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Date : 19/01/2023

Lottery Corporation

ASX :

TLC

Market Cap : $10.68 Billion

Buy

52 Week Range : $4.81 - $4.87

Share Price : $4.83

A counter-cyclical stock that is also a monopoly. A 'Buy' from us.

Company Analysis

The Lottery Corporation (ASX: TLC) is Australia’s leading lottery and Keno games company. TLC was spun out of Tabcorp in May 2022 and instantly became an ASX-200 company with an $11bn market capitalisation. It sells lottery tickets for the chance of winning weekly cash prizes. The more people that buy the tickets, the more money TLC generates. The Lottery Corporation’s business is as simple as that.

The company has reported its total active customers’ number at 8.3 million, an equivalent of 46% of the Australian adult population. It had more than 7,200 retail points of distribution as of 30 June 2022, with over 660 million lottery entries sold in FY22.

The Lottery Corporation maintains exclusive and long-dated licenses to operate its lottery business in all Australian states and territories excluding Western Australia, giving it a lucrative economic moat. And it has approvals to conduct Keno in the ACT, NSW, Victoria, Queensland, and South Australia, as well as online.

The Lottery Corporation’s business is defensive and growing

The lottery business has for decades performed well through recessions, and the prospect of inflation hitting discretionary spending – including gambling – has not been a problem. Looking back in history, TLC has proven to drive sustainable revenue growth, even during downturns such as through the GFC and other challenging economic cycles through COVID. With a mild recession in 2023 now being widely expected, the defensive nature of TLC’s business adds to the stock’s attractiveness.

Having an already established physical presence in most parts of Australia through more than 7,200 retail points, TLC is now focused on growing sales by expanding its digital avenues to sell lottery tickets. This will make participation in lotteries easier and potentially grow sales, in our view.

How to play The Lottery Corporation’s stock?

TLC has announced its intention to pay an interim dividend for its 7 months of earnings since its demerger from Tabcorp to 31 December 2022. But the amount of the dividend is unknown.

TLC is covered by 15 analysts, and their consensus estimate is flat earnings of 16 cents per share for FY23, followed by moderate but steady earnings growth in the following years. This gives TLC an expected earnings yield of 3.3%, which is equivalent to the maximum dividend yield the company can offer.

With Australia’s cash rate currently standing at 3.1%, TLC’s FY23 expected earnings yield of 3.3% does not particularly look attractive. But if we consider the long-term prospects of the company as a defensive business with long-term growth potentials and a strong moat, the current valuation of the stock will be completely justified.

Having said that, we believe the weak market expected in 2023 is likely to provide chances for buying the stock at more attractive prices. As such, we recommend keeping TLC on your watchlist in case the stock price approaches the $4.00 range once more (the green line on the chart), likely to happen in the next 6 months, as the interest rates are expected to increase further during this period. We think TLC can be a low-risk, long-term investment case for investors who are interested in receiving regular dividend payouts while preserving their initial capital.

 

The Lottery Corporation, Daily Chart in Semi-log Scale (Source: Metastock)

Our earlier coverage can be viewed by clicking here.

 

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