The Lottery Corp has been assigned an overweight rating with a price target of $5.15 by analysts at J.P. Morgan, who says few companies generate capital as effectively as the Australian lottery provider.

The Lottery Corp is Australia’s largest lottery corporation and one of the best-performing in the world.

The analysts said the value of TLC lies in its capital light structure, although they say consensus expectations for margin expansion from the digital side may be overdone. 

The firm’s discounted cash flow valuation implies that the TLC trades at a 12 percent discount to its target price. 

“We believe that TLC will perform better than most in a recession, and given its ability to generate strong returns and free cash flow there is upside to the targeted dividend payout ratio of 70-90 percent of NPAT,” it said. 

On the move to digital, J.P. Morgan said basing future performance on trends in the past few years during Covid may be misleading. It says that there was a significant one-off benefit from retail closures, which was further boosted by stimulus measures.

“All unlikely to remain repeat sponsors of growth,” it said. 

J.P. Morgan said its forecasts factor in a 220 basis point lift to margins by FY2025 from the digital business, which leaves it behind the consensus.