Company Reports

We cease coverage of Ainsworth Game Technology, as signalled in our notes published April 14, 2021 and May 18, 2021. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest.

We maintain our AUD 0.40 fair value estimate for no-moat Ainsworth following a market update on preliminary fiscal 2021 results. Ainsworth expects to report second-half profit before tax of around AUD 1 million, or a full-year underlying pretax loss of around AUD 26 million, after excluding AUD 29 million in first-half impairments--principally in the Latin America business--and an expected AUD 3 million gain on the sale of surplus land in Nevada. We increase our full-year underlying pretax loss forecast to AUD 26 million, from AUD 33 million previously. The increase to our near-term earnings forecast is broadly offset by a recent strengthening in the AUD versus the USD and our probability-weighted estimate for an increase in the U.S. corporate tax rate to 26%, up from the current rate of 21%.

We intend to cease coverage of Ainsworth Game Technology in May 2021. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest.

With a swifter return to profitability anticipated for Ainsworth Game Technology, we lift our fair value estimate for the no-moat stock by AUD 0.02 to AUD 0.40 per share The firm reported an after-tax loss of AUD 50 million in the first half of fiscal 2021, compared with an AUD 4 million loss in the prior corresponding period. Underlying net loss was AUD 21 million after adjusting for AUD 29 million in impairments--mainly the Latin America business, which is grappling with a second COVID-19 wave during the half. Latin American gaming venues remain heavily restricted--owing to social distancing requirements amid the ongoing coronavirus pandemic--and Ainsworth's customers are keeping a tight rein on capital expenditure, deferring purchasing decisions.

We expect Ainsworth will be unable to recapture lost share as the firm struggles to compete against the financial might of much larger competitors--namely International Game Technology, Scientific Games, and narrow-moat Aristocrat Leisure. In our view, Ainsworth has squandered the opportunity afforded by its licences across key regions, with underinvestment in research and development, or R&D, in recent years leading to a lack of popular games today. While the firm has flagged a renewed focus on R&D spending in an attempt to stem market share losses, we expect this will prove too little, too late. Ainsworth is working from a much smaller revenue base, and the three major competitors all spend more on R&D than Ainsworth's entire annual sales. Consequently, Ainsworth's recent product releases have been lacklustre in comparison.

We maintain our AUD 0.38 fair value estimate for shares in no-moat Ainsworth Game Technology following the firm's annual general meeting and release of first-half guidance. Ainsworth expects a pretax loss of AUD 15 million in the first half of fiscal 2021--in line with our full-year forecast of a AUD 29 million pretax loss. Ainsworth's outright electronic gaming machine, or EGM, sales have been hard-hit as coronavirus-induced shutdowns, social distancing measures, and travel restrictions weigh on the firm's casino and club customers. While the vast majority of North American casinos have now reopened, travel restrictions and social distancing measures mean visitations remain well below prepandemic levels, and we expect curtailed capital expenditures to persist through fiscal 2021.

We expect Ainsworth will be unable to recapture lost share as the firm struggles to compete against the financial might of much larger competitors--namely International Game Technology, Scientific Games, and narrow-moat Aristocrat Leisure. In our view, Ainsworth has squandered the opportunity afforded by its licences across key regions, with underinvestment in research and development, or R&D, in recent years leading to a lack of popular games today. While the firm has flagged a renewed focus on R&D spending in an attempt to stem market share losses, we expect this will prove too little, too late. Ainsworth is working from a much smaller revenue base, and the three major competitors all spend more on R&D than Ainsworth's entire annual sales. Consequently, Ainsworth's recent product releases have been lacklustre in comparison.

We lower our fair value estimate for shares in Ainsworth Game Technology to AUD 0.38, from AUD 1.10 previously, following the release of fiscal 2020 earnings and transition to a new analyst. We no longer believe Ainsworth enjoys competitive advantages in the electronic gaming machine, or EGM, market. While stringent regulatory licensing requirements in major markets create barriers to entry for new players, the market is already highly competitive and we no longer believe Ainsworth has the appropriate intellectual property to enjoy economic returns in this environment.

We place Ainsworth under review to assess the firm's diminishing competitive position following the release of fiscal 2020 results. Ainsworth declared an underlying net loss after tax of AUD 30 million compared with our forecast for a AUD 2 million loss. Revenue for the year fell 36% to AUD 149 million, with the impact principally felt in the second half. Sales in the second half were down over 60% compared with both the first half of fiscal 2020 and the second half of fiscal 2019. Electronic gaming machine, or EGM, sales have been particularly hard-hit by the coronavirus-induced shutdowns of most of the firm's customers. We anticipate Ainsworth's customers have been slowing capital expenditure prior to shutdowns in order to protect balance sheets, grinding EGM sales to a halt.

As a result of the current market rout, narrow moat Aristocrat Leisure now trades at a meaningful discount to our unchanged fair value estimate of AUD 27.50 per share, and narrow moat Ainsworth trades at an even deeper discount to our intact fair value estimate of AUD 1.10 per share. We expect the impact of COVID-19 to weigh on the firms' near-term earnings as customers reduce capital expenditure to protect balance sheets amid shutdowns of nonessential public venues--including clubs and casinos. But our fair value estimates are intact as we expect the impact to be short term. Our long-term earnings forecasts are largely unchanged and the time value of money offsets the lower near-term earnings outlook.

We lower our fair value estimate for shares in Ainsworth Game Technology to AUD 1.10, from AUD 1.14 previously, amid a lower near-term earnings forecast following the fiscal 2020 interim results. The net loss before tax of AUD 4 million was in line with guidance for the half, but included currency losses and one-off items relating to a legal settlement. Excluding one-off and currency impacts, the underlying net loss before tax was about AUD 0 million. The firm continues to expect to return to profit in the second half of fiscal 2020. Ainsworth enjoys competitive advantages in North America, with its licences underpinning the firm's narrow economic moat. While margins in the key North American market appear to be holding up, sales growth was softer than expected, with pressure on unit volumes and average selling prices. We lower our full-year net profit after tax, or NPAT, forecast to AUD 6 million for fiscal 2020, from AUD 8 million previously.

We retain our AUD 1.14 fair value estimate for shares in Ainsworth Game Technology following the firm's fiscal 2019 annual general meeting. The beginning of fiscal 2020 appears more troubled than we previously expected for the Australian business. Fiscal 2019 marked the fifth consecutive year of declining domestic unit volumes, and it appears fiscal 2020 will be another disappointing year. While we lower our near-term forecasts for the domestic business, we remain optimistic on the firm's North American prospects. Ainsworth enjoys competitive advantages in the key North American market, with its regulatory licences underpinning the firm's narrow economic moat. Our fair value estimate remains intact as the impact of the time value of money offsets near-term earnings reductions.

We reduce our fair value estimate to AUD 1.14, from AUD 1.20 previously, for shares in narrow-moat Ainsworth Game Technology, following the release of its fiscal 2019 results. While the 36% fall in underlying EBITDA to AUD 43 million was in line with our prior forecasts, the near-term outlook appears to be more challenging for the smaller domestic segment than we anticipated. Ainsworth continues to falter in Australia and we lower our domestic margin forecasts from fiscal 2020. Despite the reduction in our fair value estimate, we continue to see value in Ainsworth at current depressed prices. The key North American business remains strong. Ship-share losses have virtually stopped, revenue continues to increase year on year, and new game approvals are progressing.

We transfer coverage of narrow-moat-rated Ainsworth Game Technology and reaffirm our AUD 1.20 per share fair value estimate. Our very high fair value uncertainty and Standard stewardship ratings are also unchanged. The firm endured a couple of challenging years, particularly in the highly competitive domestic market, ceding considerable market share to larger rival Aristocrat. Delayed product approvals and launches contributed to recent underperformance. Notwithstanding, we see value at current levels. At the most recent trading update, management was confident new game approvals are progressing, which should translate into improved product performance and domestic market share gains during fiscal 2020.

As we have long expected, Senate Republican leadership recently passed a “tax reform lite” plan that has the potential to bring about lasting changes to the U.S. corporate tax system. While we may modify certain tax reform-related assumptions incorporated into our models, we don’t anticipate a material change in our fair value estimates or economic moat ratings for firms with U.S. earnings exposure, due to various offsetting factors. We believe tax reform is more likely than not to occur and the product of the House and Senate’s reconciliation efforts in committee will directionally align with our previous assumptions. As a reminder, we had assumed the following in our models: 1) a 25% corporate tax rate beginning in 2018; 2) an election for firms to either fully expense their U.S. manufacturing capital expenditures when made or deduct net interest expense; 3) a deemed repatriation tax of 10% on overseas earnings held in cash; and 4) the elimination of certain special interest tax provisions.