Acceleration Of Powerball Jackpots Will Attract More Customers

Key Takeaways

• Digital expansion and customer-centric initiatives, like game innovation, are driving revenue growth by attracting younger demographics and enhancing engagement.
  
• Strong cash flow and low capital needs support flexible capital allocation, including dividends, improving shareholder returns and earnings-per-share.
  
• Reliance on exceptional jackpots and rising costs threaten revenue stability and margins amid potential regulatory impacts and digital competition challenges.

Catalysts

Engages in provision of gaming and entertainment services in Australia.

• The Lottery Corporation's increase in digital turnover, particularly from Store Syndicates Online, suggests strong growth potential in revenue as digital sales continue to expand and attract younger demographics.
  
• The focus on customer-centric initiatives, including planned game changes like the Saturday Lotto price increase, is expected to boost future revenue and engage more consumers through innovation.
  
• Strategic management of jackpot sequences, such as the accelerated sequence for Powerball, is likely to sustain high turnover rates and improve earnings by creating regular large prize draws that attract more customers.
  
• The company's strong cash flow generation and low capital intensity provide flexibility for capital allocation strategies, such as dividend payouts, which could enhance shareholder returns and positively impact earnings-per-share.
  
• The completion of the separation process and focus on cost optimization could lead to improved net margins, as operational expenses are expected to stabilize in upcoming fiscal years.

Lottery Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lottery's revenue will grow by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.4% today to 10.5% in 3 years time.
• Analysts expect earnings to reach A$443.2 million (and earnings per share of A$0.21) by about February 2028, up from A$414.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$489.8 million in earnings, and the most bearish expecting A$370.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.9x on those 2028 earnings, up from 26.6x today. This future PE is greater than the current PE for the AU Hospitality industry at 24.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.87%, as per the Simply Wall St company report.

Lottery Future Earnings Per Share Growth

Risks

• The Lottery Corporation's revenue boost was significantly driven by exceptional jackpot performance, which may not be sustainable long-term and could impact revenue stability if such events become less frequent in future periods.
  
• Operating expenses have risen, partly due to separation costs and inflation, which could squeeze net margins if these costs continue to outpace revenue growth.
  
• The company is currently experiencing wage inflation at a 4% increase for FY '25, impacting overall earnings if this trend continues without corresponding productivity improvements.
  
• Keno’s earnings were affected by changes in commercial arrangements and digital competition, which may continue to challenge revenue growth and profitability in this segment.
  
• Potential regulatory impacts from governmental reviews of the gambling industry could affect the company’s operations and revenue streams, particularly if more stringent regulations are implemented.

Valuation

• The analysts have a consensus price target of A$5.379 for Lottery based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$4.2 billion, earnings will come to A$443.2 million, and it would be trading on a PE ratio of 33.9x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of A$4.95, the analyst price target of A$5.38 is 8.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.