Broker has initiated a buy recommendation on retail lottery seller Jumbo’s shares, pointing to the company’s monopolistic character.
The post Why this broker has rated Jumbo (ASX:JIN) shares a buy appeared first on Motley Fool Australia. –
Goldman Sachs has initiated a buy coverage on Jumbo Interactive Ltd (ASX: JIN) shares, assigning the online lottery retailer a target price of $14.50 within 12 months. The Jumbo share price is today trading at $12.69, which implies a 12% discount to Goldman’s fair value.
The broker believes that the lottery industry exhibits monopolistic characteristics, with high barriers to entry given its long-dated licensing agreements with state governments. In addition, Goldman believes lotteries are ideal to be sold online due to features such as non-physical delivery, no loss-making customer refunds, and no supply issues.
What does Jumbo do?
Jumbo was founded in 1995 by the current CEO Mike Veverka. Jumbo sells online lottery tickets to retail customers in Australia. Its flagship is the OzLotteries.com platform. In addition, it sells the “Powered by Jumbo” software to other retail lottery operators around the country, making money though software-as-a-service (SaaS) agreements, as well as commission on each sale. For example, Lotto, Powerball, and Lucky Lotteries use Jumbo’s software to sell their own lottery tickets online.
Why was Jumbo assigned a buy recommendation?
There are five main reasons noted by Goldman in issuing its initial buy recommendation.
First, Goldman believes that the shift to online lotteries has been accelerated due to COVID-19. Currently 28% of Australians buy lotteries online, and the broker is forecasting that percentage will increase by between 3% to 5% within the next three years. It cited the experience of real estate, job listings, and online car sales as precedence – with those three industries doubling at similar stages to Jumbo.
Second, Goldman believes that Jumbo has the opportunity to capture the global market with its Powered by Jumbo software. The broker estimates that the current total addressable market globally is around $25 billion, and it notes that Jumbo has already invested over $20 million and hired twenty engineers in 2020 in a bid to capture that market.
Third, Goldman believes that its domestic business is in a strong position due the sticky and recurring nature of its customer base. For example, 10%–15% of its lottery buyers are on auto-play, which means they keep buying tickets automatically. The broker also notes that its long-term reseller contract with Tabcorp Holdings Limited (ASX: TAH) provides a good long-term revenue for the company.
Fourth, Goldman notes that Jumbo has a strong balance sheet. It views the business as capital light with a high return on equity (ROE), which has delivered over 30% this year.
And finally, Goldman believes that Jumbo has compelling valuation relative to its peers – with peers defined as other software companies addressing the Australian market. The main reason for this, according to Goldman Sachs, is that the market is underpricing Jumbo’s SaaS business and its future potential.
How has the Jumbo share price performed in 2020?
The Jumbo share price has lost around 20% on a year-to-date basis. It began the year trading at $15 before falling dramatically to $6.95 during the peak of the pandemic. It has since recovered to its current trading price of $12.69. At this level, Jumbo commands a market cap of $792 million.
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Eddy Sunarto has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Jumbo Interactive Limited. The Motley Fool Australia owns shares of and has recommended Jumbo Interactive Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.