The Lotteries Corp (TLC) released their maiden first-half result, the first since the separation from wagering. The result was ahead of our expectations quite high expectations for this very high-quality business.

Key Points:

  • Profit Surprisingly strong: First half profit +17% to $360 million compared with the same segment in 2022.   Keno roared back as expected with the reopening of pubs and clubs that saw retail turnover up 50%. However, the highlight was Lotteries. Like the market, we were expecting Lotteries profits to be flat at best as they were cycling some tough comps benefiting from digital growth during CV-19. Instead, profits were up +11%, setting another record as added another 221K active digital customers in the past 6 months, benefiting from jackpot sequencing of the $160 million Power Ball and $33 million Lucy Lotteries and changing the game to encourage small winners to reinvest in future games.
  • Dividends:  Maiden 8-cent dividend plus a 1-cent special, both fully franked = 86% payout. Unlike most businesses, TLC has minimal ongoing capex.
  • Guidance: No guidance per se, but 2023 has started well for TLC with the levelling of the tax playing field, giving the company a tailwind for earnings. Historically, the wagering market has been resilient during periods of economic uncertainty. Something that is not a positive aspect of Australian society.

The Lottery Corp is held in several of the HNW portfolios and is Australia’s most stable gaming company and holds the monopoly licence to run lotteries in all Australian states except for WA. TLC’s lotteries business with long-duration licences (average expiry 2042) gives investors stable and defensive earnings, which would be very attractive as a potential takeover target. Increasing digital penetration of lotteries and keno played on smartphones increases TLC’s profit margin as the revenue leakage to newsagents, and clubs is reduced. Additionally, the high % of government taxes creates an incentive for the state to prevent competition.

The Portfolio’s move to favour the more “boring” and mechanical end of the gambling industry instead of casinos looks to be a good move today, with Star City down -65% in the last six months after reporting a $1.26 billion loss today and a deeply discounted $800M equity issue to pay off banks and regulatory fines. The Lottery Corp has a simple and transparent business model, which effectively guarantees a profit margin on each dollar invested in a lottery ticket.

TLC finished up +5%  to finish at $5.09