JIN - Jumbo Interactive

[skc]

SKC, I will reply here so as not to de-rail the DTL discussion thread.


The reason that I said this was that they developed their own systems / website, over the last decade. It's a world-class system. I consider most services based companies that rely heavily on "people power" to be marketing companies at heart. They also won the SA Lotteries contract recently by the way. Gives the earnings a higher degree of certainty than there was twelve months ago. Certainly wouldn't hold this company as a core holding though. Agree that there is still speculation involved.

The system and websites are mere enablers of their business. They are not having a competitive advantage because of those. They have a competitive advantage because of the fact that they have exclusive licence to sell lotto tickets online.

That's why it is not an IT company.

Plus you don't need a world class system to sell lotto tickets... You just need a working system.

 

[Ves]

This has tanked since late May when Tatts announced that they had started competing in the NSW market.

ROE - you clearly know this business well. Why would someone pay an extra 15% for a ticket off OzLotteries.com when they could use the Tatts site for the same price as paying at the newsagent? They seem to be still doing well in Victoria since the competition started there, they must have something up their sleave. Possibly some extra features on their website that I see people talking about (syndication, repeat purchases and saving "favourite" number combinations).

I guess you could also say that lottery customers are pretty "sticky" once they have opened an account.

Thoughts?

 

[McLovin]

The system and websites are mere enablers of their business. They are not having a competitive advantage because of those. They have a competitive advantage because of the fact that they have exclusive licence to sell lotto tickets online.

That's why it is not an IT company.

Plus you don't need a world class system to sell lotto tickets... You just need a working system.

Yeah I agree.

Also, some very large corps in the US sell lottery tickets in store (Walmart/CVS/Walgreens) they're not just going to watch their revenue march out the door and they already are interacting with their customers online, so they likely will already have the customer captured. Joe can get his blue doctors online from CVS and get his lottery tickets! How on Earth is JIN going to compete with that?

JIN may have a world class system but that could just be a function of the fact that lottery tickets couldn't be sold online in the biggest consumer market in the world, so no one bothered developing a better one. They've spent $10-15m developing their system, that's pocket change for a large company. Someone like Amazon could just start selling lottery tickets at cost to kill off any competition. There's no moat to this business, outside of its monopoly revenue.

Maybe I'm missing something.

ETA: Walgreens does not sell lottery tickets, but CVS does. Point still stands though.

 

[Ves]

Don't these big corporates like Amazon or Walgreens have to win a lottery contract first?

 

[McLovin]

Don't these big corporates like Amazon or Walgreens have to win a lottery contract first?

Why is the assumption that it will be done as a contract instead of whoever wants to sell them can ¿

 

[Ves]

Why is the assumption that it will be done as a contract instead of whoever wants to sell them can ¿

Are you saying that the big players are going to become lottery companies and run their own lotteries? How else do you get the tickets to sell without signing a contract with the company that runs the lottery? I would assume that since lottery is heavily regulated in the US (hence why internet lottery took so long to be legalised) that this would mean that you need to have a contract or risk being de-commissioned as a grey lotter.

Am I missing something?

 

[McLovin]

Are you saying that the big players are going to become lottery companies and run their own lotteries? How else do you get the tickets to sell without signing a contract with the company that runs the lottery? I would assume that since lottery is heavily regulated in the US (hence why internet lottery took so long to be legalised) that this would mean that you need to have a contract or risk being de-commissioned as a grey lotter.

Am I missing something?

No, I'm saying they are already selling lottery tickets in their stores, so I would just assume that anyone who has a license to sell lottery tickets in store will have that license extended to sell online. So, JIN will just become a very small player in a huge market. I'm questioning whether the assumption that JIN will somehow win an exclusive contract, as they did in Australia, is correct. You may not have been inferring that, in which case I apologise.

 

[Ves]

I don't think an American contract is a massive chance or a forgone conclusion (but I don't think the market is pricing it in). Cash balance is about 35c per share I believe, so you are paying 60c for the rest of the business. With the SA lotteries contract being 5+ 5 year option I don't think there is too much downside to that. The market may disagree in the short-term however. I only have a really small position in this companyy (roughly $2k) but I may look to increase it when I am more comfortable with some of these underlying issues that we are discussing.

I think it is interesting to note the relationship between JIN and SA Lotteries and the major player who has the maintenance contract for SA Lotteries systems, but did not win the contract.

I will research the possibility of some of the major corporations being able to sell tickets online without needing a special license. Not 100% sure on the answer.

 

[ROE]

This has tanked since late May when Tatts announced that they had started competing in the NSW market.

ROE - you clearly know this business well. Why would someone pay an extra 15% for a ticket off OzLotteries.com when they could use the Tatts site for the same price as paying at the newsagent? They seem to be still doing well in Victoria since the competition started there, they must have something up their sleave. Possibly some extra features on their website that I see people talking about (syndication, repeat purchases and saving "favourite" number combinations).

I guess you could also say that lottery customers are pretty "sticky" once they have opened an account.

Thoughts?

I dont know the exact answer to this one but this is something I do know

1. JIN system is far superior to other online lottery (interface and easy of use and replay features)

2. Psychology wise unless you are a serial gambler cost may not be a factor when paying lottery.

3. Switching hassle, it require a bit of paper work to switch from one player to another unless
there is some very strong incentive for someone to do it, 10-15% is that a strong incentive?
no one really know until some stats is compiled...I guess some people will but that is not a worry, it will be an issue if there is large number of people do it...

4. I guess if JIN start losing players they can stop this price gap and that will 99% guaranteeing people wont switch because JIN is better in every other aspect except price

we will find out in a few years how many of those points sticks

 

[McLovin]

I don't think an American contract is a massive chance or a forgone conclusion (but I don't think the market is pricing it in). Cash balance is about 35c per share I believe, so you are paying 60c for the rest of the business.

Don't forget to remove the players' cash in their playing accounts which shows up on JIN's balance sheet.

With the SA lotteries contract being 5+ 5 year option I don't think there is too much downside to that. The market may disagree in the short-term however. I only have a really small position in this companyy (roughly $2k) but I may look to increase it when I am more comfortable with some of these underlying issues that we are discussing.

What's the anticipated value of the contract, revenue wise?

I will research the possibility of some of the major corporations being able to sell tickets online without needing a special license. Not 100% sure on the answer.

I suspect this will be a state to state thing as lotteries are regulated at the state level. Illinois is going to begin its own trial program soon.

More info here if you're interested...

http://www.scribd.com/fullscreen/86509847?access_key=key-g3asni7d3mxlyvmhcki

And the website..

https://www.myillinoislottery.com/en-us/games/megamillions.html

 

[Ves]

What's the anticipated value of the contract, revenue wise?

Players funds under liabilities would decrease cash, I agree... but it's still over 30c per share if I recall.

I found this on another site, The Boat Fund (on Facebook)

Blue sky

As with any investment, what I look for is the potential for the business to grow. Until the change of legislation in the US, JIN had plenty of growth in Australia but the real sizzle in this steak is a potential contract win in the US.



Management has indicated that between 1 - 3 US state lottery contracts are achievable out of a total of 43 states. I would expect higher growth to begin with in the US because of the pent-up demand as they play catch-up to the rest of the world. I assume that they would reach 5% Internet sales in 3 years (conservative according to JIN). As a comparison, in Australia that took about 5 years.



So how much can JIN earn? Well let’s extrapolate:



- 1 US state out of 43 = 2.3%

- The Total US Lottery market is at least $56billion

- Therefore 1 US state is on average $1.3billion in lottery sales. This is very conservative as some US States are as big as Australia and some are 3 times bigger!

- In 3 years, 5% online penetration = $64.4mil in revenue for JIN. That's around what JIN did for 2010 in Australia.



Assuming costs and commission model are the same as here, then each US contract is worth 13c in EPS on average. Now if the first contract they snag is a much larger (or smaller) US state then of course the numbers will be revised upwards (or downwards) dramatically. If they win 3 contracts then in 3 years EPS will be 39c from US business and an additional 26c EPS from Australian business assuming historical 15% growth per year beginning from FY12 17c EPS forecast.



So potentially JIN can earn between 39c in FY15 with one US contract win to an unbelievable 64c EPS with 3 US contract wins!

Clearly not priced into the current share price - the market agrees with you and thinks that they have little if any hope. I would not include this "blue sky" in a valuation method. The most conversative for JIN is a 10-year mine life type DCF.

Thanks for the links - will read them when I get a chance.

ROE - thanks also for your reply. Tough to know if JIN has a competitive advantage, let alone a lasting one, but they certainly have a headstart over the competition. Apparently a lot of these big lottery sellers have very poor online presences.

 

[ROE]

Players funds under liabilities would decrease cash, I agree... but it's still over 30c per share if I recall.

JIN Annual report tell you how much cash is its money and how much are customers money..

 

[Ves]

JIN Annual report tell you how much cash is its money and how much are customers money..

Without looking I remember the net balance being $30 million if you take out the players accounts. Don't have the chance to look at the moment, sorry.

 

[ROE]

ROE - thanks also for your reply. Tough to know if JIN has a competitive advantage, let alone a lasting one, but they certainly have a headstart over the competition. Apparently a lot of these big lottery sellers have very poor online presences.

Small company rarely has any competitive advantage, what you buying for is a reasonable management that can
build it into a bigger business with better moat and JIN has a reasonable chance of doing there because of its
first mover advantages...

People invest in small caps looking for large moat going to be disappointed but you compensate for better return
if thing turn out well...

you not going to see WOW/WES double in price in a few years doesn't matter how well it travel because they face the law of large number.....

but these small caps if pick correct can easily do that....

 

[McLovin]

I found this on another site, The Boat Fund (on Facebook)

Interesting. I'd note though that the US lottery market maybe $56b, but 60% of that is scratchies.

For me, it's a pretty simple equation; these guys got lucky with their Tatts contract. They may or may not end up selling lottery tickets in the US but I see all these forecasts based on the presumption that what they do in the US will be similar to what they did with Tatts, which I think is highly unlikely.

 

[Ves]

They also won the SA Lotteries contract though? GTECH have an agreement with SA Lotteries for technology and maintenance - I find it curious that Jumbo Interactive won this contract. Does this not indicate that they had a better offering than GTECH? The Lottomatica group who owns GTECH is a massive player, it dwarves JIN.

Surely that information alone is worth something! I don't see why Tatts would not renew the two VIC and NSW licenses either. Jumbo Interactive provides them with their biggest lottery revenue stream (outside of their own operations). It may be naive to ask this - but would you sack your best employee?

 

[Ves]

Interesting. I'd note though that the US lottery market maybe $56b, but 60% of that is scratchies.

JIN quoted the $56 billion figure in the April 2012 investor update. Fairly sure it doesn't include the scratchies?

 

[McLovin]

JIN quoted the $56 billion figure in the April 2012 investor update. Fairly sure it doesn't include the scratchies?

I think it does. The difference is that lotto is a game but the word lottery is applied to the entire industry. JIN's addressable market is significantly smaller than they are stating in their presentations. Surprised that they don't disclose that.

Lottery Sales

How many lotteries are there?
In North America every Canadian province, 43 U.S. states, the District of Columbia, Mexico, Puerto Rico, and the U.S. Virgin Islands all offer government-operated lotteries. Elsewhere in the world publicly-operated lotteries exist in at least 100 countries on every inhabited continent. In some cases they are operated by national governments, in other cases by state or provincial governments, and in still others by cities.

What types of games do they offer?
Most offer instant or scratch-off tickets. Many offer lotto and/or numbers games. Some also offer keno or video lottery terminals. Outside of the United States many offer various types of sports betting. Raffles or passive games are less common. A few government lotteries, including those in British Columbia, Manitoba, Ontario and Quebec, also operate casinos. See the definitions section for examples of these and other lottery games.

How much do lotteries sell?
During fiscal year 2010 (which for most jurisdictions ended June 30) U.S. lottery sales totaled $58 billion ($US). Canadian sales reached $7.2 billion ($Can).

http://www.naspl.org/index.cfm?fuseaction=content&menuid=14&pageid=1020

 

[McLovin]

They also won the SA Lotteries contract though? GTECH have an agreement with SA Lotteries for technology and maintenance - I find it curious that Jumbo Interactive won this contract. Does this not indicate that they had a better offering than GTECH? The Lottomatica group who owns GTECH is a massive player, it dwarves JIN.

Surely that information alone is worth something! I don't see why Tatts would not renew the two VIC and NSW licenses either. Jumbo Interactive provides them with their biggest lottery revenue stream (outside of their own operations). It may be naive to ask this - but would you sack your best employee?

Fair point.

 

[Ves]

I think it does. The difference is that lotto is a game but the word lottery is applied to the entire industry. JIN's addressable market is significantly smaller than they are stating in their presentations. Surprised that they don't disclose that.



http://www.naspl.org/index.cfm?fuseaction=content&menuid=14&pageid=1020

You might be right by the looks of it. Seems odd that they wouldn't disclose. A bit of a red-mark against management... slightly misleading to those who factored this into their valuation.