The Jumbo Interactive (ASX:JIN) share price has had a wonderful last month, jumping more than 50 per cent higher after the online lottery distributor reported full year profits grew 55 per cent in the year to June 2018.
The company’s flagship product is OZLotteries.com where retail customers can purchase lottery tickets in the major draws including Oz Lotto and Powerball.
Gaming giant Tabcorp Holdings (ASX:TAH) has what it calls a strategically important holding in Jumbo Interactive with its 7.2 million shares representing a 12.49 stake in the company. Tabcorp said it has no current intention to sell any of its shareholding in Jumbo Interactive.
Tabcorp is the sole supplier of lotteries to Jumbo, with the supply agreement having a little less than a further 4 years to run. That supply agreement is the biggest risk for Jumbo Interactive, for if Tabcorp were to not renew or renew on less favourable terms to Jumbo Interactive, the current level of profitability could be significantly impacted.
In its July update, the top performing OC Micro-Cap fund said it added to its position in Jumbo Interactive shares on weakness caused by a decreased possibility of a near-term takeover of the company by Tabcorp.
The timing of that move by OC Micro-Cap looks to be perfect, given Jumbo shares are now significantly higher.
OC said it remained comfortable with Jumbo Interactive’s prospects for the payment of special dividends (as it holds cash surplus to operating requirements) and earnings growth
given the recent run of jackpots, reactivation of dormant customer accounts and the structural trend towards online retail.
Currently 18 per cent of Australian lotto tickets are sold on the internet. The UK penetration is at 22 per cent and Finland is at 48 per cent.
Just a few days after reporting its results to June 2018, Jumbo Interactive said it had experienced a strong start to FY19 from 11 large jackpots in July and August. Jumbo Interactive is expecting revenues to grow by between 20 to 25 per cent in FY19.
A juicy fully franked dividend
Jumbo Interactive pays out 85 per cent of its net profits as dividends. In FY18, including an 8 cent special dividend, it paid out 26.5 cents of fully franked dividends to shareholders.
With Jumbo Interactive shares trading around $6.50, including the special dividend, that translates to JIN shares trading on a fully franked dividend yield of 4.1 per cent.
Jumbo shares trade on a trailing P/E ratio of almost 30 times earnings. While Jumbo Interactive shares are not overly cheap, they do have a strong growth runway ahead, with good earnings visibility.
Given Tabcorp’s ownership stake in the company, the bet is either the larger company acquires Jumbo, or it renews the supply arrangement come 2022. The risk is the new arrangement is not as attractive to Jumbo. As ever, there are no free lunches in stock market investing.