Expansion Of Gaming Units In North America Will Strengthen Future Prospects

Key Takeaways

• Expansion in North American markets and securing Latin America import approvals are expected to drive revenue growth and improve net margins.
  
• Increased R&D and diversified recurring revenue streams, including online gaming development, could enhance competitiveness and positively impact earnings and net margins.
  
• Revenue declines in Latin America and Europe, currency volatility, and increased costs pressure Ainsworth Game Technology's growth and margins despite North American advancements.

Catalysts

Designs, develops, manufactures, sells, distributes, and services electronic gaming machines, and other related equipment and services in Australia, North America, Latin America, Europe, New Zealand, South Africa, Asia, and internationally.

• Expansion of gaming units and cabinets, including new San Fa titles and A-Star Raptor cabinets, in North American markets is expected to drive revenue growth as these games are gaining popularity. This should positively impact revenue and earnings as new placements are converted from trials to sales.
  
• Securing import approvals in Latin America is anticipated to recover sales volumes in this region following a period of restrictions, which should result in an increase in revenue and improved net margins.
  
• Increased R&D expenditure and the establishment of additional game studios are expected to enhance product competitiveness and innovation, which could drive future revenue growth and improve net margins by maintaining high-quality offerings in the market.
  
• Growth in recurring revenues from Historical Horse Racing and other rental or leased machines is anticipated due to increased machine placements and VLT exclusivity agreements, which should bolster predictable revenue streams and increase net margins given their higher profitability.
  
• Development of new online gaming titles in partnership with Greentube and expansion of omnichannel strategies across regulated markets in North America could lead to additional high-margin revenue streams, positively impacting earnings and net margins.

Ainsworth Game Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ainsworth Game Technology's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 6.3% in 3 years time.
• Analysts expect earnings to reach A$17.1 million (and earnings per share of A$0.04) by about February 2028, up from A$5.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.9x on those 2028 earnings, down from 45.0x today. This future PE is lower than the current PE for the AU Hospitality industry at 24.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.67%, as per the Simply Wall St company report.

Ainsworth Game Technology Future Earnings Per Share Growth

Risks

• Revenue in the current period decreased by 15%, primarily due to significant revenue shortfalls in the Latin America and Europe segments, which could negatively impact future revenue and profit growth.
  
• The decrease in machine units under operation from December 2023 to June 2024 and challenges in gaining import approvals in key markets like Mexico may continue to hinder revenue recovery and growth prospects in these regions.
  
• Currency volatility, particularly in markets like Argentina, coupled with high inflation, has led to revenue disruptions and could further impact net margins and overall earnings.
  
• Despite advancements in North America, the revenue growth has remained flat, indicating potential market saturation or increased competition affecting revenue contributions from this critical segment.
  
• The company experienced an increase in operating costs and R&D expenses as a percentage of total revenue due to declining sales, which could continue to pressure net margins if revenue does not increase in line with these investments.

Valuation

• The analysts have a consensus price target of A$0.772 for Ainsworth Game Technology based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$0.85, and the most bearish reporting a price target of just A$0.69.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$274.2 million, earnings will come to A$17.1 million, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of A$0.73, the analyst price target of A$0.77 is 5.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.