Welcome to Clime Direct!

Model Portfolio | Jumbo Interactive (ASX: JIN) SaaS – The Winning Ticket

- 0 Comments - Post New Comment Print Report
hugo_42787's picture
Analyst: Hugo De Vries, Analyst

  • JIN is strongly positioned to benefit from the digitisation of Australia’s lottery industry.
  • The ‘Powered by Jumbo’ SaaS platform is a unique competitive advantage for the business to scale and win market share.
  • The StarVale deal is a key catalyst which will facilitate JIN’s expansion into the UK market.

Jumbo Interactive (JIN) is Australia’s leading pure play digital lottery specialist. JIN has remained a long-term position in the Clime Model Portfolio since it exhibits many of the characteristics we look for in a company. This includes being founder led, having a high economic moat, exhibiting strong incremental returns on capital, a defensive earnings stream as well as a long-term growth opportunity. 

Founder, CEO, and major shareholder Mike Veverka says JIN prides itself on the core capabilities of offering a best-in-class lottery software, via a standardised and simplified platform that drives scale, with high reliability and excellent user experience. 

JIN now operates in three defined operating divisions, servicing the full lottery management value chain, with scalability built into every level:

  1. Online Lottery Retailing - Selling lottery tickets through the internet and mobile devices.
  2. SaaS (lottery platform software) - Licensing ‘Powered by Jumbo’ SaaS lottery platform to government and large charity lottery operators.
  3. Managed Services (lottery management services) - Providing a lottery platform as well as effective lottery management services to charities and worthwhile causes that are looking to establish a lottery program or enhance an existing program.

 

Online Lottery Retailing

JIN’s exposure to a long-term structural shift of Australian lottery sales from bricks and mortar, news agency based sales, to the digital channel was its primary attraction and underpins the long-term growth story.

JIN operates in what is essentially a Duopoly structure. Over the last decade the lotteries corporation (ASX:TCL - The recently demerged segment of Tabcorp ASX: TAH) and JIN have enjoyed a huge increase in digital ticket sales.

Digital sales now represent 37% of all Australian official lottery sales (Powerball, Oz Lotto etc.), and over the next 5 years the percentage is likely to rise to over 60%. What’s interesting about this model is that JIN’s business requires very low capital investment to grow revenue and has a strong track record of generating a high return on invested capital.

Figure 1:  Online & Retail Digital Penetration

Source: JIN Investor Forum 2022, 8th June 2022

 

OzLotto refresh

A further tailwind for ticket sales is the game refresh from OzLotto where the division one odds lengthened by 40%. Essentially, this makes it less likely for punters to win the jackpot but increases the number of people able to win smaller prizes which should lead to more jackpots, and greater ticket sales.

The last game refresh was from Powerball in 2018, which saw a surge in revenues when Jackpots occurred.

Figure 2:  OzLotto Portfolio Mix (TTV%)

Source: JIN Investor Forum 2022, 8th June 2022

 

Figure 3: Powerball Jackpot & Ticket Sales

Source: JIN Investor Forum 2022, 8th June 2022

The margins of online lottery sales are lower (16% from 20%) following an agreement struck with TAH to on-sell tickets for a further 10 years. While there more room to grow the online retailing footprint in Australia, the real growth opportunity for JIN is the potential of their SaaS roll out.
 

SaaS (lottery platform software) and Managed Services

At Clime, we believe the market could be underappreciating the diversification opportunity JIN have in SaaS. The combined addressable market for the SaaS (digital lottery platform) and Managed Services (lottery management) divisions is ~$65bn, which primarily relates to government and charity lotteries converting to an online offering.

JIN takes the software platform they use themselves and makes it available for their lottery partners, coined as ‘Powered by Jumbo’. They typically partner with larger organisations, who are looking to update their online presence. Subsequently, JIN have signed 10 partners in the last 2 years.

Figure 4: JIN Saas Clients

 Source: JIN Investor Forum 2022, 8th June 2022

 

As JIN use their own software themselves, they are constantly making improvements that can be made and solved internally, and thus simultaneously solving issues for their customers. This is an important differentiator between JIN and other software companies.

Scalability is the key to SaaS division, and it is showing. When JIN launched with their SaaS customer Mater, it took 12 months to onboard. Now their most recent customers take only 3 weeks to onboard.

JIN are almost at their target of $1billion in underlying total transaction values (TTV) and will exceed this if they are successful in closing the deal with UK based StarVale. This deal has a due date of late June.

The next aspirational goal JIN has spoken to is software earnings scaling to become 50% of group revenue by 2025. While this is not unreasonable given the market opportunity, we would expect the scaling to take longer. Nevertheless the pathway is there, with JIN’s Enterprise SaaS expansion, focus on existing customers, higher take rates, M&A in managed services, and scalable cost models. Additionally, leveraging pre-built software will be good for business margins.

Lotterywest Opportunity

A real catalyst will be the progress made with JINs largest SaaS customer, Lotterywest, a government lottery in WA. Lotterywest is a $1.1bn organisation, with only 18% of tickets sold online.

At Clime, we will be closely monitoring the performance of the JIN and Lotterywest partnership. This partnership will play a great reference client for JIN’s international expansion, as we hope it will showcase how JIN can improve operations.

Managed Services

The managed service segment focuses on the smaller end lotteries around the world. JIN services aid with program development, marketing and draw management. The company Gatherwell was acquired by JIN 2 years ago in the UK, and the business works with over 1000 small charity lotteries and also embodies JIN’s scalable aspiration as lotteries can sign up and become active in 5 minutes. JIN’s global expansion has been rolling out with the purchase of a similar company, Stride recently in Canada.

US on the cards?

JIN does not have operations in the US yet, however the time devoted to the opportunity in the investor forum on Wednesday would suggest it is now a question of when. A future expansion into the US market will likely be via a SaaS platform, and further diversify JINs geographic exposure. 

Risks

The recent weakness in the share price is attributable to a number of factors. Most notably, is the larger sector-wide tech sell off. However, JIN has fared better than most given its healthy financial position, having strong earnings and continuing ability to pay a dividend to shareholders.

The second reason is likely to be the subdued Jackpot activity in 2H22. While January, February and May were strong, there was a drop-off in March and April with peak jackpots making it hard to market to the new customers recently acquired with the $120m jackpot in February.

If JIN got 4 more jackpots by end of financial year, that would take the number to 20 jackpots for the half, which would be a good result. Should they not reach this figure, there may be some weakness in the share price.

Other risks are primarily execution based. For example, should JIN fail to close the Starvale deal, or blunder the Lotterywest opportunity, this would a be big negative for both the share price and market expectations for business growth.

Regulation will also remain a risk for the company, particularly when pursuing further M&A.

Lastly, while JIN has a strong capital position, previous updates have featured higher than expected investment costs which tend to spook the market. It would be pleasing to see costs stay in line with market expectations. 

In closing, we have conviction in JINs market leading position, which is underpinned by structural growth and long reseller agreements (10 years). Looking forward, we are confident the company will be able to focus on executing its strategy and the SaaS opportunity is well worth maintaining a position in the Clime Model Portfolio, and the $16.62 price target in Clime Direct should be attainable.

Upcoming catalysts to watch closely will be the Starvale acquisition announcement, and the full financial year results.

Ownership Disclosures: 
Our fund partner Clime Asset Management (Clime) owns (JIN) on behalf of various mandates where it acts as an investment manager.

Disclaimer

All statistics and information referenced are sourced from the named Company's ASX announcements, share prices, website, or discussions with Clime, unless otherwise stated.

StocksInValue and associated websites are published by Stocks In Value Pty Ltd ABN 43 162 644 724 (Trading as Clime Direct), Authorised Representative of Clime Asset Management Pty Limited ABN 72 098 420 770 AFS Licence 221146.

The information provided in this document is intended for general use only. The information presented does not take into account the investment objectives, financial situation and needs of any particular person nor does the information provided constitute investment advice. Because of this, you should, before acting on any information on this website, consider whether it is appropriate to your objectives, financial situation and needs. Clime Direct does not guarantee the accuracy or timeliness of any information in this website, including information provided by third parties. We will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts, opinions and ideas contained within this website.

Except for personal non-commercial use, you may not copy, publish, distribute or reproduce any of the information contained in this newsletter in any form without the prior written consent of Clime Direct. If you have any queries please email us at members@climedirect.com.au. Our full terms & conditions are available on our public website (www.climedirect.com.au/page/terms-conditions).

Investing Reminder

Investing in direct equity exposes you to the risk of capital loss. Before investing in any of these companies, we recommend you convince yourself, through your own research, that you agree with our theses or have an alternative positive thesis. It is also imperative that your portfolio weighting for any stock is consistent with your risk tolerance.

We believe you should take a three to five-year view on all equity investments. These are not empty 'caveats', but the exact principles that Clime Asset Management Pty Ltd holds.

This note summarises the insights and understanding of Clime Direct at the time of publishing. Importantly, the understanding of our analysts will evolve in response to ongoing changes in company operating and financial performance, equity market conditions, internal research and discussions with management. As time passes after publication, reports become a less accurate reflection of the current thinking of Clime analysts. While analysts endeavour to publish frequently about stocks of interest to members, they are not able to comment on all company, market and internal research developments. For this reason members considering an investment based on our thesis are advised to always ensure they understand and still agree with that thesis, and are aware of the downside risks to their investment.

We endeavour to maintain the accuracy of data provided on this website, by using information prepared from a wide variety of sources, which Clime Direct, to the best of its knowledge and belief, considers accurate. However, Clime Direct makes no representations or warranties of any kind, expressed or implied, about the completeness, accuracy, reliability, suitability or availability of the information provided.