introduced in November 2022, has been a hit with both retailers and customers. It enables retailers to sell entries in their store-created syndicates online through thelott.com, rather than the paper notices pinned-up all over the counter. Expect to see further initiatives to drive customers to the app or the website.
TLC is also looking to improve earnings by generating more frequent and larger jackpots, which it has done with price rises, to increase the size of prize reserves. The most recent was the increase to Powerball prices in May (which Jumbo was forced to pass-on to its customers), but the market barely reacted in terms of volume drop-off – Lottery Corp and Jumbo both know they have an almost captive market, of players who can’t bear to think of not being in the game “when their lucky numbers come up.”
The lottery operators do face the risk of “synthetic” lottery operators such as The Lottery Office, a local online lottery operator – licensed in the Northern Territory – which gives Australians access to international jackpots, such as the US Powerball/Mega Millions jackpots, which can exceed $US1 billion ($1.5 billion). These offerings, if they are allowed to continue, may attract market share away from Lottery Corp and Jumbo. Like Jumbo, analysts are quite positive on Lottery Corp; broker UBS is the most bullish, with a price target of $5.95.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
