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Morningstar | Further Approval Delays Weigh on Ainsworth’s 2H Performance

Narrow-moat-rated Ainsworth Game Technology downgraded earnings guidance for the second half of fiscal 2019. Underlying profit before tax (precurrency) is expected to be around AUD 4 million in the six months ending June 30, 2019. This compares with prior guidance for at least AUD 18 million during fiscal 2019 and falls short of our AUD 22 million forecast. A disappointing outcome, which management attributes to the intense competitive pressure, along with delays in product approvals. The firm highlighted the lower-than-expected contribution from Australia in the second half will be partially offset by a slight improvement in North and Latin America, compared with the first half of fiscal 2019.

Our AUD 1.20 per share fair value estimate is unchanged, despite trimming our fiscal 2019 EPS forecast to AUD 0.03 from AUD 0.05 cents. However, our long-term assumptions are broadly unchanged, and we think the approval delays are a key contributor towards the loss of market share in the second half. The stock remains undervalued in our view, bearing in mind earnings are extremely volatile and its very high uncertainty rating. We expect the shares to rerate when new games are released and well received by the market, which should drive a modest sales recovery. Management expressed confidence the approvals are progressing, and we expect the firm to recover some of the lost ground in fiscal 2020 and the subsequent years. We project sales growth to resume in the coming years and average in the mid-single-digits. Meanwhile, we expect EBIT margins to recover from the current high-single digits (record lows for the firm) towards the midteens in the long run, reflecting the high degree of operating leverage.

On a more positive note, the balance sheet remains strong, and the firm is well placed to continue funding growth initiatives and investing in technology, along with game design and development. Net debt as at June 30, 2019 is expected to be approximately AUD 7 million, which is only slightly higher than our previous AUD 2 million forecast. In light of the earnings deterioration, we no longer expect the firm to declare a dividend in fiscal 2019. We forecast AUD 1 cent per share dividend in fiscal 2020, equivalent to a 20% payout ratio which should return to around 40% within the next five years as earnings recover.