The Lottery Corporation Ltd (ASX: TLC) share price isn't off to a good start since its spin-off, but this might be an opportunity as it's the newest buy idea from Morgans.
The broker calls Lottery Corporation "one of the highest performing lotteries businesses in the world" when it initiated coverage with an add recommendation.
This didn't save the Lottery Corporation share price from falling just over 3% to $4.40 during lunchtime trade. The drop takes its loss over the week to 8.5%.
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Lottery Corporation share price's poor start to the ASX
This isn't an auspicious beginning for the group after it split from Tabcorp Holdings Limited (ASX: TAH).
But there are a lot of things to like about the newly minted shares. Some of the things Morgans likes about Lottery Corporation include long-dated and exclusive licenses to operate lotteries across Australia – apart from WA.
Morgans commented:
Lottery ticket sales are resilient to economic cyclicality, cash flows are steady and predictable, and there is a low ongoing need for capex.
These characteristics mean we expect TLC to be able to deliver a fully franked dividend at a high payout ratio, while still paying down debt steadily.
Desirable defensive qualities
The broker likened the Lottery Corporation share price to that of an infrastructure asset. During these volatile times, defensive cash flows should be highly prized.
Further, there are no major license renewals facing the group until 2028 in Victoria. Its license to sell Keno has an average 29-year expiry.
Another source of strength is the group's large distribution networks. The lottery tickets are sold by 4,000 retailers as well as online either directly or through Jumbo Interactive Ltd (ASX: JIN).
What is the Lottery Corporation share price worth?
Morgans is tipping robust earnings growth for the Lottery Corporation share price. The broker said:
We forecast TLC to deliver 15% growth in EBITDA to $702m in FY22. With growth expected in both the Lotteries and Keno divisions, we forecast EBITDA to reach $765m in FY25, implying a FY19-25F EBITDA CAGR of 7%.
We model a lesser rate of EBITDA growth (+4%) in FY23 as the number of large jackpots is expected to normalise after an unusually prolific FY22.
The broker's 12-month price target on the Lottery Corporation share price is $5.40 a share. This implies a 23% upside before the 16 cents a share forecast dividend is paid.
The child looking better than the parent
On the flip side, Morgans is less enamoured by the parent. It thinks the lotteries and Keno businesses were the jewel in the crown of the Tabcorp share price.
Morgans holds a cautious view on the wagering and gaming divisions that remain with Tabcorp. This prompted it to downgrade its recommendation on the Tabcorp share price to hold from add with a target price of $0.95 a share.
