JIN – Jumbo Interactive Limited

Jumbo Interactive Limited (ASX:JIN) is an innovative and successful internet lottery business that has created the hugely popular Oz Lotteries website.  Thousands of people each day play their favourite numbers in lottery games such as OzLotto using Jumbo’s safe, secure and innovative technology.

In 2013, Jumbo made the leap from an Australian business into a global business with operations in Germany, the USA and Mexico.  Official lotteries around the world are beginning to adopt the “authorised e-retailer” model that Jumbo has pioneered in order to create an environment of reliable operators and protect lottery ‘players’.

In Australia, Jumbo’s sales in 2012 reached $109 million and appear to be growing in the vicinity of 20% per annum.

Jumbo has received licenses in all states (landers) within Germany to begin selling official lottery tickets on the Internet.  The German lottery market contains their population of 80 million people and approximately $10 Billlion in lottery sales.  The online site in Germany is anticipated to kick off this month, December 2013.

In the USA, Jumbo signed an agreement with Hess Corporation, a company with over 800 convenience stores spread across 11 US states.  And Jumbo also signed an agreement with Tops Friendly Markets, a grocery chain with 159 locations across New York, Pennsylvania and Vermont. Jumbo’s 50/50 joint venture in the USA with Retail Gaming Solutions is providing interactive lottery solutions to physical retailers in preparation for full Internet lottery sales being rolled out across the USA in time.

Jumbo also has an agreement in Mexico with Sorteo Games to begin selling official Mexican lotteries.  This agreement was anticipated to begin by the end of 2013 however it will now likely to start closer to the end of 2014 due to ‘approval’ delays.

Jumbo’s goal is to constantly innovate and expand in order to benefit their lottery partners as well as thousands of Jumbo Interactive shareholders around the world.

Does this business have a sustainable competitive advantage?
Jumbo’s competitive advantage comes from being a global leader in the provision of online lottery services. Jumbo have proven systems which provide a repeatable model to win new contracts around the world.

And, with expanding outside of Australia in the past year with contracts in the USA, Germany and Mexico, it makes it easier for the company to expand into other countries online lottery markets.

Not so much competitive advantages but reasons for growth
Jumbo has over 1.5 million registered Ozlotto accounts in Australia.  This is only 11% of the Australian adult population providing the company with significant growth potential for online lottery ‘players’.

The lotteries business is an industry made for online.  Basically, as a consumer, all you need to do is set up an account and your numbers are chosen for you each week and your payment of your lottery ticket is made electronically.  Transferring this process online makes it easier for consumers to participate.

By expanding internationally, Jumbo has taken themselves from the relatively small Australian customer population of 22 million people to a population of about 400 million people across Australia, Germany, Mexico and the United States.  This 400 million people equate to a lottery market (turnover) of about $100 billion in lottery sales.

What are the risks facing this business?
The first risk to the company is that the current contracts in NSW, VIC and SA are not renewed when they expire.  Tatts NSW & VIC along with SA Lotteries earn more via this online channel provided by Jumbo Interactive than from any newsagent or reseller of lottery tickets.  While not renewing these contracts obviously wouldn’t benefit Jumbo Interactive, it would potentially impact Tatts and SA Lotteries to a greater extent.

The second risk is that Jumbo Interactive are not successful in winning any of the 43 online lottery contracts that will be available in the USA.  Jumbo Interactive have been working for three years promoting their wares prior to the announcement from the Department of Justice that online lotteries are allowed in the USA.  The company has built up an extensive network of contacts across each of the individual US state lottery operators.  The employment of the two industry executives places Jumbo Interactive in the best possible position to win at least a contract or two.

The third risk is that the company diversifies into other online businesses.  The company has at some point set up an online pet food and accessories business ‘Jumbopets.com’.  While this business may be profitable and the pet market in Australia is very large, the risk is that the company loses focus from the main lottery business.

Is it run by able and trustworthy management?
The Managing Director, Mike Veverka is very experienced with over 20 years information technology experience.  Mike is the founder and the company’s largest shareholder so he does have plenty of ‘skin in the game’.

One thing I noticed in 2012 was that management and employees had large numbers of cheap options which they were exercising and selling on market the same day.  This instant selling at the time did send a mixed message that staff and management were not waiting for the forward potential and value of the business to be realized.  However, this practice has seemed to slow down significantly in 2013.

The business is cash flow positive pretty much equal to their net profit which is very good, the business has 100% of its equity in cash and they have been paying dividends since 2008.

Is it trading at a bargain price?

It looks like the market is beginning to price in the future growth of the business.

Company Code Rank 2011 Actual Valuation 2012 Actual Valuation 2013 Actual Valuation Today’s Share Price Margin of Safety 2014 Forecast Valuation 2015 Forecast Valuation
Jumbo Interactive Limited JIN Gold 1 $1.82 $3.08 $0.74 $2.43 -85% $1.31 $1.80

*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

Here is a weekly chart for Jumbo going back a couple of years

Jumbo has been one of our best performing stocks over the past two years. The scary thing is that we could have doubled our initial performance from this company had I bought them on the day that value hit me over the head when I first discovered the company in January 2012 instead of waiting a month.

In summary, Jumbo Interactive is currently a highly profitable business with positive cash flow and experienced management.  Jumbo Interactive has no debt and 100% of their equity in cash.  It appears staff and management have stopped hastily selling their options and the business has large potential which does have to be realized to be truly successful.  Jumbo have proven systems in a high growth market with exciting expansion plans.  The business is not cheap at the moment as the market appears to be pricing in its international growth.

The Edge Fund owns shares in Jumbo Interactive. We may sell some of our shares at some point when the market tells us we are likely to be able to buy them back at a meaningful discount to our sale price.

This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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