It has been a wild ride for the share price of pubs and clubs gaming solutions and operations provider eBet (EBT) in recent weeks.
On limited trading volume and no company specific newsflow, the share price was down materially in early May.
Since this time the company has provided an update on its expansion into Victoria and upgraded its FY15 earnings guidance materially.
These releases suggest that eBet’s investment thesis remains on track and that the recent volatility appears to be a market aberration rather than a sign of operational challenges.
We will look at each of the releases in turn below but first provide a brief recap on the eBet business.
The eBet group provides gaming solutions that cover a range of gaming operations. This includes electronic gaming machines (i.e. pokies), gaming management systems and licensed monitoring operator services.
The company’s largest earnings streams are gaming operations and gaming systems.
Gaming systems effectively provides a technology platform for gaming venues as well as bolt on services such as cashless gaming solutions.
eBet’s gaming operations division provides support and licensing to its technology platform as well as acting as a licensed monitoring operator.
What is attractive about eBet?
We believe that eBet is well positioned to deliver above market EPS growth out to FY17, while concurrently offering an undemanding valuation of around a 13 times FY16 price-earnings (PE) multiple.
Specifically, earnings growth should be driven by the integration of the recently acquired gaming systems provider Flexi-NET, a roll out of services into the Victorian market and continued penetration of services in eBet’s existing business.
Expansion into the Victorian market
Historically, eBet’s business has primarily focused on NSW. In this region, EBT’s footprint encapsulates 590 venues with over 40,000 electronic gaming machines (EGMs).
Until recently, eBet’s gaming systems business had no exposure to the Victorian gaming market. However, in August 2014, EBT received approval for its metropolis gaming system from the Victorian Commission of Gaming and Liquor regulation.
In mid-May, eBet provided an update on its expansion into Victoria announcing that the Company has now signed agreements with a total of 103 venues operating over 5,300 gaming machines across Victoria.
This is healthy progress on 98 venues and 4,897 gaming machines that the company had signed up at the recent first-half FY15 result in mid-February. Furthermore, this achievement represents approximately 70 per cent of eBet’s addressable market in Victoria.
The agreements represent approximately $14m in revenue over the life of the contract, many of which are recurring and commence in FY15/16.
Having achieved this degree of penetration in a relatively new market, this will provide eBet with opportunities to sell broader gaming products into these venues over time. This opportunity provides upside to our current earnings estimates.
Bullish FY15 earnings guidance
Further to the update on progress into the Victorian gaming market, eBet provided profit guidance for FY15. The company expects net profit before tax to increase 52-60 per cent to $5.5-5.8m.
This is materially higher than the $3.6m reported in FY14 and higher than our own estimates of $4.6m.
Pleasingly, this earnings growth hasn’t come at the expense of generating recurring revenue streams. Recurring revenue now accounts for 52 per cent of eBet’s revenue stream. Whilst this is marginally lower than the 56 per cent generated in the first half of FY15, it is in line with that delivered in FY14.
Growth options going forward
While the Flexi-NET acquisition is the key driver of earnings growth in FY15, eBet has a number of longer dated growth options into FY17.
Clearly, the growth into the Victorian gaming market has potential to improve earnings. Since entering the market in late 2014, eBet has entered agreements encapsulating 103 venues and over 5,300 EGMs. We are encouraged by how quickly eBet has established this footprint.
Furthermore, it is encouraging to see a continuation of the improvement of recurring revenue streams. eBet’s share price should be rewarded as this revenue composition trend continues to unfold.
We have upgraded our FY15 earnings estimates to reflect our management’s earnings guidance but have left our FY16/17 earnings estimates largely unchanged until we see further details at the FY15 result.
With eBet likely to deliver above market EPS growth in the coming years while offering an undemanding valuation and the potential for future capital management, we retain a “buy” recommendation with a price target of $4.60.
To see eBet's forecasts and financial summary, click here.