Questor: buy shares in the operator of France’s national lottery? It is not the punt it may seem

Richard Evans 22 January 2020 • 6:38am

French lotto tickets — Française des Jeux has operated the French national lottery from its beginning Credit: NurPhoto

Questor share tip: Française des Jeux is a stable business – the lottery’s operator since 1933, it has a 25-year contract and a supportive shareholder in the French state

Could investing in lotteries actually be one of the safest bets around?

That’s certainly the view of one hugely respected fund manager who took part in the recent flotation of the company that runs the French national lottery.

“Française des Jeux, or FDJ, has operated the French lottery since it was created in 1933 and it has an exclusive licence for the next 25 years,” said Job Curtis, who runs the City of London investment trust. “It has been a very stable business and I would expect this to continue.”

Although FDJ was floated, at €19.90, in November, the French government retains considerable influence, which is an additional source of stability.

The state has kept a 21pc stake and has a seat on the board; it also enjoys certain governance rights that include veto power and the power to approve the appointment of the chief executive and chairman.

“The main risk to the business is unexpected regulation but this seems unlikely given the involvement of the French state,” Mr Curtis said.

The lottery generates 81pc of the firm’s stakes; the other 19pc comes from sports betting, including online. About 66pc of the stake income is returned to winners in the form of prizes, while 22pc goes on government levies and VAT and 6pc to the distribution network. FDJ retains 6pc.

However, in the fund manager’s view the share price is starting to look a “bit stretched”.

“It has risen by 18pc since flotation,” he said. “The valuation of 24 times predicted earnings for 2020, along with a free cash flow yield of 4.7pc and dividend yield of 3.3pc, reflects the quality of the business. But it is a steady rather than fast grower. Readers should wait for a share price setback to about €21 before they buy.”

Questor says: buy on weakness

Ticker: FDJ: FP

Share price at close: €23.50

Update: BHP

BHP, the miner, has made a total return of about 50pc since we tipped it in September 2017. That figure includes a special dividend paid after the sale of its American onshore oil interests. Mr Curtis said the firm “continues to benefit from the profitability of its world-class iron ore operations”.

He added: “It generates significant amounts of cash and I would expect it to be on a 6pc dividend yield for the next 12 months. The main risk is slowing demand for iron ore and other commodities from China.”

Questor says: hold

Ticker: BHP

Share price at close: £18.16⅕

Update: Carnival

Also recommended here on the basis of its inclusion in the City of London portfolio, Carnival has been more disappointing: the shares have lost 13.7pc since our tip in October 2018.

“I underestimated the capacity growth in the world cruise industry, which is holding back passenger yields,” Mr Curtis said. “I still like the long-term prospects of the cruise sector, which enjoys growing demand from ageing populations.” He has cut his stake by 15pc but retains the rest.

Questor says: hold

Ticker: CCL

Share price at close: £36.35

Update: RBS

The fund manager bought a stake in the bank in October at a discount to its “tangible book value” of 20pc. “In my opinion, this is good value given estimates for a 9.5pc return on tangible equity for 2020,” he said.

Questor says: hold

Ticker: RBS

Share price at close: 224.7p

Update: Boku

Shares in Boku, the payments firm, initially rose strongly after we tipped them here last month but then fell sharply when the company released a trading statement on Jan 14.

Matt Evans of Investec, whose stake in the firm prompted our recommendation, said: “It was disappointing to see Boku’s initial share price reaction, as operationally it is delivering.”

But he said the “key issue” was Boku’s identity verification business, Danal, which it bought a year ago.

“The headline price appeared very high,” Mr Evans said. “However, the firm has since confirmed that the ‘earnout’ [conditional extra payment for the purchase] was not paid given that performance didn’t justify it and therefore it ended up paying $26m for Danal.

I believe that it was priced reasonably given its potential. “The management of expectations has been the key error for Boku but the new finance director has a strong track record and clear understanding of the requirement to manage achievable expectations. I retain my support for the company and would consider adding to my position.”

Questor says: hold

Ticker: BOKU

Share price at close: 79.5p

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