The weaker than expected revenue number might weigh on sentiment towards eBet (EBT) but 2015 is promising to be a big year for the gaming systems company.
While top-line growth missed its mark with a 6% drop in revenue (excluding the impact of the asset sale last year) to $40.8 million in 2013-14, it didn’t stop management from delivering a 27% uplift in pre-tax profit to $3.6 million.
The profit number was 1.4% ahead of my estimates but revenue was 9.5% below the $45.1 million I had been expecting.
The softer than expected revenue figure appears to be a timing issue on when new contracts are recognised in the company’s accounts and I have pushed out the sales growth expectations by a year.
Further, growth in Australian’s largest pokies market, New South Wales, has flat-lined for the group. This means group revenue won’t hit the $45-million mark till end of June next year.
The impact of the delay has cut my earnings per share (EPS) forecast by 29% to 23.3 cents for 2014-15 and 26% for the year after to 32 cents. As a consequence, my discounted cash flow (DCF) based price target has fallen to $4.90 from $5.30 a share.
While the change in valuation is disappointing, eBet still represents good value, particularly in light of the opportunities that lie ahead.
The first is its entry into the Victorian market. The company’s backend support systems to manage electronic gaming machines (EGMs) has received the tick of approval from the state’s gaming regulators, clearing the way for eBet to run field trials of its stored value gaming card (called CARD IT) ahead of the deadline for voluntary pre-commitment on June 30, 2016.
The Victorian government has mandated all gaming venues to install systems that would allow punters (if they choose) to set limits on how much money they are allowed to spend on EGMs. According to eBet’s chief executive, Tony Toohey, CARD IT system is the only one that’s approved for use in Victoria for now.
The trials will start in September and the sales cycle is likely to take between three and six months. eBet’s first Victorian customer of scale is Mercury Group, which operates 38 venues with 1560 EGMs. The company also has smaller contracts for 108 EGMs.
Victoria has around 28,000 EGMs (excluding Crown Casino) according to the Victorian Commission for Gambling and Liquor Regulation website. There is room for eBet to grow and Toohey is not only counting on the first mover advantage to win market share in the state.
The acquisition of business intelligence software company CDOL (renamed Astute) gives eBet the most advanced offering in this area.
Full year FY14 earnings results vs. Eureka Report's expectations
|Actual||Expected||Change in FY15 forecast||New FY15 forecast|
|Total revenue ($m)||40.8||45.1||-15.1%||45.0|
|Adj EBITDA ($m)||7.7||8.2||-10.3%||9.1|
|Pre-tax profit ($m)||3.6||3.6||-14.7%||4.9|
|Earnings per share (cents)||19||23.3||-29.2%||23.2|
|Source: Eureka Report, Company accounts|
Perhaps a bigger reason to punt on eBet is management. Under the stewardship of Toohey, the stock has surged 270% over the past five years compared with a 26% increase in the S&P/ASX 200 Index, and is up nearly four-fold since I first highlighted it in June last year.
What’s more, the group has a healthy balance sheet with no net debt forecast for 2014-15 and is planning a 5-6 cent per share special dividend this year, which should bring total distributions to about 12 cents a share.
This implies a more than 25% total return potential and that is why I am reiterating my “buy” recommendation on the stock. However, the eBet has soared over the past year and it might not be a bad idea to think of taking some profit off the table after such a strong run.
After all, there aren’t any obvious catalysts for eBet over the next two months or so, and the share price could drift lower over the shorter term.
To see eBet's financial summary and forecasts, click here.