Australians sure do like a flutter, and the $12.8 billion market value of Lottery Corporation Ltd (ASX: TLC) certainly bears this out.
The company runs the major national lottery draws, including Powerball, OZ Lotto, and X Lotto on Saturday, and in November, it's about to increase prices for Powerball.
So how will this affect earnings at the company?
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Powerball changes a winner
The analysts at E&P Capital have run the numbers on the Powerball price increase and say the increase "is expected to yield positive results''.
They've factored in some drop off in players as a result of the price increases, but say the company will still come out ahead.
We estimate that at the 50th percentile outcome, total Powerball sales would theoretically increase by +14.3% to +27.4% if Powerball were to retain The Lottery Corporation's 50% to 75% price increase retention target. The reason for this is not just due to the increase in the subscription price ($1.20 to $1.40), but also due to the ability to accelerate the jackpot sequence more.
Another positive for the company, and one which its management called out at the recent annual general meeting, is a potential crackdown at the federal level on so-called "foreign-matched lotteries", which sell tickets in Australia for overseas lotteries.
Those "tickets" are not actually tickets in the lotteries, but are effectively a right to any winnings from the numbers selected, with the company offering the product purchasing and holding the tickets in the overseas jurisdiction.
With regards to the Powerball price increase, the main change will be an increase in the subscription price from $1.20 to $1.40, the E&P Capital analysts write in a note to their clients.
This will result in Powerball having a higher price than Oz Lotto. Conceptually this makes more sense as Powerball is the game that more frequently has large jackpots. The other change is a reallocation of the prizes amongst the divisions. The new distribution takes away some of the allocation towards Division One and redistributes it amongst the remaining divisions. We view this as less material than the price increase.
The E&P Capital team said the underlying game math was not changed, meaning the odds of winning each division had not changed.
Impact on earnings
And while the Powerball price change had led the analysts to marginally increase their medium and long-term forecasts for Powerball, they had downgraded the company's first-half lottery retail projections based on a weaker jackpot sequence.
The E&P Capital analysts have marginally decreased their expected EBITDA forecasts for Lottery Corporation by a slender 1.2% this financial year, then increasing by 0.6% for the following two years.
With a price target of $5.53 on the stock, compared with the current price of $5.74, they're suggesting the company is a little overbought at current levels.
The company's current dividend yield is 2.87% according to data source from the ASX.
