How Tabcorp (TAH) just sent Jumbo (JIN) shares down 11%

Companies and indices mentioned:

Tabcorp (ASX: TAH) shares are up 2% and Jumbo (ASX: JIN) shares are down 11% after some changes were announced.

What is Jumbo?

Jumbo is an Australian lottery business with its history going back to 2000. The company operates the Ozlotteries website. Jumbo is different to conventional lotteries businesses because tickets are sold online or via a smartphone app. More than three-quarters of customer interactions are completed via mobile devices.

The changes announcement

The two gambling businesses have signed a binding term sheet to amend and extend the existing commercial reseller agreements.

Jumbo can sell Tabcorp lottery products in NSW, ACT, Victoria, Tasmania, SA and NT for a 10 year term until July 2030. This is approximately a 7-year extension from the current expiry.

There is a fixed extension fee of $15 million payable by Jumbo to Tabcorp when the new deal starts.

A service fee is payable by Jumbo to Tabcorp of 4.65% of the ticket subscription price. It starts at 1.5% in FY21, then rises to 2.5% in FY22, 3.5% in FY23 and 4.65% after that. For FY21 to FY23, if the value of subscriptions is more than $400 million for each financial year then Jumbo will pay a service fee of 4.65% for the amount above $400 million.

However, if long form agreements aren’t entered into in 60 days then the term of the reseller agreement reduces from 10 years to an expiration date of 1 May 2023, with a partial refund of $13.5 million of the upfront extension fee and a partially reduced service fee.

FY20 guidance

Jumbo has reaffirmed its FY20 guidance. Sales on a like for like basis have been stronger than expected as players have turned to the online channel because of COVID-19.

As a refresher, Jumbo is now expecting the following: the number of large jackpots is expected to be 39, total transaction value (TTV) will be in a range of $335 million to $341 million, revenue is expected to be in the range of $68.5 million to $69.9 million, EBITDA (click here to learn what EBITDA means) is expected to be between $38.7 million to $40 million and net profit is expected to be between $24.4 million to $25.3 million.

A rising fee is clearly not great news for Jumbo, but it’s better to keep the relationship. Considering the Jumbo share price has fallen from $27 to today’s $10.40 then it could be a decent long term buy today. But it’s not the type of share I’d buy for my own portfolio.

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Disclosure: At the time of writing, Jaz doesn’t own shares in any of the businesses mentioned. 

Jaz Harrison

Jaz Harrison

Jaz is a keen investor who loves to thoroughly poke holes in an investment idea before it has a chance of making it into her portfolio. Jaz invests for the long-term and doesn't sweat the small stuff. She strongly believes that empowering people with knowledge is the best way for them to take charge of their finances, which is exactly the approach she takes with her own money and investments.