Optimum Capital Management Pty Ltd

Investment Thesis for

Ainsworth Game Technology
December 2014
Prepared by Heinrich Jacobs
Managing Director & Chief Investment Officer

w: optimum-capital.com.au
e: info@optimum-capital.com.au

Disclaimer
Op#mum Capital Management Pty Ltd ABN 60 154 164 020 is the Trustee and Investment Manager of the Op#mum
Australian Equi#es Value Fund (the Fund) ABN 38 923 100 447. The Trustee is a corporate authorised representa#ve
(No. 467287) of Lanterne Strategic Investors Pty Ltd (ABN 49 098 472 587, AFSL 238198).
This presenta#on is not a recommenda#on to invest in the Fund and may not include all of the informa#on that a
prospec#ve investor needs to make an investment decision. Op#mum Capital Management does not take into account
the individual circumstances of any prospec#ve investor, nor does it give any advice whatsoever but to the extent that it
does, it cons#tutes only general advice and not personal advice. Accordingly, prospec#ve investors should make their
own independent enquiries and obtain professional legal, nancial, tax and accoun#ng advice before making an
investment decision.
Disclosure - The author is a shareholder in Ainsworth Game Technology

Table of Contents

Business Overview

History of Ainsworth

Valua#on

Risks

Conclusion

Business Overview

Ainsworth Game Technology (AGI)

ASX Code: AGI

Share Price: $2.10*
Market Cap: $750m
Enterprise Value: $695m

Founded in 1995, AGI has grown into one of Australias most dominant gaming
machine operators
$244m of sales in 2014 (+23% on prior year)
$89m EBITDA in 2014 (+20% on prior year)
$62m Net prot in 2014 (+19% on prior year)
$72m Net Cash posi#on with minimal debt
Unique Jurisdic@onal Licenses
AGI has 163 jurisdic#onal licenses globally and secured 31 new gaming
licences in 2014 including Mississippi, Missouri, Arizona, and Alderney
Interna@onal Expansion
Interna#onal revenue of $100m (+37% on prior year) and strong growth
in key market of the Americas. Interna#onal revenue now accounts for
41% of total company revenue.
ADrac@ve Yield & Return on Equity
Earnings yield between 8-9%
Dividend yield between 4-5%
Return on equity ~ 25%

*Share price at time of writing

Products
AGI sells a wide assortment of gaming machines tailored for global markets

Market

No of
products

Australia Americas

35

32

Europe

Asia

27

Diverse Footprint
AGI is growing its International operations and is establishing a welldiversified business with strategic relationships being developed overseas

$58.5m

$1.0m
$4.1m

$31.9m

$143.3m
$5.3m

Revenue by geography
Source: Ainsworths 2014 Financial Report

History of AGI

Five Year Share Price Performance

AGI was trading at approximately $4.45 per share in March 2014 but has since
traded down primarily due to softer than expected earnings in FY14

$4.45

Recent
price:
$2.25

Source: Yahoo Finance

Intrinsic Value Rising

Has the share price decline been warranted? The Intrinsic Value (Blue Line) of
the company has steadily been rising and the share price is trading below
Intrinsic Value

Mis-pricing opportunity

*Rising Intrinsic
Value

Current share price mostly

driven by market
shortsightedness

Ainsworth Historical Financial Performance

AGIs strong domestic operations and international expansion is driving
significant revenue gains, with more upside potential to come
Ainsworths Historical & Predicted Revenue Growth

350#
295#

300#
244#

$"millions"

250#

198#

200#

151#

150#
100#

256#

98#
69#

50#
0#
FY#10#
Source: Capital IQ

FY#11#

FY#12#

FY#13#

FY#14#

FY#15#

FY#16#

Ainsworth Historical Financial Performance

Management has a strong focus on operational excellence through product
innovation, capital discipline and strong execution. As a result, the Companys
profitability has increased.
Ainsworths Historical EBITDA Performance

Ainsworths Historical & Predicted Earnings Per Share

100"
85"

90"
80"

cents&per&share&

$"millions"

60"

51"

50"
40"
26"

30"
10"

!0.2!!

!0.16!!

!0.19!!

!0.2!!

FY!14!

FY!15!

!0.23!!

!0.15!!
!0.1!!

!0.08!!

!0.05!!
!0!!

7"

!(0.05)!!!

0"
FY"10"

!0.22!!

!0.25!!

67"

70"

20"

!0.3!!

FY"11"

Source: Capital IQ

FY"12"

FY"13"

FY"14"

FY!10! FY!11!
!(0.01)!!!

FY!12!

FY!13!

FY!16!

High Returns on Capital

30%
23%
15%

22%

21%

22%

2012

2013

2014

16%

8%
0%

4%
-9%

(8%)
(15%)
2009

Source: Capital IQ

2010

2011

Improving Margins
EBITDA Margin %

Gross Margin %

70

52.5

35

17.5

-17.5
2009

Source: Capital IQ

2010

2011

2012

2013

2014

Valuation

Which would you rather own?

1. A 1 year Term Deposit at a 3.25% yield
2. A 5 year Term Deposit at a 4.00% yield
3. Shares in a quality company with an initial 9%, 8.6%, or
even 8.2% earnings yield and growing over time

Whats the pay cheque?

With the share price at current levels an attractive earnings and dividend yield
is being offered to investors
Share Price

Current Earnings Per Share (c)

Earnings Yield (%)

$2.10

0.19

9.04

$2.20

0.19

8.63

$2.30

0.19

8.26

Share Price

Current Dividends Per Share (c)

Dividend Yield (%)

$2.10

0.10

4.76

$2.20

0.10

4.54

$2.30

0.10

4.34

How does it compare?

On a comparable basis with rival Aristocrat, Ainsworth looks cheap on several
fronts

Comparables

Ainsworth

Aristocrat

Market Cap ($m)

765

4,261

Enterprise Value (EV)

695

4,075

EBITDA ($m)

85

198.8

Multiple

8.17

Price/Earnings
Return on Equity (3yr Avg)

20.5 x

11.2 x

23 x

30.5

22.6

Value of AGI
Our conservative NO growth valuation is based on the current free cash flow plus
tangible book value of the company. Since future growth is excluded from the
analysis, only maintenance capital expenditures are subtracted from after-tax EBIT
and growth is ignored

Norm. Earnings - Maint. Capex

50.06

WACC

9%

Cash & Equivalents

71.929

Interest Bearing Debt

0.463

Shares Outstanding

322

Total Equity

235

Intangibles

4.701

Earnings Value Power (EVP)

$1.95

Tangible Book Value (TBV)

0.72

EVP + TBV

$2.67

Current Share Price

$2.10

Margin of Safety

+27.00%

Combining the earnings power and tangible assets of AGI you have a company conservatively valued
at $2.67 per share and trading at a 27% discount.

Target Valuation
But what about growth? Ainsworth is a growing company so we should consider a
reasonable multiple on EBITDA to arrive at our implied share price valuation
Valuation Multiples
EV/EBITDA

11x

12x

13x

14x

EBITDA(m)

85

85

85

85

Implied Enterprise
Value(m)

935

1,020

1,105

1,190

Cash(m)

72

72

72

72

Implied Equity
Value(m)

1,007

1,092

1,177

1,262

Shares Outstanding(m)

322

322

322

322

Implied Share Price

$3.12

$3.39

$3.65

$3.91

Risks

Whats the Downside?

There are a number of bear points to consider as Ainsworth operates in a
competitive and regulated industry, and across geographies

External factors such as economic condi#ons and credit markets

AGIs main customers (casinos & clubs) may experience a slow down and as a result purchase
less of AGIs products

Consumer preferences may change and AGIs gaming machines may lose popularity

AGIs growth in new Interna#onal markets may slow or the company may fail to obtain licensing
and approvals

Conclusion

At current prices, AGI oers a very aDrac@ve equity and dividend yield that could grow over @me
- AGI has a ~8-9% current earnings yield and ~4-5% dividend yield

The current share price is not factoring in the earnings power of the company and the securi@es are mis-priced
- Net Cash of $72m on the balance sheet with minimal debt

High quality business with good track record of opera@onal and nancial performance

Interna@onal expansion to deliver ongoing growth opportuni@es

AGI has a high quality porRolio of gaming products in an industry with high barrier to entry

The founder Leonard Ainsworth is a pioneer of the industry and holds a majority ownership stake in the company

Get In Contact With Us

If you would like to discuss this presenta#on or nd out more informa#on about our Australian Equi#es
Value Fund (applica@ons now open) please email us at info@op#mum-capital.com.au

Thank you