Consumer Discretionary

Jumbo pegged to expand offshore footprint: Macquarie initiates with Buy

Fri 18 Mar 22, 12:18pm (AEST)
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Key Points

  • Jumbo has encountered higher Tabcorp Holdings service fees, higher marketing expenses, and a rise in employee expenses
  • Total addressable market of the charitable giving sector is said to be around $42bn
  • Macquarie expects to see more offshore M&A activity

Macquarie has initiated coverage on Jumbo Interactive (ASX: JIN) with a Buy and believes the $1.1bn internet gaming and lotteries reseller is poised to seek more value-add merger and acquisition opportunities.

The broker's price target of $20 was around 7% above the share price at the open this morning.

Everything being equal, the broker suspects new acquisitions will complement the company’s plans to diversify its earnings away from Australian lottery reselling. While the Australian lottery reselling businesses remain profitable, it has recently encountered higher Tabcorp Holdings Limited (ASX: TAH) service fees.

On top of higher Tabcorp service fees, higher marketing expenses, and a rise in employee expenses - to support its growth - prevented otherwise strong top line growth from fully flowing through to the bottom line at the half year.

Offshore expansion

To offset the company’s exposure to the local market margin pressure, Jumbo is planning to scale its managed services business – that manages lotteries for organisations such as charities, local authorities, schools or sports clubs - across the UK, Canada and Australia.

The total addressable market, of the charitable giving sector is said to be around $42bn.

Given that Jumbo only has a high single-digit share of this total addressable market, Macquarie believes there’s ample opportunity for this managed services unit to deliver future earnings that match the Australian reselling business over time.

11% compound annual growth

The magnitude of future M&A activity, adds Macquarie, could be substantial enough to support upgrades to consensus forecasts and the broker is predicting an 11% compound annual growth rate (CAGR) through to FY25.

Based on the broker’s best estimates, a $25m debt-funded managed services acquisition, based on between 5 and 7 times NPAT, could add up to $1.40 per share of value.

What happened at half year?

For the six months ended 31 December, Jumbo reported a 41% increase in total transaction value (TTV) to $327.9m and a 29% lift in revenue to $52.8m.

However, due to margin pressures, underlying earnings (EBITDA) only grew 18.2% to $28.3m and underlying NPAT grew 18.2% to $16.5m. Equally disappointing Jumbo’s underlying earnings (EBITDA) margin reduced by 5.3% points to 53.7%.

Commenting on the half year result, Jumbo’s CEO Mike Veverka noted that the company’s Powered By Jumbo software platform will be integral in supporting the global lottery industry’s move to digital.

“Our balance sheet remains strong and when combined with our new debt facility, provides additional headroom for further strategic growth.”

 

What other brokers think

Despite mounting competition from Australian lotteries brand The Lott - improved digital product and news agent incentives – Morgan Stanley reminds investors that Jumbo Interactive has a younger audience.

The broker expects sustained strength due to the investment in first half marketing, a strong start to second half jackpots, and OzLotto game changes, and retains an Overweight rating and $22 target price.

While increased costs that pressured first half margins mainly related to headcount, UBS believes the company is set up growth for FY23 onwards. The Neutral rating is unchanged with the target price rises to $18 from $17.30.

Morgans notes that while acceleration of the customer acquisition strategy was one driver of an 80% rise in marketing costs year-on-year, the addition of 198,000 new players should begin to benefit the company from the second half. The Add rating is retained and the target price drops to $20.50 from $20.75.

Consensus on Jumbo is Moderate buy.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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