Jumbo Interactive (JIN) suffered its worst sell-off in six months as its trading update showed that the turnaround of the company will take longer than some were expecting.
Shares in the online lottery reseller tumbled 7.6% to $2.32 after management forecasted revenue of $11 million to $12 million and net profit of between $1.3 million to $1.6 million.
While sales is roughly around consensus estimates, the bottom line guidance is disappointing as Jumbo will need a close to 170% uplift in second half profit over the first half to meet the $4.3 million that analysts were expecting.
Jumbo’s expansion into Germany is expected to start making a revenue contribution and that should bolster its second half result, but even then, Germany is unlikely to lead to such a massive increase in profit and margin.
In fact, Jumbo’s margins are being squeezed more than analysts were predicting. The consensus figures point to a 2013-14 adjusted net profit margin of 16.4%, but the company’s interim guidance indicates a margin of a little over 3%.
Germany is unlikely to add much to margins and may even detract as new businesses require capital and need time to ramp up to their full potential.
It seems many have overestimated Jumbo, which had been under pressure since Tatts Group (TTS) developed its own online strategy that will see Tatts turn from a partner to a rival.
The move by Tatts made overseas expansion an imperative for Jumbo as it highlighted the risk that lottery companies could be tempted to cut out the middleman in the attractive online space.
By striking partnerships with several lottery providers, Jumbo can mitigate the risk better, although it cannot totally remove it.
Given the risk, some would question if Jumbo deserves to be trading at a price-earnings premium to the market. Even after today’s fall, the stock is on a 2014-15 consensus P/E of 23 times.
Jumbo is part of the Uncapped 100.