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Jumbo Interactive Ltd shares surge 13%, is it a buy?

Rocket 16:9
Credit: Steve Jurvetson

Investors this week have now had the opportunity to hear from lottery operator Tatts Group Limited (ASX: TTS) and lottery ticket reseller Jumbo Interactive Ltd (ASX: JIN).

While the response to Tatts Group’s profit result on Thursday was muted with the share price finishing the day down just two cents, investors have cheered Friday’s results from Jumbo with the stock soaring around 13% to a fresh 52-week high of $1.75.

With Tatts being an essential client for Jumbo, analysis of Jumbo isn’t complete without analysing Tatts. Here are some key numbers from the Tatts report which Jumbo investors should be aware of.

Tatts reported a 4.4% rise in revenue and a 3.8% increase in net profit after tax from continuing operations to $263 million. The lotteries division was the standout performer for the group with record-breaking revenue, profit and jackpots.

Tatts noted that 13.5% of all lotteries sales and 30.2% of all wagering sales were conducted online, representing growth of 33.2% and 22.5% respectively.

Other lottery specific highlights from the 2016 financial year included the launch of the first new draw lottery game in Australia in 20 years, ‘Set for Life’, the release of Tatts’ first lotteries dedicated app and the launch of national umbrella lottery brand, ‘the Lott’.

Turning to Jumbo’s results and the group reported an 18% increase in revenue and a 604% surge in profit. The full year dividend has been increased to 7 cents per share (cps) from 3 cps in the prior year and the net cash balance sits at a very healthy $18.3 million.

The number of additional new accounts rose year on year by 5% (or 206,858) to a total of over 2 million accounts. Importantly, the number of “active customers” increased from 333,475 to 375,988.

Buy, Hold or Sell?

Today’s results certainly make Jumbo’s shares look appealing, the dependence on its relationship with Tatts remains a stumbling block for many potential investors.

Jumbo’s management is attempting to deal with this situation. In today’s announcement, reference was made to the high cash holdings of the group, noting that both internal and external investment opportunities were being considered.

In the near term however, investors will be keenly watching the development of Jumbo’s newly established Australian Charity Lottery business. This is an example of a new vertical which diversifies the group’s reliance on Tatts.

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Motley Fool contributor Tim McArthur 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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