Company Reports

Fiscal-year 2024 was a bumper year for wide-moat Lottery Corp. Sales beat our expectations, led by outsized 15% growth in the core lottery segment. Oz Lotto and Powerball tickets, which surged in the second half on favorable jackpot sequences, more than offset modest sales declines across most base games. Higher commissions and higher margin digital sales underpinned operating margin expansion in lotteries. Underlying EPS jumped roughly 20% to AUD 18 cents per share, compared with our AUD 16 cents per share forecast.

We expect The Lottery Corp to thrive now that it is unshackled from Tabcorp's competitively challenged wagering business. Regulation limits competition via compulsory licensing, bestowing Lottery Corp with a near-monopoly on long-dated licences in all Australian states and territories except Western Australia. The only significant licence due to expire before 2050 is for the Victorian lottery, which expires in 2028. We think competition for the Victorian licence on renewal is likely and anticipate a good chance Victoria would grant a second lottery licence, but the risk is immaterial to our fair value estimate. We do not expect any significant changes in regulation due to the government and community's dependence on The Lottery Corp revenue.

Fiscal-year 2024 has been a rollercoaster for lottery volumes. Wide-moat Lottery Corp’s core jackpot games—Powerball, Saturday Lotto, and Oz Lotto—together accounting for around three quarters of turnover, had a very slow start to the year, with an unfavorable jackpot sequence failing to stoke demand for tickets. But this changed dramatically as we approached the end of calendar 2023, with a AUD 100 million Oz Lotto jackpot in December 2023 followed by a record AUD 200 million Powerball in February 2024. Since then, volumes have kept up, with another AUD 150 million jackpot in May 2024 rounding out the fiscal year.

Households are clearly under budget pressure and cutting back on lottery tickets, which is typically a resilient product for wide-moat Lottery Corp. An unfavorable sequence of Powerball jackpots didn’t help, and both revenue and underlying EBITDA from the core lottery segment, which accounts for around 86% of earnings, fell 2% on the previous corresponding period, or PCP. Partially offsetting was the AUD 90 million Oz Lotto draw toward the end of the half, with the game finally generating the larger jackpots expected since the May 2022 redesign. But Lottery Corp’s fortunes changed in the early weeks of the second half. The record AUD 200 million Powerball lottery, drawn on Feb. 1, 2024, has improved volumes dramatically—particularly against a soft PCP. Despite the soft start to fiscal 2024, we raise our group revenue forecast by 5% to AUD 3.8 billion, which lifts fiscal 2024 forecast earnings per share by 6% to AUD 0.16. Revenue and earnings forecasts from fiscal 2025 remain broadly intact. Shares trade at a modest premium to our unchanged AUD 5.00 per share fair value estimate.

We expect The Lottery Corp to thrive now that it is unshackled from Tabcorp's competitively challenged wagering business. Regulation limits competition via compulsory licensing, bestowing The Lottery Corp with a near-monopoly on long-dated licences in all Australian states and territories except Western Australia. The only significant licence due to expire before 2050 is for the Victorian lottery, which expires in 2028. We think competition for the Victorian licence on renewal is likely and anticipate a good chance Victoria would grant a second lottery licence, but the risk is immaterial to our fair value estimate. We do not expect any significant changes in regulation due to the government and community's dependence on The Lottery Corp revenue.

Wide-moat Lottery Corp’s lottery volumes are looking soft in the first half of fiscal 2024. We estimate the combined prize pool of Lottery Corp’s three largest lotteries—Powerball, Saturday Lotto, and Oz Lotto—which account for around 75% of lottery segment revenue, is 7% below the previous corresponding period. The biggest drag is from Oz Lotto, down almost 20%. And Powerball is cycling a strong PCP due to the record AUD 160 million jackpot in October 2022.

We expect The Lottery Corp to thrive now that it is unshackled from Tabcorp's competitively challenged wagering business. Regulation limits competition via compulsory licensing, bestowing The Lottery Corp with a near-monopoly on long-dated licences in all Australian states and territories except Western Australia. The only significant licence due to expire before 2050 is for the Victorian lottery, which expires in 2028. We think competition for the Victorian licence on renewal is likely and anticipate a good chance Victoria would grant a second lottery licence, but the risk is immaterial to our fair value estimate. We do not expect any significant changes in regulation due to the government and community's dependence on The Lottery Corp revenue.

We raise our fair value estimate for shares in wide-moat Lottery Corp to AUD 4.40, from AUD 4.20 previously. The upgrade is principally due to an increase to our operating earnings forecasts, lifting our fiscal 2023 EBIT forecast by 5% to AUD 601 million, and fiscal 2024 EBIT by 4% to AUD 632 million amid strong jackpot game performance. As a beneficiary of COVID-19 lockdowns, Lottery Corp enjoyed a 20% increase in revenue in the two years prior to fiscal 2022. Most lottery retailers were deemed essential services and remained open during periods of lockdowns and restrictions, allowing consumers straightforward access to digital lottery sales as a substitute for other forms of in-person gambling such as electronic gaming machines, sports betting, or casino games. Lottery Corp pays lower sales commissions from digital sales, with the channel mix-shift to online propping up profit margins.