Why Jumbo Interactive Limited has rocketed 23% today

Credit: Matt Biddulph

Shareholders of leading interactive lottery business Jumbo Interactive Limited (ASX: JIN) will be smiling today after its share price rocketed higher by 23% to a new 52-week high following the company’s announcement of its FY 2016 earnings guidance.

The company advised the market that it expects a significant increase in profit thanks to growing customer numbers combined with a run of jackpots. Furthermore, the company’s focus on cost management and an improvement in its German unit have also contributed to the strong performance.

The company now expects the following for FY 2016:

  • Total Transaction Value – $155 million (Up 19.2% from $130 million in FY 2015)
  • Revenue – $34 million (An increase of 16% from $29.2 million last year)
  • Net profit after tax – $4.4 million (a massive 528% increase year on year from $0.7 million)

As well as allowing customers to play lotteries through its mobile app, Jumbo Interactive also operates the Jumbo Lotto website in Germany and the popular Oz Lotteries website in Australia under an agreement with Tatts Group Limited (ASX: TTS).

Mobile appears to be where a lot of the growth is coming from. The company revealed that 67% of online activity derives from mobile. The success it is having with its mobile offering is great to see, especially when you consider how vital it may be for attracting the younger demographics.

The shares are currently changing hands at approximately 15x full year earnings guidance. For the growth the company is producing I believe this is great value, but it is not without its risks.

Whilst the company does have a very strong relationship with Tatts Group, its agreements in Victoria and New South Wales expired in 2013 and have only been extended on a 30 days’ notice basis. Agreements with Tatts in South Australia and the Northern Territory expire in September 2017. As the vast majority of its revenue comes from the Australian market the ramifications of Tatts Group ending its agreements with the company would be destructive financially.

Because of this I believe that as tempting as an investment as it may be, it is too high risk for my liking. The company is pursuing the renewal of its agreements for a further five years, but until it manages to achieve this I would personally hold off an investment. I think anyone looking for exposure to the gaming industry might be better off looking into an investment in Crown Resorts Ltd (ASX: CWN).

Lastly, if you do want to add Crown Resorts to your portfolio then I would suggest getting rid of one of these three rotten shares if you own them. Each could be doing more harm than good for your portfolio.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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