I believe some of the more interesting phenomena of the coronavirus shutdowns have been the cancellation of sporting events and the closing of clubs. In particular, what have all the bored sports betters been doing? I have seen two theories on this so far. The first one posits that these people are now trading in ASX shares. Personally, I can relate to this. Several people I know recently told me they have their ‘gambling money’ set aside and want to know which shares to buy.
The second theory, proposed by JP Morgan, is that bored gamblers have drifted to online lotteries. This includes new players entering the sector and current players buying more tickets. Moreover, JP Morgan believes JobKeeper payments are partly fueling this. I have suspected something like this has been going on for the past few months. In fact, I have been watching the two ASX shares below as I think they will benefit from this dynamic, and are likely to surprise on the upside during earnings season.
ASX shares for online lotto
The Jumbo Interactive Ltd (ASX: JIN) share price is currently down by 27.1% in year to date trading. Jumbo is an online lottery company which is very active in Australia and Germany. Prior to the pandemic, the company was expanding into the United States, Latin America, Asia and Europe. In the company’s H1 FY20 report, it disclosed a 25% increase in total transaction value. This resulted in a 14% net profit increase after taxes.
Jumbo attributed this to a range of factors, however chief among them was customer engagement due to the company’s new software platform. In addition, the company credited its new software-as-a-service (SaaS) platform as contributing to the uptick. This targets charitable organisations and provides them with the means of selling online lottery tickets. At this time, Jumbo had three leading charity lotteries and had acquired a company in the United Kingdom dedicated to ethical lotteries for charities. A fourth SaaS client, MS Queensland (multiple sclerosis), was signed in February.
Something I found very interesting in the H1 report was that only 26.7% of all lottery sales were online. This means that the remainder are sold through newsagents and kiosks. As such, there is a high likelihood of increases in revenue for Jumbo due to the coronavirus lockdown. That doesn’t even take into account any increases from bored sports betters.
Lastly, and most importantly, the company has re-signed a distribution deal with Tabcorp Holdings Limited (ASX: TAH). I believe this adds a level of security to any investment in this ASX share. The previous distribution agreement with Tabcorp finished in 2022, now it runs until 2030.
Shares for online gambling
Like a few other companies on the ASX, Aristocrat Leisure Limited (ASX: ALL) has an offset financial year. This means it starts in October and finishes in September. The company’s H1 FY20 finished in March 2020.
Although known as a company that manufactures and sells casino machines, Aristocrat today does so much more than that. Of course, it continues to provide casino machines and management systems, as well as digital games. However, the company also provides online gambling games and a range of standard games for PC, Mac, online and mobile devices.
In its H1 report Aristocrat declared a revenue increase of 7% against the previous corresponding period, but a decrease in underlying profit of 12.8%. This was due to the impact on what the company calls ‘land-based’ profits from the pandemic in late February through to the end of March.
This ASX share is in a very strong cash position with $1.8 billion in cash and equivalents on hand. Furthermore, it took a range of measure to ensure financial strength. These included a $100 million reduction in operating costs, and suspension of the interim dividend.
At present, Aristocrat is trading at a price-to-earnings (P/E) ratio of 9.88. This is less than half of the company’s 10 year average P/E of 23.7. Moreover, the company’s 10 year average return on equity (ROE) stands at 28.6%. I think this is a very good metric. It shows that the company buys the right assets and is very effective at using them to generate profits.
I think both of these companies are worth looking at a lot more closely. In particular, ahead of earnings season which starts in August. I believe Jumbo Interactive is likely to surprise investors and has been very resilient throughout this pandemic. Part of my reasoning for this is that the company did not try to raise capital through a placement or additional debt in any way.
Aristocrat, on the other hand, is a bit of a different story. I believe it is also likely to positively surprise investors at the end of the company’s financial year. However, it will still be down overall even though casinos are starting to open up again globally. The opportunity here is over the medium term as things begin to normalise further. I believe Aristocrat is one of the great value investing ASX shares right now.
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Daryl Mather 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.