Should Investors Buy These 3 Consumer Discretionary Stocks- JIN, GEM, BDA

Stocks’ Details

Jumbo Interactive Limited

Multiple Sclerosis Queensland Software Licence Agreement: Jumbo Interactive Limited (ASX: JIN) is engaged in the retail of lottery tickets through the internet and mobile devices sold both in Australia and eligible overseas jurisdictions. As on 03 June 2020, the market capitalization of the company stood at ~$745.96 million. The company has entered a new SaaS licence agreement for 5 years with MS Queensland. Under the agreement, MS Queensland will utilize a personalized version of the company’s lottery platform to manage its entire lottery sales.

Strong Half Year Results: During 1H20, the company witnessed a substantial increase in active customers to ~848k and reported a YOY increase of 25.3% in TTV to $185.3 million. In the same time span, revenue of the company went up to $37.6 million and net profit was up by 14% to $14.4 million.


1H20 Financial Highlights (Source: Company Reports)

Impact of COVID-19: With the onset of the COVID-19, the company has implemented measures to ensure ample capacity for online lottery ticket sales, resulting in relatively minor interruptions. JIN currently has four contracts with a potential ticket sales volume of ~$140 million and estimated incremental TTV and revenue on the full roll-out of contracts amounting to ~$4.6 million. However, no material contributions from these contracts is expected in FY2020.
Guidance: The company has provided guidance for FY20, wherein it expects TTV in the range of $335 to $341 million and revenue between $68.5 to $69.9 million. The company also expects EBITDA between $38.7 to $40.0 million and NPAT in the range of $24.4 to $25.3 million.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company has a healthy financial position with no debt and surplus cash of $65.5 million. As per ASX, the stock of JIN gave a negative return of 20.17% on the YTD basis. The stock is currently trading close to its 52-weeks’ low level of $6.99. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and have arrived at a downside of low single-digit (in percentage terms). Considering the softer market conditions, decent half-year performance, volatility in returns, and current trading levels, we suggest investors to keep an eye on the business activities and have a watch stance on the stock at the current market price of $12.21, up by 2.176% on 3 June 2020.

G8 Education Limited

Completion of Retail Entitlement Offer: G8 Education Limited (ASX: GEM) operates early education centres. As on 3 June 2020, the market capitalization of the company stood at ~$836.7 million. The company has completed the retail component of its pro-rata accelerated non-renounceable entitlement offer and has raised $75 million at $0.80 per new share. 

Solid Progress Despite Headwinds: Despite the significant headwinds, the company witnessed an organic growth of 3% after investment in quality. GEM reported a strengthened capital position with a longer tenor of debt. It continued to maintain flexibility with comfortable covenant headroom. During the current network growth phase, Net Debt/EBITDA reflects the lag between capital invested and earnings being achieved.


Debt Structure (Source: Company Reports)

Stock Recommendation: G8 has enacted several initiatives to preserve cash and improve efficiency through the period impacted by COVID-19. As per ASX, the stock of GEM gave a return of 19.76% in the past one month and is trading close to its 52-week low level of $0.437, proffering a decent opportunity for the investors to enter the market. On TTM basis, the stock is trading at a price to cash flow multiple of 5.1x, lower than the industry median (Consumer Non-Cyclicals) of 6.4x. Considering the attractive returns in the past one month, current trading levels, decent balance sheet strength and liquidity position, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $1.015, up by 1.5% on 3 June 2020. 

Bod Australia Limited

Continued Upward Trajectory in Prescription Volumes: Bod Australia Limited (ASX: BDA) is a cannabis-centric healthcare company that distributes and markets two premium brands and products for the skincare, beauty, and health industries. As on 3 June 2020, the market capitalization of the company stood at ~$24.67 million. The company has recently stated that it is experiencing significant uptake of its MediCabilis™ product amongst Australian patients. During April 2020, BDA filled 516 prescriptions, marking a 35% increase on March 2020 and its third largest volume month on record. This has added significantly to the company’s growing revenue profile.


Cumulative Units Sold on A Month-By-Month Basis (Source: Company Reports)

Record $1.43 Million Purchase Order to Strengthen FY2020 Revenue: The company has received a binding purchase order from Health & Happiness Group Ltd for $1.43 million. The recent orders will materially add to the company’s growing revenue profile, which has increased 144% on the pcp to $3.4 million, for the 9 months of FY20.

What to Expect: The company has recently entered the UK market through participation in Project Twenty21 and anticipates that prescription volumes will continue to rise. The increase in volumes and the recent expansion into the UK will leave BDA well positioned to deliver its largest volume quarter of medicinal cannabis sale. 

Stock Recommendation: As per ASX, the stock of BDA gave a return of 17.39% in the past three months and is trading close to its 52-weeks’ low level of $0.120. During 1H20, gross margin of the company witnessed a substantial increase over the previous half and stood at 61.9%. In the same time span, current ratio of the company went up to 4.88x from 2.37x in 2H19. On TTM basis, the stock is trading at a price to book value multiple of 3.1x, lower than the industry average (Consumer Non-Cyclicals) of 4.1x. Considering the decent returns in the past three months, attractive trading levels, record purchase orders and upward trajectory in prescription volumes, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.265, down by 1.852% on 03 June 2020.

 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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