Company Overview - Ainsworth Game Technology Limited (Ainsworth) is an Australia-based company, which is engaged in the design, development, production, lease, sale and servicing of gaming machines and other related gaming equipment and services. The Company also operates in the online gaming markets, including social gaming and licensed real money gambling markets. With operations, including design, development, assembly testing, sales and field service, the Company consists of product development cycles, from conception through to installation, service and support. Ainsworth design and manufacture the A560, ambassador and celebrity range of gaming products along with a range of entertaining and linked games. The Company's products include THE ALL NEW A600, CASH ADVENTURES, ORIENTAL EXPRESS, THUNDER HITS, DOUBLE Shot, QUAD Shot, Sweet ZONE, FIRE WIZARD, ICE WIZARD, FIRE STORM, THUNDER WILDS and The A560, among others. It has operations in New Zealand, Asia, Europe, Latin America and the United States.
 

AGI Dividend Details
 
Strong top line performance: Ainsworth Game Technology Limited (ASX: AGI) reported a strong revenue growth of 27% on a year over year (yoy) basis to $141.9 million for the first half of 2016 driven by its improving recurring earnings coupled with diversifying revenue base across the international markets. On the other hand, the group has been facing pressure in its core Australian markets due to ongoing tough market conditions and rising competition and hence reported a revenue decline by 6% to $50.3 million while the profitability for the region fell by 33%. The group witnessed a decline in activity among its corporate accounts despite a steady clubs market in the Australian market. Accordingly, AGI’s overall profit after tax fell 4% yoy to $33.1 million during the first half of 2016. The group’s gross margins were also under pressure and reached 60% during the period on the back of expanding international business, ongoing diversification of product, higher costs associated with release of A600™ in core markets. However, $9.8 million was contributed from positive foreign exchange gains during the first half to the pretax profit, which led to $6.9m after tax. Meanwhile, the group’s New Zealand segment made smart gains which surged 311% to $7.5 million during the period despite prudent spending by its clients and decrease in number of venues.
 

Net profit performance for the first half of 2016 (Source: Company Reports)
 
Ongoing penetration in North America: AGI has been enhancing its International revenues which reported an outstanding performance during the first half of 2016, rising by 57% yoy to $91.6 million. As a result, the International revenues accounted 65% of the group’s overall revenues as of first half of 2016. This increase in the international revenues was mainly driven by the American markets whose sales rose by 52% to $80 million while the North American revenues surged 42%. The group’s AGT units selling’s rose > 20% in North America against the same period of last year. Several existing as well as new states in North America like California, Wisconsin, Pennsylvania and Oregon contributed to this performance. Meanwhile, the number of machines on participation in this region rose by 18% to 1,445 while clients average daily fee was USD$30. Consequently, North America represents over 30% of the group’s overall profits as of first half of 2016. AGI is planning to start its new facility in Las Vegas this month to further boost its presence in the region and even launched A600™ which offers new game concepts. Through A600™ the group intends to further boost its recurring earnings in Class III as well as II to maintain its performance in the region. Moreover, AGI even finished its Nova Technologies acquisition in January (acquired Nova for USD$38 million) which would further contribute to the group’s profitability in the region. Nova comprises around 1,425 machines on participation and is a certified Class II Bingo server with several games and licenses. AGI doubled its fleet in North America via Nova acquisition.
 

First half of 2016 performance (Source: Company Reports)
 
Latin American business also delivered a solid performance: AGI reported that its Latin American revenues also delivered a strong rise by 64% during the first half of 2016 as compared to the same period of last year, driven by its increasing sales of unit volumes by 29% to 1,398 and an average selling price rise by 2%. This growth was mainly from Mexico, which is the group’s major market in the region coupled with Peru and Argentina. Moreover, AGI delivered a strong recurring revenue in the region which rose by 71% with the installed base of 1,823. As a result, AGI generated an outstanding profitability in the region which increased by 115% to $16.8 million. As per the group’s business in the Rest of the World (including Asia), the revenues rose by 109% while profits surged by 91% to $6.3 million. The rest of the world business accounted 8% of the group’s overall first half of 2016 revenues. On the other hand, the group’s Asian market witnessed some pressure given the challenging Macau market, while the group is aiming growth from Philippines and Korea.
 

Latin America’s first half of 2016 win per Day (Source: Company Reports)
 
Outlook: The group issued a net profit after tax, excluding currency gains forecasts for the first half of 2016 to be in line with $52.5 million for the fiscal year of 2015. AGI also declared an interim dividend of $0.05 per ordinary share for the first half. This dividend leads to an overall year payout ratio of 49% of profit after tax, in line with its earlier stated payout range of 40-60%. Management reported that their focus remains to enhance its A600™ penetration in the domestic markets. The group is transitioning its A560X™ to the A600™ while management reported that they would take some years to penetrate and generate gains. The group released both single as well as multi game multi denomination packages for its new machine cabinet during the first half. AGI also earlier restructured its game development teams via internal promotions and utilization of third party contractors to launch new games and drive innovation. Accordingly, management reported that they would be delivering positive results from these efforts and expect a better progress in the coming periods. The group expects their gross margins for the second half of 2016 to be on a similar note as that of the first half of 2016.
 
Stock Performance: The shares of AGI corrected over 14.29% (as of April 08, 2016) in the last six months as the ongoing tough market conditions have impacted its core Australian market, pressurized volumes and average selling prices. On the other hand, the group’s shares have been recovering over 8.84% in the last three months (as of April 08, 2016) on the back of its solid North America and Latin American business performance. The group even built a strong recurring revenue base which rose by 43% during the first half of 2016 as compared to the same period of last year. Over 3,268 machines were on participation and rental while 15,374 machines were under service in NSW during the period.  Recently, the group reported that Mr LH Ainsworth and entities made a proposal to sell over 172.1 million of the group’s shares at $2.75 per share for cash consideration. Novomatic, an Austrian based privately owned gaming technology company would be buying these shares which would own over 53% of AGI after the sale. With this move, Novomatic intends to boost AGI strategy of being an even more diversified firm and improve profitability in the international game technology company. Novomatic intends to offer major game development and other intellectual property to the group as well as help them with global distribution and marketing strategy. As a result, AGI shares surged over 4.46% (as of April 08, 2016) in the last four weeks. With the management estimating an ongoing strong international performance for the coming months we remain bullish on the stock. Moreover, the new US facility opening this month coupled with rise in machines on participation and a solid game portfolio is expected to further drive the group’s performance in the coming periods. Meanwhile, the earlier correction in the stock also placed them at attractive valuations as the stock is trading at a reasonable P/E and has a decent dividend yield. Based on the foregoing, we give a “BUY” recommendation on AGI at the current levels of  $2.34
 
 
AGI Daily Chart (Source: Thomson Reuters)

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