Threats. Loss of interest in current games. Regulatory blocks for new games. Market capitalisation: Rs 3.4bn Diversification into sportsbetting

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1 Executive Summary Overview Lottotech Ltd (LOTO) runs the Mauritius National Lottery on behalf of the Government since Oct-09. LOTO was retained as the preferred bidder. GAMMA entered into a shareholders agreement with the State Investment Corporation Ltd (SIC) the State s investment arm to exclusively operate the Mauritius National Lottery. Lest for a change in legislation, LOTO is likely to have its licence renewed for 5- year tranches after Apr-19. The company has grown its retailer network from an intial 542 which is expected to reach 1,000 by year end. Performance: Review & Prospects LOTO revenue stems from two sources: draw-based Loto and scratch-card based Quick Win games. Loto sales grew at an annualised rate of 5% between 2011 and 2013, while Quick Win plunged due to the wearing off of the novelty and overabundance of games. In light of the above, LOTO withdrew games and reviewed its instant game strategy in May-13. This has led to improved sales and a long-term equilibrium is expected to be reached between Loto and other games. EPS grew at an annualised rate of 41% between 2011 and 2013 principally buoyed by cost containment given that sales in FY12 and FY13 stagnated at ~2.6bn. Rating LOTO Gaming revenue trends suggest that propensity to spend does not move linearly with GDP, nonetheless short term growth for LOTO will stem from organic enhancements to existing games, i.e. new ways to win at Loto and appropriate timing for bringing new games to market. The company s medium to long term growth will however depend on regulatory approval: a 2nd weekly Loto draw (led to >30% boost in 75 revenue elsewhere); new fixed odd games; and Video Lottery Terminals & Mobile/Online wagering; however these may not translate directly to PAT because of an expected increase in contribution to the Consolidated Fund. Expansion into non-core areas such as Sports betting, Consulting & IT services represent interesting prospects but remain off-the-table for now. Low 52-Wk Range High Valuation: Initated as Accumulate Assuming Loto sales plateau at 0.55% of GDP and continues to represent 80% of its sales, we forecast Rs 10 VWAP Rs 10 LOTO s FY14 PER to be 21.4x and FY15 PER to stand at 19.5x. Although LOTO s PER is higher than the ALEX-20 PER (15.3x) and Total Market PER (14.5x); its PEG Ratios from 2013 to 2015 are all below 1. Its PEG Ratio indicates that the high PER can be overlooked given the double-digit growth rates. Based on its dividend pay-out target, we estimate its 2014 DY to stand at 4.6% and 5.1% in Both are well above CDS Code: ISIN Code: LOTO.N0000 MU0431N00000 the ALEX-20 s present DY of 2.5% and the Total Market s 2.6%. As an asset poor company and given the Bloomberg Code: absence of retained earnings, LOTO s NAV is unlikely to grow beyond its current Rs100M. PBV and ROE Reuters Code: for LOTO are thus meaningless. Given the absence of debt and based on the above, we initiate an ACCUMULATE rating for LOTO. Opportunities Threats Trading data 25- Enhancements to existing games Loss of interest in current games No of Shares: 340M Introduction of new games Regulatory blocks for new games Market capitalisation: Rs 3.4bn Diversification into sportsbetting Change in Government policy Weight on SEM: Weight in ALEX-20: 1.2% Highlights F 2015F 2016F Weight in ALCAPEX-12: Revenue [RsM] 3,161 2,596 2,550 2,731 2,839 3,059 Med. daily value traded: Net Revenue [RsM] Med. daily volume traded EBITDA [RsM] YoY Total Return: PAT [Rs] All time high: Adj EPS [Rs] NAV [Rs] DPS [Rs] Key P&L Trends Indices = 100 on 15-Apr % ACCUMULATE GAMMA ALEX-20 TRI PER DY PBV FP 24.82x 4.90% 33.9x 0.0% Valuations F 2015F 2016F Net EBITDA M [%] PER [x] PEG [x] PBV [x] EV/EBITDA [RsM] ROE [%] DY [%] DER [%] F 2015F 2016F Net Revenue [RsM] EPS [cts] Net EBITDA Marg. [%] 1

2 FINANCIAL PERFORMANCE I. Overview Lottotech Ltd (LOTO) runs the National Lottery on behalf of the Government which holds a stake in the company through its investment arm, the State Investment Corporation Ltd (SIC). LOTO commenced operations in Oct-09 with a financial year that ended in June. Thus FY-11 was its first full year of operations. Historical figures in this document of FY-11 through FY-13 are based on LOTO s pro-forma 1 financials; however, given the change in FY-end from June to December, AXYS forecasts 2 are Calendar Year based. LOTO considers itself as an entertainment company which sells a moment of fun and dreams. II. Revenue annualised rate of 5% between 2011 and 2013 to cross the Rs2bn mark, Instant win games sales have plunged dramatically at an annualised rate of 37% due in part to the wearing off of the novelty effect and a market flooded with a plethora of games to choose from. Management therefore withdrew slow moving games which led to the revenue split between Loto and Quick Win drop from an initial to to In May-13 LOTO begun to re-introduce instant games in a managed fashion. This new strategy has paid-off according to management as it has seen Quick Win segment sales jump. Its long-term equilibrium point between Loto and other games is expected to hover at about Risk Assessment LOTO is poised to remain a monopoly for as long as it operates given that the Gambling Regulatory Act (GRA) of 2007 forbids the licensing of another competitor. Further, as per the shareholder agreement between Gamma-Civic Ltd (GAMMA) and the SIC, neither party shall compete directly or indirectly against Lottotech. The greatest threat to LOTO s existence is a change in legislation. Period. The likelihood of such a change is deemed to be relatively low because, the State would likely lose a steady revenue (46% of proceeds net of prizes) stream during the set-up period of a new operator, and would be required to divest from LOTO. It is thus more likely that LOTO s licence to operate the Mauritius National Lottery be extended in 5-year renewable tranches after the expiry of its current licence in Apr-19. Fig 1. Lottery sales revenue segmentation & evolution LOTO sales revenue stems from games categorised into two broad segments: Loto which consists of a rollover jackpot with a weekly draw, and Quick Win which consists of instant win scratch-card games. While Loto sales have grown 3 at an 1 The Gambling Regulatory Authority (GRA) did not allow LOTO to launch a series of games in its original plan. LOTO won its lawsuit against the state and the contribution to the Consolidate Fund has been dropped from 58% to 46%. LOTO has thus adjusted both its audited P&L and Balance Sheet to reflect the Rs262M refund which was part of the settlement. 2 Given the non-existence of interim results, we are unable to break down results into Half-Year segments so as to re-construct CY-based historical financials. Consequently, there exists a discontinuity which we would have eliminated if we could. 3 Our international sampling albeit limited (Asia, Pacific, & North America) due absence of readily available financials has shown annualised sales growth of ~4% between 2009 and 2013 III. Loto v/s Quick Win Trends A generalised trend shows that gaming sales as a fraction of GDP is on an asymptotically declining path. While this does not mean that revenue is not growing, it shows that the propensity of consumers to spend on money games does not increase linearly with GDP. Both Automatic Systems Ltd (ASL) {a listed sports Horse & Football betting company} and LOTO have exhibited this trend. 2

3 Madagascar was a failure 5 from which GAMMA s management has learned to distinguish between a market ready for such games and one that isn t. We believe any internationalisation Lottotech might consider in a distant future is thus more likely to garner success. Short-term business growth plans LOTO s short-term growth will stem from the introduction of enhancements 6 to existing games, i.e. new ways to win at Loto albeit not the jackpot. These enhancements will also be strategically spaced so as to sustain revenue on a growth path. Fig 2. Gambling proceeds evolution as a fraction of GDP The slide in Loto spending as a fraction of GDP has been rather gentle when compared to ASL s income and instant games 4. Further the long-term expected split between Loto and other games at 75-25, suggest that Loto will remain the primary income generator for LOTO. Specific to 2014, Lottotech is likely to have experienced a bumper Q1-14 on the back of Jackpot Chasers who played to win the record breaking Jackpot of Rs127M which was won and split three-ways on the weekend before Easter. According to LOTO s winner statistics, 80% of jackpot winners played for under Rs100 which also indicates that the Mauritian likely to continue to play small to win big. With respect to Quick win games, its prospects are also positive. LOTO s strategy consists of pacing the introduction of new scratch-card games as well as vary the assortment of games offered so as to keep the player engaged. That said, instant win games are unlikely to return to their initial 40% share of revenue but rather hover in the low-20s. IV. Forward Strategy LOTO s forward growth strategy can be broken into three broad lines: Short term enhancements to existing games Medium to long term introduction of new games Medium to long term diversification into sports betting and other services In addition to the above, LOTO may follow the lead of other Mauritian companies and expand their business overseas. That said, GAMMA s experiment of replicating LOTO s business in 4 Although part of the decline was deliberate Medium to long-term business growth plans LOTO s medium to long term growth plans will depend on regulatory approval. These include new features such as a 2 nd weekly loto draw and new games some of which will have fixed odds brought to market: Daily Game Keno Video Lottery Terminals Mobile/Online Wagering & Games Lottotech s management once again intends to pace rate of the introduction of the above so as not to overwhelm consumers. According to LOTO, the introduction of a 2 nd weekly Loto draw in developed countries resulted in 30-40% increase in sales. Although we expect sales to be boosted, any topline increase will not trickle directly to the bottomline because the contribution to Government s Consolidated Fund (CF) could also rise. Non-Core business expansion Other long term diversification opportunities for LOTO include its entry into the Sports Betting arena. Further, LOTO could leverage upon its advanced IT infrastructure both hardware & software to provide Point-of-Sales terminal like services. In other words, LOTO could sell its Platform-as-a-Service. Finally LOTO might also be in a position to offer consulting for other lottery start-ups on the African continent. 5 Calculated on a calendar year basis using GAMMA s interim financials, Revenues plunged at an annualised rate of 40% between 2011 and 2013 from Rs330M to Rs65M. 6 Regulatory authorisation has already been given 3

4 V. Earnings The EPS and PER figures illustrated below have been taken from LOTO s pro-forma financials; i.e. audited accounts adjust for the CF refund and lawsuit related expenditure, for FY ended June. All of LOTO s Prize pay-out, CF contribution, Retailer commission, GTECH (tech services) fee, and AS Burnstein s management fee are a function of ticket sales. The only two variable cost sources are its administrative and systems expenses. LOTO has shown substantial EPS growth (41% annualised) between 2011 and LOTO s 1 st profits 7 were boosted by increased sales, the EPS improvement from 2012 to 2013 stemmed from cost management of both administrative and systems expenses given that FY12 and FY13 revenue 8 stagnated at ~Rs2.6bn. CORPORATE STRUCTURE I. Overview In 2008, Lottotech Ltd (LOTO) was retained by the State as the preferred bidder for the implementation and operation of the Mauritius National Lottery on behalf of Government. GAMMA incorporated LOTO in April of 2008, and entered into a shareholder s agreement with The State Investment Corporation Ltd (SIC) to operate the lottery. LOTO is assured lest for change in legislation to have a monopoly on this gaming segment given that the Gambling Regulatory Authority Act 2007 forbids more than one operator at any given time. LOTO s current licence expires in Apr-19 but is renewable for five year periods. The company s management is assisted by A.S. Burnstein Management Ltd, a GAMMA subsidiary, to assist in supervision of operations, business development, marketing, human resources, finance & accounting, procurement as well as legal & secretarial services. LOTO launched La Loterie Nationale in Oct-09 and has since expanded its retailer network from 542 initially to the present day 895, and with a target of 1,000 retailers by end of II. Lines of Business Lottery LOTO s primary lines of business consist to two main types of games: Loto (Rollover jackpots) and Scratch Cards (Quick Win games). Fig 3. LOTO s earnings and key ratio evolution v/s benchmark Based on further cost containment measures 9 expected this year, should LOTO s revenue stagnate in 2014, we would still expect its EPS to stand higher. Cost containment however has its limits, thus future growth will have to come from increased sales Our conservative forecasts are based on organic Loto growth albeit non-linearly as a function of GDP and assumes an split between LOTO s Loto and Instant segments. We thus conservatively estimate LOTO s EPS to grow by 16% in 2014 and >10% in Registered in FY-11 8 Lower than FY-11 s Rs3.2bn turnover 9 Reduction in executive director fees & marketing costs Fig 4. LOTO s current business segments 4

5 III. Shareholding Prior to listing, LOTO s shareholding was split between GAMMA listed on the SEM and The State Investment Corporation Ltd (SIC). GAMMA s stake in LOTO is not direct but through four (4) fully owned special purpose vehicles. VALUATION & RECOMMENDATION Lottotech (LOTO) is more likely than not to remain the monopolistic lottery games operator in Mauritius. Lest, of course, its licence be rescinded by the GRA or Government alters its stance/policy on gaming. The probability while it cannot be ignored is believed to be low given that LOTO provides a steady income stream (46% of proceeds net of prizes) to the State; and that the State is a shareholder through the SIC. LOTO s near future domestic growth will stem from organic growth of its Loto and Quick Win segments which management intends to achieve by staging incremental and spaced-out enhancements to Loto and Instant games so as to keep is clients engaged in gaming. Its longer term growth is however to some extent beyond its control given GRA restrictions. We believe that while the GRA will try to preserve the interest of the people, the extra revenue for Government, probably suggests that new games will likely be introduced over time. LOTO s margins are expected to improve over time given that capital expenditure is only required to maintain and enhance existing IT infrastructure which will be financed directly by cash from operations. The next major expenditure for LOTO if any will be because of the introduction of Video Lottery Terminals. We therefore expect organic growth to fuel earnings increases as well as Lottotech s near 100% dividend pay-out target; however, consumer spending patterns tend to be inconsistent from year to year. Fig 4. LOTO s shareholding structure As part of its listing, GAMMA and SIC will both sell LOTO shares, and reduce their respective stakes to 56% and 19% respectively, thereby achieving a 25% free float ratio. Assuming Loto sales plateau at 0.55% of GDP and continues to represent 80% of its sales, we forecast LOTO s FY14 PER to be 21.4x and FY15 PER to stand at 19.5x. Although LOTO s PER is higher than the ALEX-20 PER (15.3x) and Total Market PER (14.5x); its PEG Ratios from 2013 to 2015 are all below 1. Its PEG Ratio indicates that the high PER can be overlooked given the double-digit growth rates. Based on its dividend pay-out target, we estimate its 2014 DY to stand at 4.6% and 5.1% in Both are well above the ALEX-20 s present DY of 2.5% and the Total Market s 2.6%. As an asset poor company and given the absence of retained earnings, LOTO s NAV is unlikely to grow beyond its current Rs100M. PBV and ROE for LOTO are thus meaningless. Given the absence of debt and based on the above, we initiate an ACCUMULATE rating for LOTO. 5

6 Appendix A I. Calculations Methods Bottom-line profit figures, e.g. Profits after Tax, Attributable Earnings, and EPS among, have all been adjusted for nonrecurrent exceptional items. All per Share metrics or calculations requiring the No. of Shares have been computed using a single constant. AXYS has used the total number of issued shares by the company excluding treasury shares as given by its latest annual report. References Lottotech Ltd, Listing Particulars KPMG, Valuation document Bank of Mauritius, Monthly Statistical Bulletin, Mar Automatic Systems Ltd, Annual Report & Interim financials, Gamma-Civic Ltd, Annual Report & Interim financials, II. Price to Earnings Growth (PEG) Ratio PEG Ratio 0 PEG < 1 Under-valued PEG = 1 Fair-Valued PEG > 1 Over-valued Disclaimer AXYS Stockbroking Ltd has issued this document without consideration of the investment objectives, financial situation or particular needs of any individual recipient. Recipients should not act or rely on any recommendation in this document without consulting their financial adviser to determine whether the recommendation is appropriate to their investment of this document. This document is not, and should not be construed as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document has been based on information obtained from sources believed to be reliable but which have not been independently verified. AXYS Stockbroking Ltd makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. AXYS Stockbroking Ltd and its officers, directors and representatives may have positions in securities mentioned in this document, or in related investments, and may from time to time add to or dispose of such securities or investments. AXYS Stockbroking Ltd is a member of the Stock Exchange of Mauritius and is licenced by the Financial Services Commission. Authors Bhavik Desai Head of Research Melvyn Chung Kai To Trader Vikash Tulsidas Manager 6