Two Undervalued Mid-cap Stocks - Slater & Gordon Limited + Ainsworth Game Technology Limited
Sep 24, 2015 | Team Kalkine
Slater & Gordon Limited
Core business and acquisitions drove the earnings: Slater & Gordon Limited (ASX: SGH) delivered a revenue surge of 27% year on year (yoy) to $521.9 million in fiscal year of 2015, wherein its Australian Personal Injury Law (PIL) practice revenues increased 12.1% yoy boosted by better performance of Victoria and NSW, while brand awareness at Queensland is increasing. Australia’s General Law practice (GIL) revenues also increased 30.9% yoy to $56.7 million, while EBITDAW (earnings before interest, tax, depreciation, amortisation and movements in work and progress) improved 23.1% yoy to $1.6 million, during the period. Meanwhile, the Schultz Toomey O’Brien acquisition, WSW and Leo Abse Cohen acquisition and Business and Specialized Litigation services (BSLS) contributed to the performance. SGH’s United Kingdom Personal Injury Law (PIL) practice surged 47.6% yoy to $211.6 million for the fiscal year of 2015, driven by the rise in new cases opened including the ones in the multi-track (significant injury) area. Moreover, SGH investments for United Kingdom’s General Law practice (to become the major provider for specialized personal legal services in UK) also paid off. Revenues for UK GIL practice improved by 22.3% yoy to $47.8 million for FY15, while EBITDAW improved by 66.7% yoy to $4 million during the year. The group completed the acquisition of the Professional Services Division (PSD), which is now Slater Gordon Solutions (SGS). PSD’s July performance was in line with expectations. Slater & Gordon’s EBITDA rose 20.7% yoy to $121.6 million in FY15. The net profit after tax increased by 12.1% yoy to $70.7 million during the year. Net debt reached $ 623 million while the gearing ratio (net bank debt/equity) stood at 43.0%. Slater & Gordon declared a final dividend of 5.5 cents per share franked to 40% payable in October 2015 for shareholders.
Growing revenues over the years (Source: Company reports)
Addressed financial reporting concerns by making Accounting changes:Slater & Gordon stock have tumbled over 42% in the month of June, on the back of investigation by Australian regulators on the company’s errors in financial reporting. Moreover, rumors surrounded on SGH’s possible share price manipulation by hedge funds which further led to the downfall. British regulators have launched an investigation on Quindell, wherein Slater & Gordon acquired Quindell’s professional services division for $1.3 billion. Therefore, SGH changed its extremely aggressive accounting practices, by shifting to early adoption of AASB 15 - revenue from contracts with customers during fiscal year of 2016. For the interim, the FY15 financial statements would have better disclosures regarding revenue recognition policy related to the currently applicable Australian Accounting Standards AASB 118-revenue and AASB 111 -construction contracts. To enable a better understanding on the relationship between work-in-progress (WIP) assets in the balance sheet and forward revenue performance, the policy and process for organizing WIP and disbursements as current or non-current has been changed. SGH also intends to adopt an interpretation of the Standard, that’s steady with the approach taken by big 4 accounting firms. This interpretation would lead to a re-classification of the acquisition consideration of some completed transactions for accounting purposes only, but has absolutely no effect on the underlying business of the Company's financial performance. The market has been acknowledging the way SGH has provided more disclosure related accounting changes at the annual results, and therefore the price dip seems to get a re-rating in view of upcoming investor day in the month of October 2015.
Stock Performance: SGH issued positive FY16 guidance of more than $205 million EBITDAW and a Gross Operating Cash Flow to EBITDAW of 100%. The total Group Fees is expected to be more than $1,150 million. The recent stock correction have placed the stock at attractive valuations with a P/E of 7.7x, which is a bargain opportunity for investors. We remain bullish on the stock and reiterate our “BUY” recommendation at the current price of $2.62.
SGH Daily Chart (Source: Thomson Reuters)
Ainsworth Game Technology Limited
Decent FY15 performance driven by new product launches: Ainsworth Game Technology Limited (ASX: AGI) stated a 14% yoy rise in audited profit after tax of $70.4 million for the fiscal year of 2015, despite 1% yoy decline in revenues (to 240.6 million). This increase was partly driven by the positive foreign currency gains of $25.6 million ($17.9 million after tax) during the period on the back of falling Australian dollar. But overall revenues were impacted by the declining domestic business due to mounting competition and shifting customer purchasing patterns. On the other hand, the group’s international revenues surged 46% yoy to $147.6 million, and accordingly improved the segment’s share in overall revenues to 61% in FY15 from 41% in FY14. North America’s growing market share coupled with new markets contribution led to 42% yoy revenue rise to $82.8 million during the period. Furthermore, AGI’s machines within the Americas on participation, rental and/or lease surged 32% yoy to 2,627 machines during FY15 against prior corresponding period (pcp). A560SL release with game brands like Sweet Zone™ and Whopper Reels™ performed better than expected. Accordingly, AGI delivered an earnings per share (EPS) increase by 16% yoy to 22 cents per share during the period. The group reported a final dividend of $0.05 per ordinary share, leading to the full year dividends of $0.10 per ordinary share.
Growing international performance (Source: Company Reports)
Stock Outlook: The group estimates that its product launches like A600™ along with strong organic sales would drive its profits in next fiscal year. AGI’s ongoing growth from Americas region in the coming periods coupled with the group’s new facility opening in 2016 at Las Vegas could support the stock in future. AGI estimates that its August release A600™ would drive its domestic business during FY16. Meanwhile, Ainsworth delivered a year to date returns of around 10.7% this year (as of Sep 23), despite broader index S&P/ASX 200 pressure. Moreover, the stock is also trading at attractive valuation and has a relatively cheaper P/E of 12.14x with a decent dividend yield of 3.75%. We remain bullish on the stock and accordingly give “BUY” recommendation on AGI at the current stock price of $2.66.
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