eBet odds shorten after earnings miss

Emerging gaming systems company eBet (EBT) suffered its biggest one-day sell off in 10-months after two brokers downgraded their recommendation on the stock.

BBY cut its rating to “underperform” from “buy” while Baillieu Holst lowered its recommendation to “hold” following the company’s weaker than expected half year result.

The downgrades sparked a 5.3% drop in the stock to $2.87 today, although the selling was on the back of low volumes.

Management delivered a 25% uplift in interim net profit to $1.1 million but that was shy of the $1.5 million Baillieu Holst was expecting with the broker noting that the miss was largely due to softer than expected sales of WMS gaming machines (eBet is the sole Australian distributor for these machines).

It also didn’t help that eBet failed to declare a dividend, which throws doubt on whether the company will do so this financial year even though the company only paid a final dividend of 3.5 cents a share and no interim dividend last year. Consensus estimates have pencilled in a 5.5 cents a share distribution in 2013-14.

eBet is restructuring its agreement with WMS, which will see the latter take over responsibility for the sales of the poker machines while eBet will get a fee for installation and maintenance for each machine sold.

The new deal will lead to lower revenues but management insists that profit margins will expand due to the lower capital outlay required by the small cap.

While eBet could face further pressure in the short-term, any weakness should be regarded as a buying opportunity for investors with at least a one-year investment horizon.

We should continue to see double-digit profit growth, in part from the introduction of its stored value gaming card offering.

I first highlighted the stock’s potential in June last year, and eBet has since surged over 150%.