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Why OzLotteries operator Jumbo Interactive Ltd shares rocketed today

Leading online lottery company Jumbo Interactive Ltd (ASX: JIN) has been a big mover today. In afternoon trade its shares are up over 6% to $1.70 after investors reacted positively to its plans to scale down its loss-making German business.

According to the release its CEO Mike Veverka believes that conditions in the German market are not favourable for its licensed reseller model and that a much bigger investment would be required to continue operating there.

As it is uncertain whether that investment would provide an acceptable return on investment, he believes focusing on the Australian market is the right thing to do at this point in time.

I would agree with Mr Veverka on this. Last year its German business posted a $2.6 million loss on sales of just $300,000. Whilst the loss was an improvement on FY 2015’s $3.6 million loss, I feel breaking even in the country is some way off.

Whereas its Australian operations are extremely profitable. As the operator of OzLotteries under license from Tatts Group Limited (ASX: TTS), Jumbo produced net profit before tax of $12.3 million on revenue of $34.2 million.

So overall I’m really not surprised to see the market react as it has today.

But is it a buy?

I really like the business and believe the company’s focus on online and mobile lottery participation has been impressive. Not only did over 200,000 new online users sign up in FY 2016, but the average spend per active user increased 6.2% to $335.27.

But the one problem I have with the company is its dependence on Tatts. I like to think that the company is doing such a good job that Tatts wouldn’t even consider terminating its agreement with the company.

But if that is the case then I’m not sure why Tatts has not extended its contracts. The licenses for Victoria and New South Wales both expired in 2013 and have continued on a 30 days’ notice basis. Its licenses for South Australia and the Northern Territory both expire in September 2017.

As the loss of these licenses would be catastrophic, I would suggest investors hold off an investment. If in September 2017 Tatts signs up each state for another five years I would grab as many shares as I could, but until then it really is a gamble I’m afraid.

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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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