I have built a portfolio of ASX shares to allow me to focus on three activities. The first activity builds wealth through investing in growth companies or undervalued companies. This is ongoing and active with a time horizon of 3 years or more.
The second part of my investing is to look for short-term market opportunities. Things like takeovers, occasional government bonds, or high yield dividend payments. This has a very near-term horizon, generally within months. Third, I use the proceeds from these two areas to buy undervalued companies that pay a solid, stable dividend. This is very long-term and I work to achieve a specific amount per year.
This week, I intend to invest in an undervalued ASX share that I believe will see good growth over the next 2–3 years at least. And if it goes well, I will let it run further.
An undervalued ASX share
Jumbo Interactive Ltd (ASX: JIN) was one of the best performing ASX shares of the past decade, and I believe it is likely to be one of the great shares of this decade. In fact, the coronavirus lockdown proved the resilience of the company's business model. Jumbo sells lottery tickets online under license from Tabcorp Holdings Limited (ASX: TAH). Despite fewer large jackpots, the company was able to increase top line revenue by 9% and earnings before interest, taxes, depreciation and amortisation (EDITDA) by 8%. This is because of higher online sales for a number of reasons.
However, despite all of these big improvements, net profit after tax remained steady at $26.5 million. The reason for this was a ~$2 million increase in depreciation and amortisation. This is an accounting transaction and the money has not left the company.
Strong growth strategy
The company's strategy continues to deliver results. During the lockdown, it renegotiated an extension to its deal with Tabcorp, from 2022 to 2030. This had held me back in the past, 2 years is not enough of a ramp for the company to create additional revenue streams. Additionally, this ASX share is in negotiations with Lotterywest in Western Australia, and has been able to grow its charity lottery business.
The charity business and its recent acquisition in the UK are very interesting to me. Charities in Australia and the UK are authorised to run lotteries for funding purposes. In Fy20, the company signed up four charities to its platform. Thus enabling them to sell tickets on the platform. Furthermore, Jumbo purchased a company called Gatherwell in the UK. This is the largest external reseller of lottery tickets for schools and local councils.
Foolish Takeaway
Within Australia, 28% of lottery sales are online, globally it is closer to 10%. Moreover, just the charity lottery sales alone are worth $26 billion. The combination of the size of the addressable market, company platform and the movement of consumers online, makes this a very interesting ASX share for me.
I think it is undervalued based on its current share price. Moreover, it clearly has a lot of growth ahead of it and is diversifying revenue streams to target the full addressable market. Therefore, this share is a 'buy' for me right now.
