An update on: AGI
A number of investors have posted requests for us to look at Ainsworth Game Technology Ltd (ASX: AGI) following the sell-off in the market price yesterday.
The share price has been heavily penalised, we believe, because second-half earnings went backwards – despite revenue growing by about $20 million. We note that the sell-off appears to be about a reappraisal of possible growth and the stock market is notoriously unforgiving and impatient.
It is true that even if the US business grows at 30 per cent, the fact that AGI has 70 per cent exposure to Australia and 30 per cent offshore, means the growth translates to single digit medium-term growth if the status quo in the domestic competitive landscape is maintained.
Investors might remember how analysts and the market would punish SEEK Ltd (ASX: SEK) when domestic unemployment went up, ignoring the massive overseas opportunities being lined up. Likewise, Ainsworth will eventually grow its Americas business to such an extent that analysts will ignore Australia and refocus on overseas growth. It’s just a matter of time.
We relish the opportunities presented by the market’s enduring tendency to react in a bipolar way.
Before we draw any firm conclusions however, we note we are meeting with the company in the next week or so, and we’ll leave our deeper analysis until that time.
For now, it might be insightful to share with you some of the comments contained in broker emails that were flying past our desks yesterday, and contrast and compare those with the comments flying around between the analysts at Montgomery – keeping in mind our very long-term and businesslike approach to investing.
Here are some ‘market’ comments following the result. We make no comment as to their accuracy or otherwise. Indeed, some analysts have correctly anticipated the fact that the market would be disappointed by the current result;
1) Result was a slightly below our expectations. We will probably revise our estimates lower for FY15 by ~5% reflecting the miss and expect consensus to come back also.
2) International growth, while strong, is not enough to overcome the slowing domestic growth, therefore making the growth profile unexciting in our view.
3) Reported NPAT up 18% to $61.57m for the year ended 30 June 2014. Revenues from ordinary activities were $244.12m, up 23% from last year. Basic and diluted EPS was 19.0 cents compared to 16.0 cents last year. Net operating cash flow was $57.6m compared to $31.57m last year. The final dividend declared was 5.0 cents, taking the full year dividend to 10.0 cents compared with 8.0 cents last year.
4) Around a 5% miss versus market consensus at the EBITDA line. The good news is that AGI was able to sell 1.5k units in North America after only 800k units in 1H14, and again deliver a material increase in its participation installed base in that region. At first glance, the caution in the result is that the sales growth in Australia appears to be starting to slow from lofty heights in what is a capped market.
And here are some comments from the team of analysts at Montgomery: meet the team here.
1) In the second half of FY14, revenues increased to $122.3m from $101.6m (+$20.7m) versus expenses of $83.4m up from $62.3m (growth of $21.1m) – which caused EBIT to go backwards -5% half-on-half. Management have stated that this represents investment in their Americas operations and that expense growth will now be more aligned to revenue growth in the future.
2) The market was looking for a decent picture in Australia and the Americas are beginning to show a very strong hand. Whilst they received the latter, there are clear concerns around the rate at which growth in Australia has slowed and the costs surprise.
3) Management’s the lack of guidance in the report, when they’ve been fairly clear in previous reporting periods, is likely to be viewed as another indicator that they are unable to provide as clear a picture as in previous years, given the slowdown in domestic growth.
4) Agree that the revenue growth in NSW and VIC/Tas was disappointing. Though, as noted, North American growth was outstanding.
5) Profit margins in the key Australian segments were actually very good. NSW and QLD were up YoY, and VIC/TAS was about stable YoY.
6) On an unlevered basis, AGI’s return on capital (ex. cash) was 37%, with incremental returns of 62%. And this is after tax using an average tax rate of 25%.
7) It’s also noted that the effective tax rate in 2H14 was 29%, above the average of 25%. This depressed ROE and incremental ROE.
8) Agree that the thing that has a lot of investors running scared is the 14% YoY decline in NPAT in 2H14. Yet, this decline is primarily due to a difficult prior year comparison relating to an FX gain and other financing items in 2H13. EBIT still grew by +17% YoY in 2H14, which is not too bad considering this was still a period of investment.
We will now leave you to continue your research and investigation and draw your own conclusions after seeking and taking personal and professional advice, of course.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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.
craig
:
Hi Roger,
For the record i have been a longterm holder of AGI and your recent recommendation or comments had no bearing on my investment decision but was a reasonable assumption for you to make. yes you are correct that you have no obligation to discuss any topic but you’re the one that said you would even after you had already met with mgt…i’m just calling you on that commitment. I’m sure if the price jumped 25 per cent we would have been reminded many times. So to me it is not that you made a bad call and i followed it but more you won’t admit it / or at least discuss it . You may feel its bad for business but i for one would be more inclined to invest in your funds if you had after all nobody can pick winners all the time. As they say you get a better sense of a character in how they respond to a defeat not how they respond to a victory. This is the last I’ll comment on the topic.
Regards
Craig
Roger Montgomery
:
We will get to it. That hasn’t changed. We will make every mistake by the time we are done/ We always freely admit that.
Roger Montgomery
:
Thanks for those thought Craig. With time, you may form a different view.
craig
:
Hi Roger,
Respectfully I find your silence on AGI poor form. You met with mgt almost 2mths ago & said you would provide an update within days. Since then you & your team have been extremely evasive on AGI on the various media forums when questions are put to you. Can you show your followers some respect and provide a reasonable in-depth response. can you please start with updating on how your shareholding has changed in AGI since their profit announcement.
Regards
Craig
Roger Montgomery
:
Craig, we are under no obligation to share anything at all about any stock at any time. Please do not run your portfolio by trying to use comments on this blog or any other as a tool. You need to always do your own analysis and where you aren’t confident, seek and take personal professional advice. We will comment on AGI when we are able.
craig
:
HI Roger,
Could you please explain why such a delay in providing an update on AGI after meeting mgt 7 weeks ago. Would be very interested to hear your updated opinion.
Regards
Craig
Roger Montgomery
:
Hi Craig,
Thanks for the reminder.
Tony Magdic
:
Roger, What is your current position on AGI?
Bob
:
Any chance of getting your new opinions on AGI after meeting with management?
Roger Montgomery
:
We are currently writing our internal reports and conducting some more due diligence. Stay tuned.
Michael Klien
:
Any update on the meeting/ further analysis with AGI Roger?
Roger Montgomery
:
Hi michael,
We will endeavour to put a report up here today or tomorrow. In summary, long term looks great but they will be cycling difficult numbers in the short term. We remain firmly in favour of holding for the prospect of a business that could possibly be profitably two or three times larger in five years.
Daniel Rosenthal
:
Roger,
What did Len and co have to say?
Kind Regards,
Daniel
Roger Montgomery
:
We are currently very comfortable owning the company’s shares for the next few years. We suspect (hope) they’ll be cycling difficult comparative numbers in the next half. Long term, we currently expect 1) the consolidation among their peers will produce desirable outcomes and 2) their revenue could be multiples of today’s.
Tony C
:
I have my eye on it but its catching a falling knife at the moment
Kent Wong
:
My view is the panic selling recently is over done. Although AGI is not doing as good as what we expected, the fall by approx 20% may be an opportunity for some investors.
Roger Montgomery
:
We’ll be meeting with management tomorrow.
Steve Banks
:
Always great to see a quality stock punished as it gives true investors an opportunity to add to their portfolios. The International growth story will see great gains for those with enough patience.
Roger Montgomery
:
Be mindful that there are also risks and it always pays to be conservative.
Bob
:
So are you guys currently holding AGI?
Roger Montgomery
:
I believe that question has been answered in some of the comments here. Yes we do. It is a small single digit percentage weight and part of a broad portfolio of more than twenty holdings in The Montgomery Fund. And we purchased at meaningfully lower prices.