Pubs and clubs gaming solutions and operations provider, eBet, recently released its earnings results for the six months to the end of 2014. The group delivered a robust set of numbers.
A brief recap on Ebet
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 companies 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.
Under Tony Toohey's stewardship the company enjoyed a period of significant growth and share price appreciation. In September 2014 Mr Toohey was appointed Deputy Chairman and Executive Director and Ken Carr was appointed CEO. Mr Carr has previously led a number of technology related business and should be well placed to lead eBet.
What is attractive about eBet?
We believe that eBet is well positioned to deliver above market EPS growth out to 2FY17, while concurrently offering an undemanding valuation of around a 13.5 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.
The first-half result: A strong set of numbers
The result was supported by an initial contribution of roughly four months trading from Flexi-NET, which will deliver its first full half of earnings in the second half of FY15 and first full year of earnings in FY16.
While we don’t view Flexi-NET as a high-growth standalone business, it should provide some important cross-selling scope for eBet’s gaming systems services in the coming years. Furthermore, the transaction appears to be on track to deliver in excess of 20 per cent earnings-per-share (EPS) accretion, in line with management’s expectations.
At an attractive acquisition price of 3.1 times enterprise value to earnings before interest, tax, depreciation and amortisation (EV/EBITDA), the acquisition will clearly improve group returns at the margin.
Key take outs from the result include:
- Revenue was up 6.3 per cent to $22.4 million. EBITDA was up 16.9 per cent to $4.4m.
- Net profit after tax (pre-significant items) was up 31.7 per cent to $1.5m.
- Recurring revenue increased from 53 per cent to 56 per cent. This compares to 46 per cent in 2012 and remains well on track to achieve managements stated goal of 60 per cent by 2020.
- Earnings quality was very strong. Cashflow conversion, as measured by EBITDA/gross operating cash flow (adjusted for changes in working capital) was 110 per cent.
- The company remains cash positive with a net cash balance of $7.5m at December 2014.
- The solid result was delivered despite a decline in revenue in the gaming machines division from $3.1m to $255,000. This was largely expected following the acquisition of WMS (with whom EBT had a gaming machine sales and distribution agreement with) by Bally in August 2014.
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.
Firstly, 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 Victoria gaming market. However, in August 2014, EBT received approval for its metropolis gaming system from the Victorian Commission of Gaming and Liquor regulation. Since this time eBet has entered agreements encapsulating 98 venues and nearly 5,000 EGMs.
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.
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.