ASX code: JIN
Share price: $3.69
Industry: Consumer Services
Forecast FY2019 Ordinary Dividend: 21.5 cents
Forecast Special Dividend: 20 cents
Online lotteries ticket e-tailer announced another strong result on Friday, with earnings for the half year of $5.3m beating the company’s upgraded guidance from last month by 6%.
Back in July when last JIN last appeared in Dividend Detective, the scene was set for a much improved FY18. The company had finalised exits from loss-making international business six months prior, and this was followed by the consolidation of state-based contracts with Tatts (now Tabcorp, ASX:TAH), which were extended until 2022.
Then, in December, the Northern Territory government prohibited NT-licensed betting operators from taking wagers on Australian-based lotteries, eliminating the threat of NT-licensed Lottoland to JIN and Tatts.
Relieved of these key risks, JIN’s cash generation and strong balance sheet increasingly attracted attention. As a result, shares are up over another $1 or 30%, even after paying $0.20 of fully franked dividends over the period.
Investors have enjoyed sustained strong returns, however we’d argue there remains more than satisfactory opportunity in JIN.
Taking stock using 1H18 figures, we highlight JIN’s balance sheet flush with $34m net company cash. Including 2H cash flow and the expected cash injection from TAH exercising its remaining 3.7 million options, we believe JIN’s net cash position will grow to around $45m by 30 June.
Given investments in platform improvements and new product lines such as charities lotteries are largely complete, we see a strong case for excess cash funding another special dividend later this year. We estimate that JIN could comfortably fund the payment of a further special dividend of approximately $0.20 per share, fully franked.
Adjusting for our estimate of net cash at 30 June, as well as additional shares to be issued to TAH in May, JIN’s implied enterprise value of $155m is less than 12 times FY19 free cash flow. In our view this is a modest multiple to pay for a high-quality, capital light business growing at above average rates. We believe intrinsic value lies north of $4.
It is worth reiterating that online retailing of official government lotteries is effectively a duopoly (with TAH). This means that two players absorb the migration of customers from newsagents to the online channel within a market totalling $4.0bn of sales. In Australia online penetration has more quadrupled since 2010 to 16.5% now, whereas in some offshore markets the percentage exceeds 40%. JIN’s growing database of over 2 million verified accounts supports engagement with customers in a low-cost manner and on an ongoing basis. Meanwhile, the charities lotteries are proving a valuable addition, as indicated by rising sales per customer this half.
Jonathan Wilson is an analyst for the Clime Smaller Companies Fund