Ainsworth Game Technology: Result 2015

On the basis of Ainsworth Game Technology's 2015 result, you can see why we might be big supporters of the RBA's efforts to force a decline in the value of the Australian dollar.

With Australian revenue diving 35% (see Table 1), increases in international sales meant total revenue declined only slightly in 2015. All things equal, the lower margins earned in the company's international business should have led to a decline in net profit (NPAT).

All things weren't equal, however, and the decline in the Australian dollar versus its US counterpart meant Ainsworth recorded a $26m foreign exchange gain in 2015 (included in Finance income in Table 1), largely due to the increased Aussie dollar value of money owed to it from customers in US dollars. As a result, reported NPAT increased by 13% to $70m, although it was $53m excluding foreign exchange gains.

Although we're not currency strategists, we doubt similar gains will occur in future and so the performance of the underlying business is what counts for investors. Here, things were mixed.

Australian sales plummet

As previously flagged (see Ainsworth warns on sales on 4 Jun 15 (Buy – $2.81)), Australian sales were disappointing, with the number of machines sold plummeting 41%, from 6,004 to 3,535. Along with delays in regulatory approvals and intense competition, buyers held off purchasing Ainsworth machines in anticipation of the recent launch of its new A600 cabinet. 

The company will begin selling the A600 and new games such as Cash Adventures in September and, while they're likely to be volatile, future sales in Australia should improve as a result.

Despite the lower sales, the number of Ainsworth machines installed in clubs and pubs 'experienced moderate growth across most domestic markets' but we'll revisit our investment case should the company's lower sales in Australia prove permanent rather than temporary as management suggests.

Foreign sales improving

Performance overseas was better, led by sales in North America which increased 41%, from $59m to $83m. Both outright sales of machines, which increased 30%, and machines under 'participation' (machines leased to casinos in return for a share of the daily proceeds), which increased 19%, improved as a result of growth in new jurisdictions such as Arizona and Missouri and continued growth in existing jurisdictions such as Nevada and California.

The company plans to open its new Las Vegas headquarters in April 2016 and is holding off officially launching the A600 in North America until then. Nevertheless, it will be undertaking a 'soft' launch at the upcoming Global Gaming Expo in late September which may mean sales of its successful A560SL cabinet suffer in the meantime as American casinos hold off purchases until the A600 becomes available. Yet over the longer term, we expect North American sales to continue to increase as Ainsworth enters more jurisdictions and builds market share.

Latin American sales also increased (by 56% to $50m) and the extended payment terms (up to 24 months) to customers in this region meant receivables increased 27%. They've subsequently declined to around 2014 levels due to collections since 30 June 15 but as shareholders of Aristocrat in the early 2000s could attest, the extended payment terms mean that Ainsworth risks not getting paid should its customers encounter financial difficulties.

Finally, Ainsworth's nascent online social and real money gaming business should turn profitable in 2016.

Members should note that future sales and results are likely to remain volatile due to the uneven release of new cabinets (notably the A600) and games in various jurisdictions. Ainsworth's shares have risen 9% today and are up slightly since we upgraded Ainsworth in Ainsworth spins the reels in Vegas on 5 Nov 15 (Buy — $3.03). BUY.

Note: Our Income and Growth portfolios own shares in Ainsworth.

Disclosure: The author also owns shares in Ainsworth.