Weaker lotteries volumes and cost pressures have weighed on sentiment for The Lottery Corporation (ASX:TLC) shares. These factors have pushed the shares to recent lows. In its short trading history, TLC shares have typically recovered off its lows. With this in mind, we recently researched TLC in The Dynamic Investor to assess whether current levels present an opportunity.
About The Lottery Corporation
The Lottery Corporation is the leading lottery and Keno game operator in Australia. The Company holds long-dated licenses 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 86% of earnings in FY25. Traditional draw-based games, such as Powerball & Oz Lotto, represent the majority of TLC’s lotteries revenue. TLC offers ~10 different lotter-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 Likely to Be Below Expectations
Turnover for the five months to November 2025 (i.e. 1H26 period to date) for the top four games is estimated to have declined by -4% (on a year-on-year basis). Powerball volumes are weaker in the 1H26 period to date due to: i) A decline in participation across the game portfolio (excluding Oz Lotto) that was most pronounced in Powerball, ii) The absence of acceleration in jackpot sequences prior to the Powerball price increase (which took effect on November) and iii) TLC has cycled two $100m Powerball draws in the period over 1H26 and recent jackpot activity has been weaker than usual.
The weakness in turnover is considered mostly luck and not structural. Notably, in 2Q26, Powerball had unusually high win frequencies, meaning jackpots haven’t built despite a recent price increase). Nonetheless, given the -4% decline in turnover growth in the 1H26 period to date, there is downside risk to that consensus estimates for lottery turnover growth in 1H26 (currently ~3-4%). This is because an abnormally high turnover growth rate would need to be reported for December in order to meet consensus forecasts for 1H26.
Relying on Price Increases to Offset Volume Weakness
The Company has been active with innovation/pricing to drive step-changes over and above underlying volumes. TLC implemented a +17% price increase for Powerball (subscription price increased from $1.20 to $1.40), which came into effect in November 2025. The quantum of the price increase is larger than that observed in recent history. The Powerball price contributes meaningfully to EBITDA in FY26, assuming retention of the price increase to be at the high end of the 50-75% range that management has seen. Early indications are that there have been strong initial retention rates following the +13% price increase in Saturday Lotto.
Further, the recent +17% price increase for Powerball, coupled with the +13% increase for Saturday Lotto in 2025 are significant. These two games represent around 65% of lottery volumes (of which Powerball represents ~40% of volumes).
Moderate Operating Leverage Expected in FY26?
TLC reported a decline in the EBITDA margin, from 20.7% in FY24 to 20.0% in FY25. While broadly in line with consensus estimates, there were expectation earlier in the year that EBITDA margin in FY25 would expand on the back of two factors. The first is, the introduction of TLC’s Customer Data Platform (boosting its data and personalisation capabilities). The second was that FY25 was the final year from operating cost increases attributed to the demerger from Tabcorp.
Further work is needed to improve cost efficiencies, which is likely to be the focus of the new CEO, Wayne Pickup, who commenced on 24 November 2025. There is potential for moderate operating leverage in FY26 should the Company make progress on reducing the headcount (~47% of the cost base) as well as improving product distribution.
Gearing Level High but Manageable
Gearing as at 30 June 2025 was 2.9x (up from 2.6x at 30 June 2024) and remains below the target gearing range of 3.0x-4.0x. Despite the increase in gearing vs FY25, TLC was able to deliver an improved fully-franked dividend of 16.5 cents per share (cps) for the year (2H25: 8.5cps).
The current gearing level is considered very manageable. In particular, TLC is a highly cash generative business, underpinned by the long-run and generally exclusive licences within Australia across lotteries and Keno. CAPEX requirements are also low. As such, there is strong free cashflow generation which may also be applied to capital management and/or Merger & Acquisition (M&A) opportunities.
Fundamental View
We highlight several factors underpinning our view that that the prospects for a re-rating are limited:
i. A more balanced risk-reward. TLC shares are currently trading on a 1-year forward P/E multiple of ~26.5x, which is slightly below the average of ~28x over the last two years. The multiple remains unappealing in the context of a modest EPS growth profile of +8% over FY25-28 on a CAGR basis.
ii. Further work is needed to extract cost efficiencies in order to, firstly, improve operating leverage over the medium term and secondly, mitigate the impact on EBITDA margin from lower lottery volumes. To this end, there is downside risk to consensus estimates given the weak trends in lottery volumes in the 1H26 period to date.
iii. Limited scope for further capital management and/or M&A activity outside of seeking an extension of the Victorian lottery licence.
Charting View
When we looked at the TLC chart 12 months ago in The Dynamic Investor, we noted that it was trading sideways under resistance near $5.20 and that a break above that level should see a multi-month rally. After eventually breaking higher and rallying towards $6, the shares then fell and they are now back under that old resistance zone. At this rate, it appears as though TLC is heading back towards $4.80, which would provide a cheaper entry point for investors.
Michael Gable is managing director of Fairmont Equities.
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