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Jumbo Interactive share price sinks lower on new Tabcorp agreement

Lottery Balls

The Jumbo Interactive Ltd (ASX: JIN) share price has returned from its lengthy suspension and is sinking notably lower this morning.

At the time of writing the lottery ticket seller’s shares are down 9% to $10.39.

Why is the Jumbo share price sinking lower?

Investors have been selling Jumbo’s shares this morning after it announced a new 10-year reseller agreement with Tabcorp Holdings Limited (ASX: TAH).

According to the release, Jumbo and Tabcorp have extended their reseller agreements for New South Wales, Victoria, South Australia, Northern Territory, ACT, and Tasmania (as well as international jurisdictions) until July 2030.

However, given the enlarged scale of Jumbo and the fundamental value of Tabcorp’s lottery licences to it, these agreements will come at a cost.

Jumbo has agreed to pay an upfront extension fee of $15 million for the 10-year term and a service fee of 4.65% of the ticket subscription price.

The latter will be introduced in phases, initially with a service fee of 1.5% in FY 2021. After which, its service fees will increase to 2.5% in FY 2022, 3.5% in FY 2023, and then 4.65% thereafter. Though, should the value of its ticket sales be in excess of $400 million for each applicable financial year, it will pay a pay a service fee of 4.65% on ticket sales beyond that amount.

Western Australia update.

Jumbo also revealed that it is in discussions with Lotterywest in relation to arrangements for its Western Australian customers. These represented approximately $33 million or 10.5% of ticket sales in FY 2019.

Though it warned that there is no guarantee that these discussions will result in any agreement being reached with Lotterywest. Furthermore, if an agreement with Lotterywest cannot be reached, Jumbo will seek alternative options for maximising the value of its Western Australia customer base.

FY 2020 guidance.

Jumbo has reaffirmed its guidance for FY 2020 despite a lower than expected number of large jackpots.

It expects to report ticket sales of $335 million to $341 million and revenue of $68.5 million to $69.9 million. In respect to earnings, it is forecasting earnings before interest, tax, depreciation, and amortisation (EBITDA) of $38.7 million to $40 million and net profit after tax in the range of $24.4 million to $25.3 million.

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Returns as of 6th October 2020

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Jumbo Interactive Limited. The Motley Fool Australia owns shares of and has recommended Jumbo Interactive Limited. 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 Scott Phillips.

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