With international sales now representing 71% of total revenue (up from 24% in 2011), Ainsworth is in the minority of Australian companies that have successfully pursued international expansion (see Table 1).
Sales in North America were the highlight, rising 34% from $83m to $111m despite strong competition from the likes of Aristocrat Leisure and industry giants International Game Technology and Scientific Games. Sales of the company’s popular A560SL cabinet increased 15% to 3,559 and Ainsworth maintained an average selling price of US$16,700 for its machines.
Higher margin machines ‘on participation’ – those rented to casinos in return for a share of the daily winnings – also increased but mainly due to the acquisition of Nova Technologies in January 2016. The company now has 2,792 machines on participation, up from 1,316 in 2015.
International sales the highlight
Australian sales dismal
Novomatic transaction still a concern
Initial signs from Nova are positive, with its 1,425 units on participation at acquisition rising to 1,511 at 30 June 2016, with around three-quarters of these being Class II machines and the remainder Class III machines. (See Ainsworth enters new market with Nova for the distinction between Class II and Class III but, despite the regulatory and technical differences, the cabinets and games in each class are very similar nowadays).
Average revenue per day (or ‘yield’) on machines under participation fell 27% from US$33 to US$24 per day due to Nova’s machines having a lower yield and casinos purchasing higher-performing games previously on participation.
Latin America was also a standout, with revenue increasing 49% from $50m to $75m, with both the number of outright sales and machines on participation rising, by 32% and 37% respectively. The company was also able to increase its average selling price slightly, to US$15,500, while the average revenue per day on its machines on participation rose by an impressive 27% to US$19 per day.
Ainsworth and other gaming machine makers typically have to accept long payment terms and, as a result, a relatively high risk of bad debts: the company wrote off $2.2m owed by a troublesome debtor in 2016.
D for dismal
By contrast, the performance in Australia was dismal, with revenue declining 12% to $82m and the company selling only 958 machines in the second half of 2016, half what it sold in the first half of 2016. Clearly, the company’s new A600 cabinet is struggling in a market dominated by Aristocrat’s Helix cabinet and successful Lightning Link series of games, with the only bright spot being a 3% increase in average selling prices.
An 81% decline in foreign exchange gains due to a higher Australian dollar versus its US equivalent and 44% increase in depreciation from its new Nevada factory and increased machines on participation – which remain on Ainsworth’s balance sheet – helped push net profit down 20%. However, after removing the impact of foreign exchange and one-offs such as due diligence costs on potential acquisitions, net profit was flat at around $52m or 16 cents per share.
Where to now?
Ainsworth’s share of the North American Class III market stills pales in comparison to that of Aristocrat and IGT. It continues to obtain more licences, adding six across North America and in the Bahamas along with 37 new American Indian tribal licences. This should help it continue to grow sales in the region.
|Year to 30 June||2016||2015|| /(–)
|Aust. revenue ($m)||82||93||(12)|
|Int. revenue ($m)||204||148||38|
|Total revenue ($m)||286||241||19|
|Forex gains ($m)||5||26||(81)|
|* 5c final div (no change), fully franked, ex date 30 Sep, DRP (no discount)|
Its entry into the faster-growing Class II market via its Nova acquisition offers further growth opportunities. Competitor Aristocrat has increased the average revenue per day earned from the Class II machines owned by Video Game Technologies and we’d expect Ainsworth to do the same as it converts its existing popular games for use on its Class II fleet. The 45 titles currently available on Class II machines will expand to 70 in 2017.
While Australia now represents less than 30% of sales, the country is much less important than it used to be. We agree with chief executive Danny Gladstone who believes Ainsworth in Australia is ‘only one game away from success’ and so any recovery here will be a bonus. Access to Novomatic’s game library and far greater research and development budget – Novomatic produces around 300 new games each year compared to around 50 for Ainsworth – along with the sourcing of games from third parties will help.
Yet Novomatic’s purchase of around 53% of Ainsworth from Len Ainsworth looms large. While access to Novomatic’s research expenditure, game library, its markets in Europe and potential cost synergies are positives, we opposed the acquisition because minority shareholders weren’t offered the same terms.
We're also concerned that Novomatic might give its products precedence once Ainsworth begins distributing them. With Novomatic receiving almost all of the profits from its machines but only 53% of the profits from the sale of Ainsworth’s machines, Ainsworth’s products could be potentially discounted in favour of Novomatic machines, to the detriment of shareholders.
However, as access to the lucrative US market was the main driver behind Novomatic’s purchase, that Novomatic will look to consolidate its US operations into Ainsworth somewhat counters that argument.
Moreover, after participating in the recently initiated dividend reinvestment plan (DRP), Len Ainsworth and his wife still own more than 10% of the company. There’s only one reason Len would participate in the DRP and that is to ensure that he and his wife can prevent Novomatic compulsorily acquiring the rest of his company for a bargain price.
We note that Novomatic has committed to ‘maintain its holding at around 53%’ and not to rely on the 3% ‘creep’ provisions within the Corporations Act to increase its shareholding. However, these commitments expire on 31 Dec 18 or earlier if ‘new information becomes available or as circumstances change’ and, further, it can increase its holdings via the DRP.
Len’s participation in the DRP, his wife’s continuing stake and the short-term, conditional nature of Novomatic’s intentions suggest it will move to full ownership at some stage. While a potential takeover is never a good enough reason to own a stock, it does provide some reassurance.
Of course, the $470m that the Ainsworths have already taken off the table, not to mention their considerable other wealth, mean that the $70m value of their remaining stake is merely a drop in a much larger ocean.
All in all, though, its still-low debt burden, good growth prospects and price-earnings ratio of 15 just about counter the concerns above. We’re reinstating the price guide but are nudging our maximum recommended portfolio weighting down to 2%. With due consideration of the risks and the likely ongoing volatility in its share price, we continue to recommend that you HOLD.
Note: The Intelligent Investor Growth and Equity Income portfolios own shares in Ainsworth Game Technology. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.
Disclosure: The author owns shares in Ainsworth Game Technology.