A balancing act
Legacy Notice for this Australian Stock Report
This Australian stock report, authored by in house equity analysts under the supervision of Fat Prophets CIO Angus Geddes, was originally released to our private members only. We have unlocked this legacy equity research report to provide the public with a transparent, historical view of Fat Prophets’ original fundamental and technical analysis.
Note: This is archived financial research for educational purposes and historical reference only and reflects the market landscape at the time of publication. It does not constitute current investment advice or recommendation.
Jumbo Interactive Limited (ASX, JIN) released its annual report for FY15 in August, showing a resilient performance over the past year. In FY15, Jumbo juggled the dual challenge of growing its core business while at the same time nurturing its offshore businesses, and in the end reported higher revenues, Total Transaction Value (TTV) and customer accounts. This, in our view, was underpinned by successful marketing activities and the upgrade of its software and systems in both Australian and German markets.
In addition, we see future growth opportunities in both the Australian and German internet lottery markets, and believe Jumbo’s new technology and internet marketing skills position the company well to capture these opportunities, thereby becoming a global leader in online lotteries. However, marketing campaigns and the software upgrade have led to a significant increase in operating costs, which further crimped net profit after tax (NPAT) in FY15. With management now aiming to reduce ongoing costs and optimise marketing, we expect margins to improve over the next financial year.
Jumbo also plans to continue with its investment in the US and Mexican markets, and its strong cash flow and favourable liquidity position will provide the Company with excess to internal and external fund during the time of investment.
Encouragingly for investors, management took the opportunity at Jumbo’s Annual General Meeting last week to reiterate the company’s outlook for FY16. Having stated at the FY15 result that Jumbo’s domestic business has started FY16 with some positive momentum, management has since provided a little more colour on the company’s near-term outlook. First, management expects continued growth in TTV and revenue. Secondly, an increased focus on operating costs, particularly in relation to overseas expansions. Last, an improvement in the company’s performance in Germany, with a view to reaching a break-even point in “the short to medium term”.
Source: Jumbo Interactive
As highlighted in the daily chart, following the sharp decline in January 2013, the company’s share price has broadly trended sideways over the past twelve months above a band of support at 83 cents and 88 cents respectively. In our view, the recent move through the 50-day moving average bodes well for a near term recovery. However, we believe that it will take a break out above resistance of $1.26 to spark a revival in the uptrend over the coming months.
Full year result
Looking at the FY15 result, the Company has performed resiliently despite stagnant market condition, reporting slightly lower jackpot activity compared to the previous corresponding period. Nevertheless, both TTV and revenue reached a record level, with a 21 percent increase in TTV to $30 million and an 18 percent growth in revenue reaching $29 million. However, a significant increase in marketing expenses, up 62.6 percent, resulted in a marked decrease in the NPAT contribution from $3.25 million in FY14 to $0.66 million in FY15.
Source: Annual Report
The Australian market, which represents approximately 98.5 percent of Jumbo’s total revenue, performed strongly in FY15. In particular, we note that the company’s customer accounts increased by 11 percent to 1.92 million, while revenue and other income increased by 16 percent to $29.35 million. In our view, Jumbo’s Australian performance can be largely attributed to successful marketing campaigns and a major upgrade of the company’s software and systems. Importantly, both of these factors helped mitigate a slight decrease (i.e. from 36 in FY14 to 34) in the number of major Jackpots that reached $15 million or more – jackpot size is an important driver of sales.
Source: Annual Report
Another key driver of Jumbo FY15 performance in the Australian market was the increased diversification of its existing portfolio of national games, with this due in part to the return to the Australian Charity Lotteries market last year. Jumbo is not a new player to this market having issued tickets in the Australian Returned and Services League and Red Cross lotteries in the past. However, the return to the charity lotteries market has allowed Jumbo to add an additional revenue stream and further mitigate the effects from a modest drop in the number of the major Jackpots for the year.
Looking ahead, we expect Jumbo will continue to benefit from the strong growth in Australian internet lottery participation. In FY15, the internet lottery market represented 7 percent of the total lottery market, with this comparing to 25 percent in the UK and 30 percent in Finland. This suggests to us that internet sales in the Australian market have the potential, at least in theory, to increase significantly over the next several years. Jumbo’s new technology and internet marketing skills also put the Company into a strong position to capture the growth opportunity and become a global leader in online lotteries. Over the last financial year Jumbo has achieved mobile penetration of 50 percent in Australia, up from 39 percent in previous year.
In addition to Jumbo’s strong focus on its core Australian market, the company has continued to pursue opportunities in international markets. Jumbo’s business successfully completed its first full year in Germany, where all States in the country have signed up with sales growing in FY15. Revenue and other income boosted significantly from $8,621 to $172,157, and TTV went up from $88,788 to $1,535,613. In our view, this was driven by the commencement of marketing activities in the region, with the key mediums having included the first version of www.Jumbolotto.de, Lotto 6aus49, GlücksSpirale as well as releasing JumboLotto app. Overall the German lottery market remains healthy, and is expected to reach €12 billion by 2020, with the Internet driving this growth. We therefore believe that Jumbo’s internet-driven marketing activities have laid a sound foundation for the company to improve competitiveness and boost future growth in the German market.
While top line growth in Germany has been encouraging to date, a key area of concern was the huge increase in marketing costs, which resulted in an increase in the net loss before tax of $3.59 million (2014: loss of $1.11 million). In FY16, we expect the profit margin to improve based on Jumbo’s focus on reducing ongoing costs and optimising marketing efforts, which involves a number of staff changes and a move of the office from Munich to Hamburg.
Jumbo also actively invested in the US and Mexican markets in the past year. In the future, the company plans to continue negotiations with the Mexican lottery administration. Management has also indicated that Jumbo will continue to invest in its New York based associate company Lotto Points Plus Inc., which provides new generational lottery solutions incorporating internet, physical merchandising and lottery affinity/loyalty programs to US retailers
Looking at the financials, Jumbo boasts a strong cash management capability, as evidenced by the Operating Cash Flow (CFO) of $4.7 million in FY15. In the past year, the company had a CFO/CAPEX ratio of 106 percent, suggesting it generated more than enough cash from operating activities to cover its capital expenditure, which is a positive, particularly given the start-up nature of its overseas operations.
In addition, Jumbo has a large cash reserve of $23.8 million on its balance sheet, but does not incur any interests bearing debt. In our view, this represents a major positive for the business given management’s growth plans for the US, Mexico and European markets, as its favourable net cash position will provide Jumbo with the funds it requires to ensure the company hits the ground running in each region.
With reference to the weekly chart, a broad consolidation remains at play between support at 88 cents and resistance of $1.26. Over time, we would expect the share price to continue tracking north, targeting the upper boundary of $5.15.
Summary
Jumbo has performed reasonably well over the past year, having managed to grow its domestic business while at the same time progress the development of its various offshore growth opportunities. In our view, the successful marketing activities and upgrade of software and systems in both the Australian and German markets has not only resulted in the increase in revenue, TTV and customer accounts in FY15, but also strengthened the company’s competitive position in these markets. With this sales momentum expected to be supplemented by an increased focus on costs in FY16 and beyond, we expect an improvement in profit margin over the next financial year.
Jumbo will remain firmly held in the Fat Prophets Portfolio.
Disclosure: Jumbo is held with the Fat Prophets Concentrated Australasian Share, and Small & Mid-Cap Models.
