Why I'd be willing to bet on this ASX 200 share

This business is growing in a number of compelling ways.

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Lottery Corporation Ltd (ASX: TLC) shares have dropped 12% since 8 August 2023. The S&P/ASX 200 Index (ASX: XJO) share is growing its business in a few different ways – I'd be willing to bet on it.

It's the business that operates a number of Australia's lotteries including Powerball, Oz Lotto and Set for Life, as well as Keno.

There are a number of reasons why I like the ASX 200 share, which I'm going to tell you about.

Customer and revenue growth

Based on purchasing tickets in the prior 12 months, FY23 saw the business report it had 9.7 million total active lottery customers, including 4.2 million registered customers. It saw an increase of active customers of 132,000. The company put this down to digital and marketing innovation.

More potential customers is a good thing for the business and can help grow the company's turnover. FY23 saw group turnover rise by 1.3%.

Total revenue went up by 7.2% to $3.5 billion, while comparable revenue increased by 0.2%, which excludes the impact of the demerger of Tabcorp Holdings Ltd (ASX: TAH).

The business implemented a price rise in FY23, which also helped revenue growth.

Potential for growing profit margins

In FY23, the ASX 200 share delivered underlying earnings before interest and tax (EBIT) growth of 12.3%, or 3.5% growth on a comparable basis. This was faster than revenue growth.

The business seems very scalable to me. As it becomes larger, it can grow its profit margins.

I think there's potential for the business to grow its margins as more of the sales are done through the digital channel. At the same time, it increased its maximum commission rates for eligible lotteries retailers from 10.3% to 12.3% and adjustments were also made to its omnichannel commission structure. This can help the long-term sustainability of the lottery ecosystem.

If profit keeps growing faster than revenue, then this could be appealing to investors.

Defensive earnings?

In leaner economic times, the ASX 200 share may well see demand for lottery tickets remain resilient, or even grow.

A Sydney University article once said this about gambling and its effects:

In times of economic recession, gambling, particularly on lotteries, usually stays strong. Gambling during recession times is typically highest amongst those who are experiencing the greatest financial hardship as it represents a potential way out.

While it's not guaranteed that Lottery Corporation would see higher demand, historical research shows that lotteries may be resistant to recession.

Projections on Commsec suggest that the business could generate earnings per share (EPS) of 17.4 cents, which would put the business on a forward price/earnings (P/E) ratio of 27 times.

The suggestion is also that it could pay an annual dividend per share of 16.8 cents, which would be a year-over-year increase of 12%. The forecast payout would be a grossed-up dividend yield of 5.1%.

In an uncertain time, I think Lottery Corporation shares could offer defensive earnings and returns.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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