Saturday Lotto Refresh Will Encourage Customer Engagement And Participation

Key Takeaways

• Digital transformation and operational improvements are likely to boost customer retention, net margins, and sustained revenue growth.
  
• Revamped product offerings and strategic commission adjustments are expected to drive sales momentum and incentivize customer engagement, contributing to revenue growth.
  
• Dependence on unpredictable jackpot outcomes and mandatory spend limits on online play constrain revenue growth and impact financial stability and profit margins.

Catalysts

Engages in provision of gaming and entertainment services in Australia.

• The Lottery Corporation's strategy to accelerate Powerball sequences, leading to larger jackpots, is expected to bolster ticket sales and increase revenue. This proactive management can drive growth in the company's top line with higher jackpot sequences encouraging customer participation.
  
• The company's focus on growing its digital footprint points to an expected increase in digital revenue share, which generally yields higher margins compared to retail channels. This digital transformation is likely to contribute positively to net margins and earnings.
  
• Operational improvements such as enhanced RD verification processes and a new customer data platform aiming for personalization at scale are expected to increase customer retention and conversion rates, thereby supporting sustained revenue growth.
  
• Upcoming product innovations, like refreshing Saturday Lotto and adjusting commission rates on Lucky Lotteries, are anticipated to drive sales momentum and improve margins. Price increases can elevate Division 1 prize pools, incentivizing customer engagement and contributing to revenue growth.
  
• Strong focus on operational efficiency and cost discipline, including tight control of discretionary expenditure, renegotiations, and process optimizations, are expected to preserve and potentially enhance net margins despite economic pressures.

Lottery Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lottery's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.6% today to 10.9% in 3 years time.
• Analysts expect earnings to reach A$472.0 million (and earnings per share of A$0.21) by about April 2028, up from A$372.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$370.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.3x on those 2028 earnings, up from 29.3x today. This future PE is greater than the current PE for the AU Hospitality industry at 19.5x.
• 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 8.02%, as per the Simply Wall St company report.

Lottery Future Earnings Per Share Growth

Risks

• The company's revenue decreased by 5.6% in the reported period, impacted by lower jackpot outcomes and economic pressures, which could continue to affect future revenues adversely.
  
• Operating expenses increased by 5%, partly due to the impact of separation costs, while EBITDA and net profit after tax decreased by 7.4% and 9.9% respectively, indicating a potential risk to profit margins if costs are not managed effectively.
  
• The company is dependent on jackpot outcomes, which are inherently unpredictable. The variability in jackpot sequences can significantly impact revenue and would affect earnings stability.
  
• The decision to introduce mandatory spend limits on online Keno play has impacted turnover, potentially constraining revenue growth in the online segment, which can affect margins as online transactions typically have higher margins than retail.
  
• Regulatory outcomes are uncertain, and any unfavorable changes could impact the company's ability to operate efficiently, affecting the overall financial performance, particularly in terms of revenue and compliance costs.

Valuation

• The analysts have a consensus price target of A$5.437 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$4.3 billion, earnings will come to A$472.0 million, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 8.0%.
• Given the current share price of A$4.9, the analyst price target of A$5.44 is 9.9% higher.
• 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.