The Covid-19 epidemic will structurally change the way we shop, transact and work. Over the last few weeks, we have spent a lot of time researching and speaking to companies in order to identify the sectors and companies that will not only survive this epidemic but also prosper, grow and take market share. This week we discuss one company that is poised to benefit.
As we spend more of our time at home, the online world has become our almost exclusive channel to shop and transact. Historically (and particularly in difficult recessionary times) people search and dream for hope, and nothing facilitates and encourages those dreams more than playing the lotto.
The lotto industry has been relatively recession proof over the decades. The average weekly lotto ticket for 12-18 games has averaged between $10-$18. In difficult and sombre times, people tend to see lotto as affordable, fun, and something to hope for, chasing the dream of winning millions.
In Australia, each state runs its own lottery license which, outside of Western Australia lotteries, are operated by Tabcorp (TAH). TAH is required to provide resellers (mainly newsagents) with the license to sell lotto tickets nationally. The most popular games that are pooled on a national level are Oz Lotto, Saturday Lotto and Powerball.
Jumbo Interactive (JIN.ASX) has been operating as a pure online reseller of lotto tickets for almost twenty years. Over the years, JIN has renewed its agreement with Tabcorp multiple times. Unlike TAH (which operates The Lott; an online website) and all newsagents, JIN sells tickets online at a premium of 10-15% on the normal ticket price. Despite this, JIN continues to win market share.
JIN has justified the premium by pointing to the service and many features and benefits it provides customers through their website and mobile app. For the ease of use and for an extra $1-$2 a ticket, customers have flocked to JIN’s Ozlotteries website over the years.
Fun Fact: The $80m Powerball winner from two weeks ago was a JIN customer.
In addition, JIN also licenses its propriety software to charities so they can operate and run their own charity lotto draws to raise funds. JIN charges a SaaS-like fee and a commission on total ticket sales. So far JIN has signed over $150m of potential ticket sales and is currently working on a pipeline of many charities both here and overseas who are all looking to transition online.
Online sales of lotto tickets have been steadily growing over the last decade at approximately 3% p.a. As of 2019, online sales represent about 26% of all lotto sales in Australia. Outside of the state of Queensland, which does not permit online sales, every state allows residents to buy tickets online regardless of where they purchase their tickets. This is an important aspect to understand in order to better assess the risk for JIN and their reseller agreement with TAH.
In a nutshell, JIN can allocate ticket sales to the state license of its choice. Investors over the years have had concerns about the risk of TAH not renewing JIN’s license. If that were to happen, JIN could theoretically direct all ticket sales via WA lotteries which is not owned by TAH. This would not only deprive TAH of JIN’s current sales but also each state operating under TAH licenses. We do not believe that is an outcome that will be looked upon favourably by any of the states. Not to mention, TAH owns 11% of JIN.
In our mind, there is no logical reason, other than habit, for players to buy lotto tickets in a physical store. There is nothing easier or more convenient than playing lotto on your mobile phone and there is never the risk of losing your ticket or forgetting to check if your numbers have won. The Ozlotteries app does all that for you and much more. The online user experience is fantastic.
The current pandemic and the restrictions on Australians movement outside the home is providing a structural shift to online sales. We have already seen an older demographic transitioning to purchasing tickets online over the last few weeks as, with the risk of catching the virus, they are concerned with going outside.
Overseas and in certain European countries, online lotto sales are over 40% of total sales. We believe the current shift to the online space will accelerate over the next 6-12 months in Australia and may reach as high as 35-40% of lotto sales by next year. Both TAH and JIN will be the ultimate beneficiaries here with JIN providing the best upside to this structural trend.
JIN revenues are dependent on the number of large jackpots ($20m+) each year as those drive customer engagement. JIN has over 850,000 active customers and only last week management updated the market that they are on track to reach $340m of ticket sales, generating $70m of revenue and $40m of EBITDA. This should result in around $25m of NPAT.
The company has a net cash position of over $65m and is confident it can keep paying out 70%+ of fully franked dividends out of profits. Unlike most other companies, JIN has a strong balance sheet and enviable EBITDA margins of 60%+. JIN is in a fortunate position to capitalise on opportunities that may arise and acquire international lotto operators in the charity space; going a long way to achieving its $1bn ticket sales milestone by 2022.
With a market cap of around $600m, a capital light model and earnings growing at 40%+ p.a. historically, we see JIN as a business that is truly set to benefit from the current situation. We own JIN in both the TAMIM Small Cap Income and All Cap portfolios and value the stock at around $13.00 a share.
A Message from TAMIM
This is an evolving situation; the facts and figures are changing day by day. What applies today may not apply tomorrow. One must stay informed and have their opinions and actions evolve accordingly. Stay safe, take appropriate precautions and be sensible.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.