MACD, page-78

"Share price now factoring in broad based product improvement
Ainsworth shares have outperformed the ASX300 by 42% over the past six weeks, driven by hype around new game releases including the highly anticipated 'Pac-Man' series. While we agree that expectations were low and the share price was susceptible to a bounce on good news, we think the shares are now factoring in a broad improvement to game performance – something that we aren't seeing in our data or anecdotal feedback. We have reviewed our estimates and updated currency which has resulted in a minor 1% EPS downgrade to FY17E and FY18E. The shares have re-rated to 18x FY18E P/E (a 15% premium to the ASX300) and we downgrade from Neutral to Sell with the upside from current game performance already in our forecasts and an additional re-rating of the shares unlikely in the near term.

New game performance remains below house average
During the past year Ainsworth has released 60+ new games within the Australian market. The performance of these games has been poor, generally below house average (0.9x in May 2017) which is unlikely to drive near term ship share higher in our view. While this kind of data is unavailable in offshore markets, anecdotal feedback has generally suggested a flat outlook for outright ship share in FY18. Recent surveys suggest US ship share will fall to 4% in FY18E from 6% in FY16 (UBSe 5%). See Link

How successful could Pac-Man become in North America?
We have factored in success of Pac-Man, with 800 additions in North America (roughly one-third of the first year roll out of Aristocrat's Lightning Link). This 50% increase to Ainsworth's class III participation installed base is assumed to generate a yield of US$50 per day and we have taken into account the third party fees that make this product less profitable than others. Key assumptions and sensitivities are contained in this note. We have not factored in success of this product to Australia at this stage given licenced titles have historically not performed well in this market.

Valuation: $1.77 per share (unchanged)
Our valuation is based 13x FY18E EPS, which is in line with the 2 year P/E multiple relative to the ASX300. On our estimates, the current share price is factoring in FY18E ship share of 14% in Australia (UBSe 12%) and 7% in the US (UBSe 5%) at a P/E of 18x"