This story was originally published on July 08, 2010. It has now been re-published to make it available to non-paying members at FNArena and readers elsewhere.

Microequities is an Australian financial adviser specialising in in-depth research of listed "micro caps" - those companies of low capitalisation too small to register on ASX indices or to attract research coverage from leading stockbrokers. In June Microequities hosted its Rising Stars conference, at which selected companies presented their stories. FNArena was invited to attend, and over a period of time will provide conference highlights. This is the first in the series.

It is important to note that Microequities invites selected companies to present at the conference. Companies do not simply pay Microequities for the opportunity.

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By Greg Peel

You know what it's like. You go to the service station to buy petrol and get stuck behind a queue of people buying milk and bread. You go to post a parcel and get stuck behind people paying their electricity bills. You try to buy a schooner but have to wait for someone to get his TAB card in before the jump. And you try to buy a newspaper and wait an eternity while a queue of hopefuls either submit, or check, their Lotto/Oz Lotto/Lottery/whatever tickets.

The reality is all of those transactions unrelated to the place of business could actually be conducted online. Even the milk and bread, if you have foresight. In the late nineties, we were told that the internet had become so powerful that by the beginning of the twenty-first century no one would ever need leave their home. But all that happened was the dotcom bubble burst.

In retrospect, the call was both premature and presumptuous. People, by their nature, do like to leave the house occasionally, but it is true that many day-to-day tasks can now be performed in front of the home computer. This at least means not having to run around town and join several different queues. Such services were never going to become de rigeur overnight, however. We just had to grow into it.

A decade later, Gen Y-ers have never seen the inside of a CD shop. DVD hire stores are counting the days. Online banking is part and parcel, little is purchased before first checking eBay, Bpay makes paying bills a trifle, books bought from Amazon can actually be cheaper despite the exchange rate, Google is the source of all information, Wikipedia is the source of all knowledge, and social networking means everyone has a thousand friends, most of whom they've never met.

The gambling industry has also seen the rise of the internet, with the likes of Betfair and SportsBet ensuring anyone can bet on the fourth at Randwick, the weekend's football fixture, or two flies up a wall with ease, without having to be there at said wall. And if there were two pojnts which struck British comedian Griff Rhys-Jones in his recent documentary series on the World's Greatest Cities, one was that the Opera House is indeed spectacular and the other is that “Australians are the biggest gamblers in the world”.

The Opera House was, of course, built by just those same people who hold you up forever when you just want a Herald. With a plethora of different lotteries to choose from, and a number of different combinations and permutations of each, it's no wonder I have to get my paper delivered. The truth is, nevertheless, that one can easily buy lottery tickets online. Unfortunately, to date only 4% of Australians choose to do so.

That's why Manaccom Corporation ((MNL)) is excited.

With ten years experience, Manaccom has developed software that allows punters to buy lottery, Lotto etc tickets and collect any winnings over the net. It provides for all combinations and permutations and allows for selected numbers to be carried forward if desired. It means that punters can happily take their chance without having to queue up at the newsagent, that they can allow purchases to be automatic, and that they need not fossic in panic down the back of the couch to find a possible winning ticket, or cry out despair at the sodden lumps in the bottom of the washing machine.

Manaccom's online software means gamblers need do nothing but occasionally note winnings appearing in their bank balance.

Manacomm has signed contracts with the likes of the state lotteries and Tatts Group ((TTS)) to act as online agent in lottery ticket sales. In FY08 the company signed a five-year exclusive deal with NSW Lotteries. Manaccom accounts for 50% of all online lottery purchases, with Tatts claiming the other 50%. Tatts might compete but is still happy to sub-contract to Manaccom on another five-year deal.

In five years the company has seen its lottery revenues grow from $10m to $60m and its profits grow to $5m from capex losses. The Australian lottery market is currently worth $3.6bn per year, and with online penetration having reached only 4%, the only way is up. Australians spend on average $20 a week on lotteries.

Punters do not become Manacomm customers for that one-off flutter. Once signed up they tend to be stayers. While new customer growth is steady it doesn't hurt for the odd Lottery to jackpot. When the Powerball jackpot recently reached $90m, Manacomm signed up 6-9 months worth of new customers in one week.

Manacomm's success is not simply dependent on it having been a first mover in market that may yet be swamped with contenders. The company has spent ten years developing its software and the business is split into two operations. One is the simple agency model, in which lottery companies see Manaccom as just another agency for business (like a newsagent) rather than any competitor, and the other is the software distribution business, which sees Manaccom offering its proprietary software for sale. FY10 has marked the completion of the company's restructuring of its software distribution business.

Manaccom counts among its assets its website and its customer database and traffic, and its software and systems. Each of these, along with its government contracts, it sees as barriers to entry for other players. The company's aspirations do not, however, end at the other 96% of the Australian lottery market. The Australian lottery market has reached $3.6bn, but the US market is $60bn and the European market is $110bn.

Manaccom is currently in discussions in the US, and Canada ($10bn) and Europe will be next. What makes the US market so appealing is that despite the size of the market, online gambling is currently banned by law. However, a rather cash-strapped Obama Administration is currently looking at a proposal to relax this law, perhaps beginning with “safer” forms of gambling – being lotteries.

As a cashflow-based operation, Manaccom has paid a dividend for the last three years. The company has $15m in net assets and a current share price of 27c. The share price peaked at 50c ahead at the end of FY09 at which point exiting founder Ian Mackay began selling out of his stake with the company's assistance.

Ian Mackay's balance of 43m shares on issue remained at 19% in June with current CEO Mike Veverka's stake at 21%. All other shareholders hold less than 10%. Clearly the market has previously ascribed a value for Manaccom which has been undermined by the overhang of executive sales.

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