Lotto24 AG (DE:LO24n) 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 capitalizing 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.
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