Lotto24 — A leader in the online lottery market

Lotto24 — A leader in the online lottery market

Lotto24 extended its market leadership in 2016, with market share up from 26% to 31%. This demonstrates its core USPs: first mover advantage in the German online lottery market, management experience and marketing know-how. Despite a weak Q3, top-line growth remains strong (FY17 guidance of 10-15% billings growth). After heavy investment in technology and marketing, the business should reach FY17 EBIT break-even, with future profitability flexed according to jackpot opportunities. The stock has performed well but, in our view, there is plenty of upside, as online lottery continues to take a bigger slice of the overall German lottery market.

Katherine Thompson

Written by

Katherine Thompson

Director

Lotto24

A leader in the online lottery market

Consumer

QuickView

23 November 2017

Price

€10.46

Market cap

€253m

Share price graph

Share details

Code

LO24

Shares in issue

24.2m

Net cash (€) as Q317

€6.6m

Business description

Lotto24 is Germany’s market leader in the online market of state-licensed lotteries. It receives commissions when customers enter lotteries such as Lotto 6aus49 and does not bear any bookmaking risk. It was founded by Tipp24 (now Zeal Network) in 2010 and spun off and listed in 2012.

Bull

Strong organic growth, with 1.5 million registered customers.

Online lottery market is nascent compared to other digital markets, with scope for significant further penetration.

Scalable technology for online and mobile, with no associated jackpot risk.

Bear

The company is still in start-up phase, with EBIT break-even expected in FY17. Future jackpot opportunities may lead to higher marketing spend and negative EBIT in the near term.

Competitive markets, with 16 federal state lotteries and secondary lotteries.

Ongoing regulatory restrictions and uncertainties.

Analysts

Victoria Pease

+44 (0)20 3077 5740

Katherine Thompson

+44 (0)20 3077 5730

Lotto24 extended its market leadership in 2016, with market share up from 26% to 31%. This demonstrates its core USPs: first mover advantage in the German online lottery market, management experience and marketing know-how. Despite a weak Q3, top-line growth remains strong (FY17 guidance of 10-15% billings growth). After heavy investment in technology and marketing, the business should reach FY17 EBIT break-even, with future profitability flexed according to jackpot opportunities. The stock has performed well but, in our view, there is plenty of upside, as online lottery continues to take a bigger slice of the overall German lottery market.

Online lottery still only 9% of market

The overall German lottery market is estimated to be worth €7.3bn, with modest growth forecast to 2019 (source: GBGC). The online segment was closed between 2009 and 2012, when new licences were awarded (advertising permitted from 2013). Online is growing rapidly, up 25% in 2016 to €650m (source: Deutscher Lottoverband). However, this was still only 9% penetration in 2016 (2015: 7%) and compares to c 51% in Slovakia, c 40% in Finland and c 18% in Norway and UK (Source: GBGC), suggesting plenty of scope for continued strong market growth. Mobile is an important driver, allowing lottery ticket purchases anywhere, any time.

Lowered guidance after exceptionally weak Q3

Following an exceptionally weak jackpot trend in Q317, the company has lowered FY17 guidance to 10-15% increase in billings (from 15-20%). For the first nine months of 2017, billings increased 16% to €164.6m with registered customers increasing by 28% to 1.5m. Revenues grew 20% to €18.8m. The 16 federal state lotteries still account for c 65% of the market, but Lotto24’s 2016 market share gain (to 31%) suggests that it is successfully capitalising on its first mover advantage. It is materially bigger than all the other private providers combined. This is important since once they have signed up, lottery customers are generally very loyal.

EBIT break-even expected for FY17

Lotto24 has an attractive, scalable business model with no bookmaking risk and long-term contracts with all 16 lottery operators. Investment in marketing and IT means that it has been loss-making until this year. Marketing costs are flexed according to the prevailing jackpot trend and, despite lowered billings guidance, the company still expects to achieve EBIT breakeven in FY17. Market consensus is for FY17 PBT breakeven, rising to €3m in 2018. Future profitability is likely to be affected by higher spend on jackpot opportunities.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

22.8

(4.21)

(0.01)

0.0

N/A

N/A

12/17e

26.6

0.18

0.05

0.0

N/A

N/A

12/18e

32.0

3.15

0.12

0.0

87.2

N/A

12/19e

37.1

6.33

0.23

0.0

45.5

N/A

Source: Bloomberg

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US

Sydney +61 (0)2 8249 8342

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investments Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2014]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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