JIN - Jumbo Interactive

[skc]

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.

The 10-year mine life type DCF will get you the right value for the company if you have control. I bet you that the management isn't going to distribute all funds and delist the company if their licences are not re-newed. What's stopping them burning cash looking for some illusive US opportunity while ensuring they are still being paid? Bit like smaller oil companies that hit a few good and be profitable for a few years, then management simply drain on the company's assets until they either strike it lucky again, or live in a cap-raising-every-6-month kind of existence.

That was my concern when I looked at the company at 40c. At the time the share price supported the DCF-type analysis, but I had no idea on how to include a factor of safety taking into account that I had no control how management will treat the cash. And I still don't so JIN is not something that I would invest in.

Obviously others view things differently and if they made good profits on the last leg up then good on them.

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?

Would you sack your best employee? Depends on how much you are paying them vs the cost of substitute.

The three enablers of JIN's business are:
1). The licence.
2). The IT systems.
3). The customer database.

Tatts owns 1) can probably duplicate 2) and needs to either purchase 3) from JIN or build up over time.

Imgaine Tatts says "We won't renew your licence, and we are offering you $5m for the customer database." Can a reasonable JIN board refuse if they are looking after shareholder's interest?

 

[McLovin]

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.

I'll put this in there with the fact they are capitalising customer acquisition costs and website development. That's about when I decided they weren't for me.

 

[Ves]

The 10-year mine life type DCF will get you the right value for the company if you have control. I bet you that the management isn't going to distribute all funds and delist the company if their licences are not re-newed. What's stopping them burning cash looking for some illusive US opportunity while ensuring they are still being paid? Bit like smaller oil companies that hit a few good and be profitable for a few years, then management simply drain on the company's assets until they either strike it lucky again, or live in a cap-raising-every-6-month kind of existence.

SKC, all of these points are pertinent and I certainly don't disagree.

The risks are their for all to see, and I have definitely considered them. This is where the great unknown of investing for the future comes into it and you have to trust yourself and control the risks as much as possible (in your case avoid the company, in my case a very small position). In the case of JIN, they have currently issued stock options to two very senior US lottery executives, only able to be taken up in the event that they win a USA contract. I think this in itself helps mitigate some of the risks about splurging for US opportunities that may or may not come. Not sure why else these US executives would work for "free" unless they had some confidence in securing a contract. Also believe that their business model and technology development is highly scalable in its current form. I don't doubt they could waste money - but hard to see where at the moment. I think this is the case with any company and their free cash flow to equity.

Also helps that the CEO has most of his wealth in the company and has sat on illiquid shares for over 10 years now.

Would you sack your best employee? Depends on how much you are paying them vs the cost of substitute.

The three enablers of JIN's business are:
1). The licence.
2). The IT systems.
3). The customer database.

Tatts owns 1) can probably duplicate 2) and needs to either purchase 3) from JIN or build up over time.

Imgaine Tatts says "We won't renew your licence, and we are offering you $5m for the customer database." Can a reasonable JIN board refuse if they are looking after shareholder's interest?

I don't think the last line here is as risky as it was six months ago. The SA Lotteries contract insulates them from this to a greater extent than if they did not win it. They now have additional bargaining power over Tatts, that they previously did not have. Remember, they are also building a decent profit margin (cream) onto the tickets that they buy from Tatts, they have room to move cost-wise if need be.

If anything they could be a prime takeover target for one of the bigger players (perhaps Lottomatica).

 

[skc]

In the case of JIN, they have currently issued stock options to two very senior US lottery executives, only able to be taken up in the event that they win a USA contract. I think this in itself helps mitigate some of the risks about splurging for US opportunities that may or may not come. Not sure why else these US executives would work for "free" unless they had some confidence in securing a contract.

Executive / employee options exists in most US companies - even working level staff are incentivised with options. The use of options (and the employee's acceptance of them as incentives) has absolutely no bearing on the chance of success of the venture imo.

I don't think the last line here is as risky as it was six months ago. The SA Lotteries contract insulates them from this to a greater extent than if they did not win it. They now have additional bargaining power over Tatts, that they previously did not have. Remember, they are also building a decent profit margin (cream) onto the tickets that they buy from Tatts, they have room to move cost-wise if need be.

Can you explain why the SA lotteries contract create bargaining power over Tatts?

The risks are their for all to see, and I have definitely considered them. This is where the great unknown of investing for the future comes into it and you have to trust yourself and control the risks as much as possible (in your case avoid the company, in my case a very small position).

Very sensible. This is what I find interesting with this type of "investing". With a very large range of outcome, the share price is determined by the opinion of the marginal buyer/seller. So the share price movement, in the absence of real confirmative news, will be driven by sentiment and money flow. You can argue that JIN is worth 40c to $1.20 and you wouldn't be wrong. I believe a trader has the advantage in this kind of situation, trading within this range, following sentiment and flow, with appropriate stops. You'd only achieve high confidence/ good risk-adjusted investing at below the sensible price range.

 

[Ves]

Can you explain why the SA lotteries contract create bargaining power over Tatts?

Sure. Lotteries in Australia are operated in a national bloc. The lottery companies (Tatts, Intralot, SA Lotteries) operate and market the games in their respective states, but these games are often sydnicated on a national level so that winnings can be pooled from all tickets sold across the country. Therefore, in states that allow selling of tickets interstate via the internet JIN can now choose whether to buy the tickets that they on-sell to customers from Tatts or SA Lotteries. This obviously isn't allowed in all states however (fairly certain QLD is an example of this).

I think that this puts them in a better position than if they had not won the SA Lotteries contract.

 

[Ves]

Executive / employee options exists in most US companies - even working level staff are incentivised with options. The use of options (and the employee's acceptance of them as incentives) has absolutely no bearing on the chance of success of the venture imo.

No it probably doesn't - but if they do not succeed then JIN owes them nothing. Certainly better than paying for no result. My comment was more in relation to JIN wasting money chasing the big bucks in the US - I think that this demonstrates that they are willing to be sensible about it (at least from what we can tell in the beginning).

 

[skc]

Sure. Lotteries in Australia are operated in a national bloc. The lottery companies (Tatts, Intralot, SA Lotteries) operate and market the games in their respective states, but these games are often sydnicated on a national level so that winnings can be pooled from all tickets sold across the country. Therefore, in states that allow selling of tickets interstate via the internet JIN can now choose whether to buy the tickets that they on-sell to customers from Tatts or SA Lotteries. This obviously isn't allowed in all states however (fairly certain QLD is an example of this).

I think that this puts them in a better position than if they had not won the SA Lotteries contract.

I was not aware of this. If this is the case it puts them in a pretty strong position - not so much to bargain with Tatts but it basically changes their DCF valuation from 2 years to 5 years. Yet that announcement was not marked as market sensitive?!

Do you have a reference as to where you got this info? Was it in a company presentation?

 

[Ves]

I was not aware of this. If this is the case it puts them in a pretty strong position - not so much to bargain with Tatts but it basically changes their DCF valuation from 2 years to 5 years. Yet that announcement was not marked as market sensitive?!

Do you have a reference as to where you got this info? Was it in a company presentation?

It's amazing how they didn't mark it as market sensitive. And I think that is why it was never priced in (the major price rises seem to have come from the US announcement - the market always fancies "blue sky" fantasies).

http://en.wikipedia.org/wiki/Lotteries_in_Australia

Have a read of this - it describes it fairly well. The company announcements do offer some insight, but some of it you have to piece together.

I am pretty sure that the SA Lotteries contract is 5 years with a 5 year option by the way. Also remember that currently JIN has one million customers on their database. Tatts has no direct access to these - they would have to run a full-marketing campaign to start poaching them IMO. It's a bit of a double-edged sword for Tatts. JIN is both a competitor and a source of revenue - and I think the market is mis-interpreting that relationship, which has the potential for mispricing.

Honestly if they keep selling the amount of tickets that they have been this year, their cash balance will at least double by the time 2014 comes around. As you said, if they mis-use that cash it's worth nothing - but the optimist in me says have they done anything poorly with it so far? What if they put it to good use or even returned it to shareholders?

 

[McLovin]

Sure. Lotteries in Australia are operated in a national bloc. The lottery companies (Tatts, Intralot, SA Lotteries) operate and market the games in their respective states, but these games are often sydnicated on a national level so that winnings can be pooled from all tickets sold across the country. Therefore, in states that allow selling of tickets interstate via the internet JIN can now choose whether to buy the tickets that they on-sell to customers from Tatts or SA Lotteries. This obviously isn't allowed in all states however (fairly certain QLD is an example of this).

I think that this puts them in a better position than if they had not won the SA Lotteries contract.

I didn't know this, thanks.

So at the end of the day, these guys just charge a premium for something I can buy online for the same price as in store?

 

[Ves]

I didn't know this, thanks.

So at the end of the day, these guys just charge a premium for something I can buy online for the same price as in store?

They initially charged a premium to cover costs of their website and technology development, but found over-time that consumers are not as price conscious with lottery tickets as they are other items. It seems an extra $2 or $3 is nothing compared to the promises of the riches that a big jackpot conjures up in their dreams.

No guarantee that this will always be the case; but Australia only has 7% online penetration of lottery sales compared to much higher levels in parts of Europe, so the industry will grow and JIN looks fairly well placed to take advantage of it IMO.

 

[McLovin]

They initially charged a premium to cover costs of their website and technology development, but found over-time that consumers are not as price conscious with lottery tickets as they are other items. It seems an extra $2 or $3 is nothing compared to the promises of the riches that a big jackpot conjures up in their dreams.

No guarantee that this will always be the case; but Australia only has 7% online penetration of lottery sales compared to much higher levels in parts of Europe, so the industry will grow and JIN looks fairly well placed to take advantage of it IMO.

Thanks

It will be interesting to see how this plays out, over the next few years.

 

[Vader]

A few notes to add that you might find interesting (I don't own any shares, but do know the company - though I haven't kept comlpetely up to date with them over the last 5 or so years).

• Jumbo is a survivor of the tech bubble (asx code was JUM back then, has gone through a merger and a demerger in between).
• Started life with the concept of developing online shopping malls
• CEO is a pretty smart operator and is generally a step or two ahead of things that are happening IMO... I have complete faith that he will always do what is best for shareholders, the company is his baby and he knows how to survive tough times.
• Prior to buying OzLotteries.com in 2005/6(?) they earned the majority of their money selling online tickests for the RSL prize homes and also selling cigarettes online, duty free, via Switzerland... That industry started to change quickly (supply issues, legalities etc.). At the time Jumbo had some small interests in a couple of online casinos (and the RSL prize home ticket sales), spent a bit of time feeling out a couple of options in related industries before moving quite quickly to take over OzLotteries.com and move all focus to that (marketing and selling online had always been a core component of the business). If you start to see them branching out into other industries, you'll know they are starting to get a bit nervous about cashflows over the next couple of years
• As mentioned above, the key lotteries in Australia (Saturday lotto, powerball, ozlotto) are syndicated nationally, so having a license in one jurisdiction is enough to sell those tickets. There is some room for complication (i.e. Tatts sell tickets online in Qld and while it has been some time since I last looked at the legislation, I think it's complicated further given that Jumbo are also located in Qld)
• Unless things have changed in the past few years (which they quite possibly have), they also operate the point of sale for lottery sales in several pacific island nations - which I believe was under the NSW lotteries license. Not sure if anything changed there when NSW privatised their lottery a few years ago, but I suspect that (NSW privitisation) was a key driver for getting the SA online lottery license (insurance basically).
• The've been looking at potential Europe and US licencses since the day they bought OzLotteries.com... so I wouldn't put too much hope in that - it's a very tight, protected and exclusive market as you might imagine, though if the opportunity does arise I would certainly expect them to expand quite quickly.
• Interesting to note the CEO just sold about $500k worth of shares a week or so ago. If it turns out the current price is getting near the top I would expect him to pour most of that money back in at a later date when the price gets low again... either that or he might have just bought a new porsche

IMO, yes they are a high risk option. They are a small company and I have no idea whether they can continue to grow profits substantially over the next few years, but they are helped by low costs and good margins. I've got no problems predicting that they will still be around in 10 years time, but wether they are still selling Australian Lottery tickets in 10 years is another question altogether (they are doing everything right, but continuation of licenses isn't something under their control).

 

[Ves]

Thanks Vader - I certainly didn't know about some of those little tidbits!

 

[ROE]

beautiful set of number

profit up 39%
dividend increase 100%

Network effect certainly play apart with this result, it can only get better from here.
Stage 1: first mover advantage Stage 2: Network effect .. Stage 3: yet to play out...

Still holding and hang out they may bag Western Australia Market...

 

[ROE]

http://www.brrmedia.com/event/102193/mike-veverka-ceo

Customers database up, these guys use technology very cleverly
to drive grow in customer database and sales much like Dominos Pizza.

all this without counting SA revenue, that will be up and running in October.

 

[Ves]

Rock solid result. Completely blew brokers & analyst's estimates out the water (the few that cover it).

Still growth left in Australia, but the big upside is in the US.

 

[ROE]

Rock solid result. Completely blew brokers & analyst's estimates out the water (the few that cover it).

Still growth left in Australia, but the big upside is in the US.

May update upper guidance is 6.2m they did a 6.7m Amazing, all in 2 months space.
not even got a 1 sentence mentioned on AFR BHP takes Centre stage today

 

[Ves]

May update upper guidance is 6.2m they did a 6.7m Amazing, all in 2 months space.
not even got a 1 sentence mentioned on AFR BHP takes Centre stage today

Let's hope they turn into a serial under-promiser, over-deliverer!

 

[VSntchr]

I think that Mike may have low balled the guidance in order to surprise on the upside..
Still, as a holder I'm happy with the result and continue to hold with a big

 

[McLovin]

Well done. Seems like a pretty good result. I may have to eat humble pie on this one. Time will tell.