Is a mega jackpot worth it? For Lottery Corp, definitely

Balancing the excitement of a large payout against a normal Powerball sequence is a ‘delicate art and science’, JP Morgan brokers told their clients.

In the last financial year, there were 29 jackpots of between $15m and $49m, and 15 above $50m. Picture: David Swift

How much attention does a larger lottery jackpot attract? That’s the question posed by JP Morgan analysts Don Carducci and Michael James in a client note in which the pair note their enthusiasm for ASX-listed The Lottery Corporation and its strategy of ramping up jackpots.

The average jackpot size has increased 22 per cent from where it was at this time last year, with almost 50 per cent of jackpots now at or above $15m, the investment bank estimates.

In the last financial year, there were 29 jackpots of between $15m and $49m, and 15 above $50m. And that trend does not appear to be reversing, with a jackpot of $50m a fortnight ago, $100m last week, and this week’s record $160m. But, Mr Carducci and Mr James write, it is a “delicate art and science” balancing the excitement of a jackpot against a normal Powerball sequence.

“We believe the investment has paid off and $160m is the effective lever offsetting a weaker jackpot sequence thus far in (the first half of the new financial year); driving $500m of turnover into this Thursday,” their note, sent on Monday, reads.

A September 2019 Powerball draw of $100m generated $120m in turnover, while the following week’s $150m generated $200m.

“Assuming a similar rate of turnover to draw size, (The Lottery Corporation) will generate at least $500m across then $100m and $160m Powerball,” they write.

The Lottery Corporation shares rose 1.7 per cent, or 7c, on Tuesday morning. They trade at around $4.25, having slid since the company was spun out of Tabcorp earlier this year. JP Morgan has an overweight recommendation on the company, and a target price of $4.95 per share.

Other brokers disagree. In a note earlier this month, Goldman Sachs analysts Darshana Nair Syama, Lisa Deng, James Leigh and Jak Carty recommended clients sell The Lottery Corporation shares. The company is the exclusive lottery operator in all states outside of Western Australia, and sells lotteries products at about 3857 outlets.

“While the stock currently trades in line with defensive infrastructure names, we view volatility from Jackpot games as being underappreciated and that markets are already pricing in significant growth, suggesting downside earnings risk,” the Goldman Sachs analysts wrote.

“We estimate lotteries per capita spend is $335 pa per adult population (pre-Covid), implying a significantly higher number if adjusted for the active adult population in this game category.

“We therefore believe that there is limited growth opportunity from a per capita spend or penetration perspective in Australia, implying that revenue growth is limited to inflationary growth or through an adjacency for (The Lottery Corporation).”

The Lottery Corporation posting a record result for the 12 months to June 30, with comparable revenue rising 9.4 per cent to $3.5bn and comparable earnings up 11.9 per cent at $694m.

Growth from selling lottery tickets online via digital channels drove further profit margin improvement, with the digital share of overall sales rising to 37.7 per cent, compared to 32.8 per cent a year ago.