AGI (Ainsworth Game Technology) Update
When we last provided an update on AGI, the share price was progressing towards our $5.00 valuation at a pace that was taking us by surprise. That update was back in July and below is brief snippet of what we wrote:
“Assuming AGI can replicate Arisocrat’s revenue trajectory and maintain the current 20 per cent profit margins, AGI in the years ahead could conceivably generate $500m, $600m or even $700m in revenue.
“With these numbers, net profit after tax could grow from its current levels to $100–$140m per annum. At these levels, earnings per share will range between $0.31–$0.43 and a share price closer to $5.00 would not be completely unrealistic.”
With a dearth of information since their annual report, has anything changed?
The business environment the company operates in is dynamic. The landscape is always changing to present new challenges and for this reason, we regularly make contact with our investee businesses, their management and other industry contacts to ensure we are on the ball (as much as we can be) with what is occurring at the coal face.
Just a few weeks ago, we spoke to a number of our contacts and below you will find some of their anecdotes and how they believe AGI is progressing:
Contact No.1
– In Australia, on the ground visits to ‘lots’ of venues, some extremely busy, some very quiet, but in all of them AGI machines are running at almost 100 per cent on their occupancy.
– There is a ‘wave’ of popularity with their machines, which could last for another 3 years.
– This popularity is an excellent sign for the US opportunity which is very immature.
– They’ve only held all licenses in the US for a short period. Yet to scratch the surface.
– Management are very relaxed with the way things are going in the US. So much so that Danny is now coming back to Australia given the US business now has scale and momentum.
– Thinks their forecast of at least 15 per cent NPAT growth in the first half is ‘low-balled’ and risks are to the upside with their forecasts given “they are literally kicking the cover off the ball”.
– His feel based on fortnightly contact with management is that many are missing the huge momentum behind the scenes.
Contact No.2
– In Australia, ALH / Woolworths have a large proportion of market share and are big supporters of AGI machines. Vast majority of their purchases recently have been AGI.
– Feedback across industry is still very supportive and whilst growth may moderate from current high levels, they should continue to take market share.
– Expects mid 20 per cent ship-share (number of new machines being sold) to grow to low 30 per cent in coming years.
– In the US, feedback from G2E Conference participants (http://www.globalgamingexpo.com/) is that AGI machines have been very well received.
– A lot of new interest in AGI machines which they didn’t have 12 months ago – but awaiting confirmation that this interest has turned into actual orders.
– 15 per cent NPAT growth forecast at full year result presentation is “absolutely conservative and we will definitely see an upgrade at the AGM
– May even surprise further as they have plenty up their sleeve”.
– Biggest upside risk is machines on ‘participation’. New machines have a revenue day rate of $55-$60 vs. an average rate of $38 in 2013.
– This is large recurring revenue base for AGI and the average daily revenue per machine will trend higher as it did in FY13.
– Noted that the PE for AGI is the same for ALL 2 years out yet AGI’s growth profile is materially stronger.
Contact No.3
– Contact has followed the business since it was losing money and said they are ‘travelling very well’.
– QLD is going to contribute meaningfully with Echo entertainment group on a replacement cycle. AGI has > 30 per cent ship share in this market.
– VIC also doing well and believes that AGI ship share has exceeded ALL’s (first time this has been the case since).
– Many analysts are way too bearish on Aust growth slowing – “Australia is still doing well”.
– In the US, just got back from G2E conference where the company stated that they are aiming to double the number of machines on participation this financial year. Newer machines are averaging $55-$60 per day – so expect both volume growth and yield growth.
– They are gaining market share but because the replacement cycle market is slow to recover, it’s all market share gains which is harder given well entrenched incumbents such as IGT.
– They are taking share, just impossible to say how much. It’s very early days. Estimating timing and magnitude of revenues is a very hard task at the moment.
– In terms of growth, it’s the ‘most attractive’ gaming stock on the ASX.
– In terms of overall market conditions, it’s very competitive but market conditions are no worse than last year and if anything are a little easier for AGI sales.
– Their 15 per cent NPAT growth forecast in the first half is ‘ridiculous’. They are too conservative.
Based on the above up-to-the-minute – but admittedly anecdotal – feedback, and our own research, we remain content to hold shares in Ainsworth Gaming Limited (AGI) on behalf of investors in The Montgomery Fund and The Montgomery [Private] Fund.
With AGI shares now trading at $4.33 (at the time of writing) and the AGM (Annual General Meeting) set for 20 November 2013, should the above commentary translate to actual orders and revenue, we may not have to wait long before we see that $5 share price. Please seek and take personal professional advice before engaging in any activity on the share market.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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bex taiwan
:
Hi Roger, good tact with some of the previous comments :) quickly about the 24cent EPS for AGI mentioned in the Weekend April this year, simply capitalising the $26.3 R&D over 5yrs takes it to $5.2 in 2014, which nicely boosts NPAT and provides an EPS of approx. 24-25c/share. However…assuming this becomes an ‘asset’ depreciated over 5yrs, does this suggest that 2010-2013’s 5yr component should be added to 2014? This would create an expense for 2014 of approx. $18.2, taking EPS to approx. 21.6/share. Otherwise it appears like you’re artificially boosting NPAT?
Thanks :)
sharleen
:
Mr Montgomery,
How about you provide an “update” to AGI?
Roger Montgomery
:
SUre Sharleen,
We visited the company today and are currently very comfortable owning a piece of this business for the next several years.
Of course, however, that does not mean the share price will always go up. Indeed it call fall 50 per cent or more! Liking a business and its prospects does not mean we can predict its share price and certainly not the share price over a few weeks or months (or even years). Valuing a business and its prospects is one thing (and we can be wrong) but predicting share sprices is another entirely. We are no good at predicting share prices so we don’t bet on share prices. They could halve or worse. One of our favourite businesses (not currently owned) is ARB. Its share price has risen from $3.75 ten or eleven years ago to nearly $14.00 last year. This has been in line with growth in intrinsic value. Within that ten year period however, there were periods where the share price fell 40%. If you are not prepared to see shares fall by 50% in the short term, even for the very highest quality businesses, you should not be investing in the share market. Be sure to always seek and take personal professional advice. Read the important warnings and conditions of use here at the insights blog and also at the beginning and end of the TV shows you like to watch.
sharleen
:
On Switzer 3 weeks ago you passionately touted AGI as a buy. Since then it has dropped 8% Were you selling into us suckers buying?
Roger Montgomery
:
Thanks “Sharleen”. First, we do not “tout”. We simply answer the questions asked of us by the host.
With respect to your reference to an 8 per cent decline: Warren Buffett famously advised: “don’t take your queue from prices”. Ben Graham, Buffett’s mentor, also suggested adopting a business-like approach to investing and not listening to the market’s wisdom, but rather taking advantage of the market’s wallet. At Montgomery, The Montgomery Fund and The Montgomery Private Fund have both – we estimate – outperformed the market meaningfully this month so far.
Sharleen, “suckers” passionately speculate on the short term. Investors invest rather more dispassionately for the long term.
If you came here looking for someone or a team of people to be able to predict short term direction, you’ve come to the wrong place.
Speculators don’t diversify either. You forgot to mention that I also mentioned CSL some time ago. A portfolio approach ensures we have a team of invesments that can help us win the football game, even if one player is sidelined now and then. If you have built a diversified portfolio of high quality businesses, then a short term share price movement, over three weeks, in one of the holdings, should not cause you to lose sleep.
In answer to your accusation, we have not sold and AGI represents a couple of percent of our total portfolios. We’re looking forward to our meeting with the company and understanding the investments that were made in setting up the US business and which caused expenses in the second half to jump as much as revenue did. Of course, as a serious investor, you would know what we do, having read last year’s and last half year’s financial reports and now the current full year accounts.
Finally, it is vital that you don’t buy off the back of something someone says on TV. We have owned AGI for some time, have bought at lower prices and may have a very different objective to you. That’s why the warnings on the TV shows and here say you MUST seek and take personal professional advice etc etc before engaging in any financial and/or securities transactions.
Kiffin Miller
:
Roger
I have just joined. Purchased your book some time back.
I have set up an Excel to calculate intrinsic value and checked my calcs against JB Hi fi example.
My problem is that nearly all my calcs show a value about 50% of current price.
e.g MTU $2.27 and AGI $2.48.
On this basis I will be waiting a long time to find a bargain.
Kiffin
Roger Montgomery
:
With just a little experience, you would know that not to be true. I have never had to wait very lo g. That is not to say patience isn’t required…
David King
:
I should add to the above that i don’t seek from you a justification of your investment in Ainsworth per se. I simply want to know how far down the slippery pathway of dubiously moral enterprises you would be prepared to travel in order to make a dollar. Is there a line in the sand, or is there not?
Roger Montgomery
:
There has to be a line in the sand and the great challenge for any socially responsible investing is that the line is at a different point for each manager and for each of their clients. I agree with you that it is a very important subject and one that is too important to decide on rashly or without proper consideration. Its a big topic and one you will find I have commented on here at the blog previously.
David King
:
I have to ask you young Turks of the Montgomery investing world this question, and announce in advance that I think it’s a test of your collective consciences. Where would you draw the line when it comes to the industries you like to invest in? Given you are all educated young men, who cannot fail to have noticed the abject misery brought about by the monstrous, satanic beings that are poker machines, what else would you consider? Would you invest in, say a legalised manufacturer of heroin, in some brave new world? What about a float involving an amalgamation
of 500 or so highly profitable brothels? Answer please. Don’t duck this issue, it’s a biggie.
Roger Montgomery
:
Agree. Much to big to deal with in a short blog post too. See our discussion about the issues surrounding socially responsible investing elsewhere here on the blog.
John Penn
:
I’m waiting for the IPO of the one where they put poker machines in brothels… :)
michael white
:
To Roger,
I bought the book, joined the fund. Love the professional manner of your team
thanks Michael white
Roger Montgomery
:
Delighted to be working for you Michael.