Ainsworth: Interim result 2015

Ainsworth Game Technology's (AGI) share price fell 9% in the two days before it issued a profit warning at its AGM last November (see Ainsworth: AGM 2014 from 21 Nov 14 (Buy — $2.42)), so when the share price fell 8% in the lead up to the recently announced interim result we were prepared for the worst. In the end the result came in as expected and our view hasn't changed.

As management warned at the AGM, Australian revenue fell 33% to $54m. Delays in regulatory approval for the A560SL and A560X cabinets in Queensland and Victoria were mostly to blame. Increased gaming taxes and the introduction of a voluntary pre-commitment system designed to prevent problem gambling also impacted Victorian revenue.

Ainsworth should receive approval in Queensland shortly, with pokie sales getting a further boost from recent regulatory changes that make it easier for people to lose money. These changes included removing maximum betting limits on each machine and introducing 'ticket in, ticket out' technology which made it easier to transfer any winnings between machines (thus increasing the chances of those winnings disappearing).    

International expansion

International sales increased 45% to $58m, and now represent 52% of total revenue. Most importantly North American sales increased 43% to $30m, with the average price of a cabinet increasing 2% despite Ainsworth's focus on selling higher volumes to large corporations. This is a good sign that the recent consolidation of the pokie manufacturing industry hasn't triggered irrational pricing in a grab for market share.

Ainsworth also increased its machines under participation (those leased to casinos in return for a share of daily revenue) by 57% to 1,223. Yet average daily revenue actually fell 11% due to volume discounts and lower percentage of daily revenue agreements to drive market share, and increased competition from high performing machines that casinos purchased outright instead of leasing.

Ainsworth is betting heavily on the launch of the Sound of Music and Showgirls games, while expanding in Missouri, Mississippi and Arizona where it now has licences.  

Sales in Latin America also increased by 64% to $23m. Similar to North America, the company increased its average selling price by 1% but the number of machines under participation increased by 39%.

Other opportunities

Ainsworth was arguably a bit tardy but it has just released its first online casino Players Paradise. Facebook and mobile users can now purchase virtual currency and play pokies online.

The company plans to launch a second social network casino later in 2015, and is close to obtaining a gambling software license to provide its games to British real money online casinos. Distribution agreements should follow in North America and Europe. Aristocrat generated $50m in revenue in 2014 from its online division – a fourfold increase from 2013 – so it's starting to become a meaningful source of revenue.

Management is searching for acquisitions, and spent $2m investigating an American-based gaming manufacturer. Depending on the size, this may require a capital raising which we would likely support if the deal makes sense. The board approved a fully-franked interim dividend of 5 cents, though future dividends are only likely to be partially franked due to its large overseas earnings.

Management expects increased revenue in 2015 compared to 2014, mainly through increased international sales, but didn't provide forecasts. But as we're more interested in what this company can achieve over the next five and ten years once it completes its new production facility in Las Vegas, our long-term view hasn't changed. BUY.

Disclosure: The author, Jon Mills, owns shares in Ainsworth.