Weak but Well-Flagged Fiscal 2018 for Ainsworth, but we see Meaningful Upside from Current Levels
Ainsworth Game Technology
Analyst Note: Fiscal 2018 was a challenging year for narrow-moat-rated Ainsworth. Underlying profit before tax declined by 32% to AUD 39 million, although this weakness had been previously flagged, and the result was broadly in line with our expectations. Accordingly, our AUD 1.70 per share fair value estimate is unchanged. The main contributors to the earnings pressure were continued market share losses in the domestic market and rest of the world, along with lower margins in North America. On a more positive note, the board declared a final dividend of AUD 2.5 cents per share, which exceeded our expectations, taking the total for the year to AUD 4 cents per share (fully franked) equivalent to a 46% payout ratio. Management reaffirmed a target dividend payout ratio between 40% and 60% of underlying earnings, which signals confidence in the earnings outlook and balance sheet. We continue to believe the stock is undervalued at the current price. While the negatives overshadowed during the year, several positives worth highlighting were: (1) early signs of ship-share improvement in the domestic market, following new game title releases; (2) a strong 10% increase in group participation machines (double over the last five years) particularly in Latin America, which should increase earnings stability; (3) R&D expenditure increased by 1% to 13% of revenue. While management expects to maintain R&D at around 13% of sales going forward, it is expected to be higher in absolute dollar terms which implies stronger revenue in fiscal 2019. This level of R&D is considerably higher than the 11% long-term average, which is pleasing as future sales are highly dependent on innovation and game development, both areas in which we believe the company has dropped the ball in recent years; and (4) the balance sheet is also in healthy shape, with net debt steady at around 0.5 times EBITDA, providing the company a buffer to weather the cyclical down periods.
Last Close Price: $1.15
Morningstar Recommendation: Accumulate
I agree
Meaningful upside
AGI Price at posting:
$1.15 Sentiment: Buy Disclosure: Held
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