Will shares in The Lottery Corporation deliver a jackpot?

We recently researched The Lottery Corporation (ASX:TLC) in The Dynamic Investor. Weaker lotteries volumes had weighed on sentiment, pushing the shares to the bottom end of its trading range over the last year. With the shares having a habit of recovering off its lows, we assess whether current levels present an opportunity.

About The Lottery Corporation

The Lottery Corporation is the leading lottery and Keno game operator in Australia and commenced trading on the ASX on 24 May 2022, following its demerger from Tabcorp Holdings (ASX:TAH). TLC 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.

Its main division is Lotteries, which accounts for nearly 90% of earnings. The Company is the sole retail distributor in Australia (ex- Western Australia) with an extensive network across ~3,863 outlets. TLC operates its own digital platform, but also has relationships with five official lottery resellers.

Key Fundamental Drivers

Game Changes Can Support a Recovery in Lotteries Volumes

Following high jackpot activity in FY24, a lack of jackpots above $100m and a fall in overall jackpot prize pools of 10%.are expected to drive volume declines of ~7% in FY25. Game innovation / pricing can drive step-changes over and above underlying volumes. As an example, game changes introduced to Powerball in April 2018 increased prize frequency and the opportunity for bigger jackpots, as well as more winners overall.

Over the next three years, TLC are suggesting game innovation / pricing changes across Saturday Lotto in FY25 and potential game innovation in FY26/FY27 for Set for Life & Powerball. In particular, the Company has flagged a likely price increase for Saturday Lotto and changes to the Division 1 prize. Overall, Saturday Lotto represents around 30% of volumes, as such, based on a 5-10% price increase, and assuming no volume benefit would provide up to a 3%-point annualised revenue benefit.

Is the Competitive Threat Increasing?

Offshore lottery providers pose a potential impact on revenue for the Lotteries division over the medium-to-long term. Offshore lottery providers provide local consumers with access to offshore lotteries that have significantly higher jackpots than Australian lotteries. The threat is that any growth in the number of offshore lottery providers has the potential to cannibalise TLC’s products.

Of particular relevance to TLC is the step-up in advertising and market activity from The Lottery Office, which has increased broader awareness of The Lottery Office brand. In addition, web traffic for lotteryoffice.com.au has picked up sequentially since June 2024, from ~0.6m to 1.162m, which is at the top end of the monthly figures reported since August 2021.

There has been minimal impact on recent like-for-like sales performance for TLC’s games from The Lottery Office, given its still small scale. Notwithstanding, continued growth in web traffic for lotteryoffice.com.au is likely to present a minor risk to the rate of LFL sales growth for TLC’s products.

Digital Penetration Expected to Grow – But Why Not Reflected in Operating Leverage Beyond FY25?

After reporting minimal EBITDA margin expansion in FY24 (+40 basis points to 20.7%), a larger expansion in EBITDA margin is expected in FY25, EBITDA margin growth in FY25 is expected to be generated from TLC introducing its Customer Data Platform. In addition, FY25 is the final run-rate operating cost increase year on year following the demerger from Tabcorp

In terms of distribution, or the origination of lotteries sales, retail remains the dominant channel, representing around 59% of volumes. Digital volumes are tracking around 41%, and likely to surpass retail levels in the next five years.

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 (given that online sales negate the retail commission).

Online penetration (i.e. digital market share for the Lotteries division) increased by +250 basis points in FY24, to 40.9%. This growth was driven by share gains in TLC’s proprietary digital channel and contribution from digital store syndicates.

However, we contend that there is a cap to the degree of EBITDA margin expansion from the transition to digital channels, given that the Company is expanding its retail presence. In particular, whilst its presence in newsagents has declined, TLC has expanded its presence in other traditional retail channels (convenience/tobacconists/other). In addition, partnerships (for example with BWS) provide an opportunity for growth in the retail channel.

Fundamental View

TLC shares are currently trading on a 1-year forward P/E multiple of ~27x, which is slightly below the average of ~28x over the last two years. The current multiple also remains unappealing in the context of a modest EPS growth profile of +3% over FY24-27 on a CAGR basis. We consider that the prospects for a re-rating are limited by:

i. Challenges in achieving operating leverage beyond FY25 (i.e. FY26/27). In particular, lower lotteries volumes in 1H25 to date presenting a potential negative mitigation to expectations for EBITDA margin expansion in FY25.

ii. Potential for downward revisions to earnings from lower lotteries volumes, noting that 1H25 results are released on 19 February.

Charting View

TLC has been trading sideways for almost a year now with resistance near $5.20 and support back near $4.80. It is now back at support and we therefore need to see if it can hold onto these levels or not. A bounce from here on good volume would indicate that it should move back up towards the top of this trading range again. However, a failure to now bounce could see TLC shares get back to cheaper levels near $4.60 – $4.70.

The Lottery Corporation (ASX: TLC) weekly chart
The Lottery Corporation (ASX: TLC) weekly chart

 

Michael Gable is managing director of Fairmont Equities.

 

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