Lottery Corp’s (ASX.TLC) fiscal 2026 underlying EBITDA was $736 million, about 2% lower than last year on a below-average run of jackpots. The company estimates turnover was about $700 million worse than a normal run of jackpots would produce.

Why it matters: EBITDA was about 1% lower than our prior forecast. While last year was a weak year for jackpots, this year was worse. The company estimates this below-average sequencing was a 1-in-45-year outcome.

  • Despite a slow start, we expect the rest of fiscal 2027 to be a normalized year for jackpots, boosted by a full year of the Powerball price hike and the 17% price increase for Set for Life flagged for September. We forecast fiscal 2027 EBITDA of $828 million, a 12% increase on this year.
  • With a ban looming, we had already excluded online Keno in our earnings forecasts. But margins for online are much stronger than expected, meaning the remaining Keno business is lower margin. Adjusting for this, our fiscal 2027 and 2028 EBTIDA forecasts are trimmed by 1% and 2%, respectively.

The bottom line: Shares in wide-moat Lottery Corp trade close to our unchanged $5.40 fair value estimate. Jackpots can be volatile and fluctuate across the year. We expect them to normalize over the long run, underpinning Lottery Corp’s valuation.

  • We expect 13% lottery turnover growth next year, assuming average jackpot sequencing, and a full year of normalized jackpots in fiscal 2028. Longer term, we view lottery turnover as a function of population growth and inflation, underpinning average annual turnover growth of 3%-4%.

Between the lines: The Australian government’s new gambling reforms are set to effectively ban online Keno from January 2027 and vaporize these earnings.

  • Keno is primarily an in-venue product, with online about 10% of segment turnover. But the company noted online was about 23% of segment EBITDA, indicating significantly stronger margins than in-venue. Online Keno was about 3% of consolidated EBITDA this year.

Lottery Corp’s long-dated licenses underpin its Wide Moat

The Lottery Corporation should continue to dominate lotteries in Australia. Regulation limits competition through compulsory licensing, thereby bestowing on Lottery Corp a near-monopoly over long-dated licenses in all Australian states and territories except Western Australia. No significant licenses are set to expire before 2050. Competition at license renewal is likely, and we anticipate a good chance that exclusivity may not be retained. But this risk is immaterial to our fair value estimate. We do not expect any significant regulatory changes, given the government and community’s dependence on Lottery Corp’s revenue.

Lottery Corp has a few digital-only competitors with an estimated combined market share of less than 5%. None of the digital competitors has the same brand strength as Lottery Corp, with its 50-year history, physical retailers, range of games, and televised lottery draws all contributing to its brand equity. We think a lack of brand recognition will prevent digital competitors from gaining sufficient market share, given their relative obscurity.

We view the digitization of lottery products as an opportunity for Lottery Corp, which already conducts more than 40% of its lottery sales online. We think the lower commission margin paid on online sales more than offsets the impact from the closure of retail outlets such as newsagents. Lottery Corp pays sales commissions to digital retailer Jumbo Interactive, and Jumbo pays an upfront license fee and a percentage of sales in service fees. We think Lottery Corp has the power in this relationship to renegotiate commissions lower as the dollar amount grows. The retail franchises operate under a similar agreement but command a higher margin.

Bulls Say

  • Lottery Corp’s earnings are defensive, with historical performance indicating resilience during economic recessions, resulting in a stable earnings profile.
  • With state-based lottery licenses in all Australian states except Western Australia, Lottery Corp enjoys a near-monopoly position in Australian lotteries.
  • Greater digital sales improve Lottery Corp’s operating margins while offsetting the impact of a decline in newsstand retailers.

Bears Say

  • With already two-thirds of lottery revenue collected by state governments through taxes, fees, and contributions, increased taxes would weigh on Lottery Corp’s earnings.
  • Regulatory risks and the introduction of onerous gambling-harm minimization measures would increase costs and potentially reduce the popularity of Lottery Corp’s products.
  • The value of the franchisee retailer sales model is waning as sales become digital, leading to fewer retail outlets—a significant source of Lottery Corp’s branding and advertising.

Subscribe to get Morningstar insights in your inbox