On Thursday, Goldman Sachs initiated coverage on The Lottery Corporation (TLC:AU) stock with a Neutral rating and a price target of AUD5.60.
The firm highlighted TLC's position as the exclusive operator of lotteries and Keno across Australia, noting the historically defensive nature of lottery expenditure, which has grown at a compound annual growth rate (CAGR) of +4% over 25 years.
The Lottery Corporation's revenue is expected to accelerate into the 2024 fiscal year, with Goldman Sachs estimating increases of 12% and 14%. However, this growth is anticipated to present a challenging comparison for the 2025 fiscal year, which may see a return to more normalized jackpot sequencing, barring any active prize management.
Despite these short-term expectations, the firm maintains a positive view of TLC's long-term prospects, supported by factors such as population growth, game changes, and price adjustments.
The transition from retail to digital channels is another point of interest for TLC, as this move is likely to enhance profit margins over time. This shift has been slower than the pace observed during the Covid period. The firm also noted TLC's significant generation of free cash flow and its low leverage, which is at the bottom end of its target range of 3.0-4.0x.
Goldman Sachs also pointed out the attention drawn to TLC's balance sheet regarding capital management, particularly in light of the potential for an early renewal of its Victorian lotteries license, currently set for 2028. The firm suggests that TLC may be maintaining financial flexibility in anticipation of this event.
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