Jumbo Interactive – Lottery tickets for millenials (JIN)

Jumbo has been on my radar for a long time, but I’d been leery about their business.  Since the FY16 numbers were released, the share price has zoomed from $1.60 to $2.90, and I’m ashamed to say my decision to buy around the $2.80 level was driven by the FY16 numbers, so I was slow off the mark and it cost me dearly.

What I like about Jumbo’s business is their fixed cost base, with a growing group of users who have a reliable habit of buying lottery tickets, which increases markedly during jackpots.

This is similar to the Kogan model for travel and insurance, where they leverage the existing asset, in this case a lottery license, and act as a sales agent, using digital efficiency to acquire and keep customers at a lower cost than the asset owner can.  Most lottery tickets are currently sold at newsagents who also collect a commission, albeit with less scale and a higher cost base.

Jumbo’s customer base is also to be envied – it is tilted to a younger demographic of users, who one presumes will be longer-term customers.

As we have seen with the proposed merger of Tatts and Tabcorp, a lotteries business is quite literally a license to print money, with a base of habitual players, with many casual players who only play jackpots.

But let’s turn to the business, which recently released FY17 results.

Although TTV and Revenue were both down around 5%, FY17 had less jackpots than a typical year, which adversely impacted total volume.  However NPAT for continuing operations was slightly up, from $7.3m to $7.6m.

Jumbo also generates float, carrying $7.7m in players funds, as well as $28m in cash after the special dividend was paid.

The major risk I see to Jumbo’s future prospects is Tatts dropping their license to sell Oz Lotto tickets in 2022, but with Tatts investing $15m into the business, they are more likely to be acquired.

Subtract the $28m cash from the $149m market cap, and JIN is selling on a PE for FY17 of around 16.  When you consider that with a fixed cost base, any revenue growth will flow directly to the bottom line, it becomes obvious that Jumbo will continue to be a river of money for years to come.

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