Is it time to sell this small-cap gaming stock - Ainsworth Game Technology Ltd?

AGI Details

Disappointment by the rebasing of the profit expectations for 2HFY18: Ainsworth Game Technology Limited (ASX: AGI) is a gaming machine developer, designer and manufacturer, which earlier provided its guidance to the market while expecting that H2FY18 PBT, excluding currency movements, will be modestly ahead of the $42.2 million in H2FY17. Profit Before Tax, excluding currency movements for H1FY18 was $16.2 million. While Ainsworth continues its progress to develop a more competitive product range to drive long term market share growth, several short-term factors caused profit expectations for 2HFY18 to be rebased. The Company now expects 2HFY18 Profit Before Tax, excluding currency movements to be around $20 million, which is a significant fall from the earlier guidance. Profit Before Tax for the full year FY18, excluding currency movements, is now expected to be approximately $36 million as compared to the $57.4 million in FY17.

Domestic sales for H2FY18 have been said to be adversely affected by a range of factors, including competitive activity, regulatory approval delays in product submissions and further product development changes which have deferred the approval and release of previously scheduled key game titles until H1FY19. In Latin America, total unit sales have been indicated to be slightly lower in H2FY18 than the prior corresponding period with second hand units making up a larger share of the sales mix. While these second-hand unit sales have reduced inventory levels and are profitable, gross margins have been lower. The Group reported a decrease of 2 per cent in total sales revenue ($120.3 million) in H1FY18 as compared to same period in the prior year and EPS was down to 2.4 cents (PCP: 6.4 cents).
 

International Revenue and Earnings Trend (Source: Company Reports)

In North America, AGI’s new unit sales in H2FY18, including the contribution from CDI, are expected to be similar to the 2,117 units reported in the prior corresponding period in 2017 with consistent average selling prices. Meanwhile, Mr. Joseph Bertolone has been appointed as President of AGT North America. Subject to regulatory approval, Mr. Bertolone will commence the new role on June 1, 2018. The growth in PacMan licensed product, with its associated royalty fee and lower gross margin, coupled with the reduction in participation income in the Class III market, was impacting margins and profitability in the region. It is operating in competitive markets and its execution this time has not met the high standards as expected. It is moving decisively to improve its profit outlook and is continuing to progress new product developments and marketing initiatives, which it confidently expects to improve in FY19. In the last six months, the share price was down by 48 per centand declined by 37 per cent in last five days, as on 4 May 2018. Given the prevailing issues and lower than expected performance in the near term with lack of catalysts, we put a “Sell” recommendation at the current price of $ 1.185.
 

AGI Daily Chart (Source: Thomson Reuters)

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