Slater & Gordon Limited

SGH Details

1HFY21 Key Financial Results: Slater & Gordon Limited (ASX: SGH) is a legal services provider in Australia. On 12 April 2021, SGH announced a 620,000-performance rights issue under an Employee incentive Scheme not yet listed on the ASX. SGH reported $98.293 million of revenue, up 10.7% YoY for 1HFY21 due to higher average fees realised from the improved case mix. It posted an NPAT of $3.091 million for 1HFY21 versus a net loss of $0.6 million in 1HFY20. The improved financials are mostly the transformation benefits of a tighter working capital management, business growth in both product lines- Personal Injury Law (PIL) and Class Actions portfolio. SGH saw a 16% growth in enquiries and a 6% increase in active files for 1HFY21. It posted $6.4 million of net cash flows from operations in 1HFY21. SGH repaid $5 million to Super Senior Facility (“SSF”) lenders and fully paid the Disbursement Asset-backed facility in the reporting period. It held a cash and cash equivalents balance of $19.73 million as of 31 December 2020.

Revenue Trend from FY16-FY20; (Analysis by Kalkine Group)

Key Risks: The company faced lockdown restrictions in Victoria for most of the 1HFY21. SGH is exposed to the reduced activity in some parts of the legal process and lower settlement volumes due to the COVID-19 restrictions and seeking/renewing finance facility at cost-effective terms.

Outlook: SGH intends to reduce its gearing further over time. It plans to grow through service differentiation by training lawyers and brand campaigns, delivering social justice (seeking compensation for over 1,300 asylum seekers) and building scale digitally via the implementation of Digital Management Solution. It has created more roles in Civil practice groups, and Class Actions expanded the referral and partner program with Australian Family Law and looking to advance on other avenues.

Stock Recommendation: The stock of SGH gave a negative return of 13.37% in the past six months and a negative return of 33.98% in the past nine months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.620-$1.485. On a TTM basis, the stock of SGH is trading at an EV/Sales value multiple of 1.0x, lower than the industry (Professional & Commercial Services) median of 2.9x thus seems undervalued. Considering the current trading levels, increase in revenue, earnings, and NPAT, growth in Work-In-Progress PIL and active files in 1HFY21, plans to reduce gearing over time, valuation on a TTM basis, and related risks of pandemic restrictions, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.680 on 22 June 2021.

SGH Daily Technical Chart, Data Source: REFINITIV 

Ainsworth Game Technology Limited

AGI Details

Business Update: Ainsworth Game Technology Limited (ASX: AGI) is engaged in the design, development, and manufacturing of gaming machines, software, and related equipment. On 18 May 2021, AGI announced the enactment of an exclusive partnership with GAN Limited (“GAN”) for providing access to its real money online game assets in the US. The access is available at a minimum guaranteed sum of US$30 million, subject to conditions and terms. The contract will start on 1 July 2021. AGT expects to receive US$10 million cash in 1HFY22 and another US$20 million in cash over the remaining tenure of the contract.

Key Takeaways from 1HFY21: The company posted $72.073 million of revenue in 1HFY21, down by 33% on 1HFY20. However, the 1HFY21 revenue was up by 71% on 2HFY20. The decline in top-line was due to the adverse impact of continued closures of customer venues during COVID-19. International sales added 73% to the total revenue and recurring revenues contributed ~25% of the total revenue in 1HFY21 versus ~23% in 1HFY20. AGI reported a statutory net loss after tax of $50.1 million in 1HFY21, down by 1,152.5% in 1HFY20. AGT held a cash balance of $24 million and reduced net debt of $15.5 million as of 31 December 2020.

Revenue Trend from FY17-FY20; (Analysis by Kalkine Group)

Key Risks: The company faces the impact of the closure of customers’ venues and COVID-19 restrictions on its business. It also risks the cost of impairment and currency exchange fluctuations. 

Outlook: AGI anticipates a profit before tax (PBT) of ~1 million in 2HFY21 (excluding currency exchange movements and one-off items) subject to the compilation of audited results. It expects Group underlying EBITDA (excluding currency exchange and surplus gain impact) of ~$19 million (consisting of $13.2 million in 2HFY21, up by 128% on the $5.8 million notified for 1HFY21 results).

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of AGI gave a positive return of 32.09% in the past three months and a positive return of 120.61% in the past six months. The stock is currently trading higher than the 52-weeks’ average price level of $ 0.275-$1.175. The stock of AGI has a support level of ~$0.942 and a resistance level of ~$1.287. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price with a correction of high single-digit (in % terms). We believe that the company can trade at a slight discount than its peer median, considering its lower revenue and higher statutory net loss after tax for 1HFY21 vs 1HFY20 and risks associated with the COVID-19 customer venue closures. For this purpose, we have taken peers like Tabcorp Holdings Limited (ASX: TAH), Star Entertainment Group Limited (ASX: SGR), Helloworld Travel Limited (ASX: HLO) and others. Considering the current trading levels, steep price movement in the past months, valuation, and associated risks of the COVID-19 venue closures, we suggest investors book profit and give a ‘Sell’ rating on the stock at the current market price of $1.070, up by 7.00 % as on 22 June 2021.

AGI Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: - 

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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