We recently researched The Lottery Corporation (ASX:TLC) in The Dynamic Investor after the Company reported results for the 12 months to 30 June 2026 (FY26). The result showed some resilience given headwinds from historically low jackpots in FY26, which negatively impacted on TLC’s lotteries business.

We recommended TLC as a BUY for two key reasons. Firstly, earnings downgrades from short-term jackpot-related weakness appeared to have been largely reflected in consensus estimates. Secondly, the outlook for FY27 was more promising given: i) Potential normalisation in jackpots providing a tailwind; and ii) Upside risk to EBITDA margin forecasts over the medium term from price increases/product innovation across the game portfolio, a stable underlying cost base, and the digital strategy.

With the shares having gained since our recent report, we assess whether the risk-reward at current levels remains attractive.

About The Lottery Corporation

The Lottery Corporation is the leading lottery and Keno game operator in Australia. The Company holds long-dated licences to operate lotteries in all Australian states and territories excluding Western Australia. As synthetic lotteries are prohibited in Australia, TLC holds a monopoly position in the states and territories in which it operates.

The main earnings driver is the Lotteries division, accounting for 84% of earnings in FY26. Traditional draw-based games, such as Powerball & Oz Lotto, represent the majority of TLC’s lotteries revenue. TLC offers ~10 different lottery-based games, consisting of seven core base games & three jackpotting games. These are sold via both the retail and digital channels.

Key Fundamental Drivers

Lottery Volumes Expected to Improve in FY27

We expect normalised jackpot activity to support a recovery in FY27 lottery volumes, supplemented by game and pricing changes. The Company has been active with innovation/pricing to drive step-changes over and above underlying volumes.

As at FY26, the Powerball price rise in November 2025 had seen price retention of 63%. While this is within target, the retention rate is likely to improve as jackpot activity returns to more normal levels. In contrast, the Saturday Lotto price rise in May 2025 had reported price retention of 100% (compared to long-term expectations of 50-75%) – albeit there may be some benefits from customers shifting from Powerball given weaker Powerball jackpots.

TLC is not looking to move to periodic price changes. It prefers price increases that coincide with product innovation to ensure the customer sees value in paying the higher price. To this end, the Company is exploring a potential price and game matrix change for Oz Lotto in 1H28, which has a materially larger turnover, at ~13-25% of the Lotteries book. The proposed changes for Oz Lotto follow the previously-announced game change for Set for Life. A +16.7% subscription price increase for the latter took effect from September 2026, alongside an additional upfront $200,000 Division 1 prize.

Digital Strategy to Support Margin Expansion

Online sales have progressively expanded in the last several years and currently account for 46.6% of overall lottery sales. The continued transition onto higher-margin digital channels theoretically supports EBITDA margin expansion over time. Online tickets are estimated to generate an EBITDA margin that is > 2x higher than that for retail sales. This is because online sales negate the retail commission.

The Company outlined several initiatives under a new digital strategy, including i) More interactive game play, ii) Social-media-like syndicate products, and iii) Improved subscription / autoplay products. A key opportunity lies in leveraging the customer base, which is split almost evenly: approximately 4.15m registered customers alongside an estimated 4.3m unregistered retail players. Registered customers spend approximately twice as much as their unregistered counterparts. As such, converting even a modest proportion of that pool into known digital relationships represents a material embedded growth opportunity. Further, delivery on the opportunity requires no new market entry and no new product.

The number of registered customers in FY26 declined by -6%, given the weakness in the jackpot environment. However, it is likely that many of the new initiatives in the pipeline (including Autoplay 2.0 and the new greenfield app in 1H28) should help to stabilise this metric over the medium and longer term.

Clear Path to Lower Gearing After FY27

Gearing (on a net debt to EBITDA basis) as at 30 June 2026 was 3.1x, up slightly from 3.0x as at 31 December 2025 and 2.9x as at 30 June 2025. Notwithstanding the increase, gearing remains at the lower end of the target gearing range of 3.0x-4.0x.

Gearing at the end of FY27 is expected to increase to the upper end of the target range following the early extension of its Victorian Lottery Licence. Payment for the latter will be funded by debt.

However, given that TLC is a highly cash generative business, gearing is expected to progressively decline after FY27.

A pleasing aspect of the FY27 result was that the Company held the total dividend for FY26 flat. This was despite the impact on EPS from unfavourable jackpot outcomes. This resulted in a dividend payout ratio of 107%, which is above the target range of 80-100%. Importantly, the Company’s willingness to payout 107% of EPS reflects its confidence in both the growth outlook and ability to reduce gearing post FY27.

The expected reduction in gearing after FY27 provides the potential for capital management and Merger & Acquisition (M&A) opportunities. However, capital management options may be limited, as: i) The extent to which share buybacks are EPS-accretive depends on the share price at any given time and ii) Limited franking credits restricting the ability to pay special dividends.

Fundamental View

At current levels, we consider that the risk-reward has become less attractive. Since our report, TLC shares have re-rated from a 1-year forward P/E multiple of ~27x, to ~29x currently. This is broadly in line with the average multiple of ~29x over the last two years.

Having said that, a normalisation in the jackpot cycle over the course of FY27 is likely to be a catalyst for a further re-rating.

Charting View

In our report on 22 September when TLC was trading at $4.79, we made the following comment about the chart: “TLC has suffered a steep decline over the past two months but we have a couple of buy signals on the daily RSI and the MACD which suggest that it could bounce here in the short-term. However, more conservative investors may wait to see if the stock can trade above $5 and therefore break the shorter-term downtrend first.” With these conditions now having been met and the stock rallying, it should continue to head higher from here.

 

Michael Gable is managing director of Fairmont Equities.

 

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