Let's face it, Australia is the world capital of gambling. Whether it is at the casino, racetrack, or pub, Aussies love a punt. In fact, annual gambling losses of over $1,000 per adult make us the biggest gamblers in the world! With three times more poker machines per capita than the United States, our gaming machine companies have become world leaders in design and innovation.
Ainsworth Game Technology (ASX: AGI) designs, manufactures and markets those gaming machines for gambling venues here and around the world. The company has been growing at a rapid clip over the past five years as its modern machines gobble up share from large incumbents and expand in to ever larger markets.
Stealing share
Most Australian states have tight regulations that cap the number of gaming machines that can operate, putting a lid on overall market growth. Yet despite this, Ainsworth has been able to grow Australian sales of its gaming machines at a compounded rate of 24% per year over the last 3 years.
This success can be put down to the strong competitive advantage that Ainsworth's A560 range of modern gaming machines enjoy over the competition. A July 2013 survey found that while Ainsworth machines occupied only 13% of the floor space of New South Wales gaming venues, they contributed 19% of venue turnover and profits.
In other words, Ainsworth's machines are 30-40% more profitable for venue operators on a per square metre basis than the broader market. This has provided Ainsworth with a powerful sales pitch for gaming venues: buy our machines and you will make more money.
International opportunity
To put Ainsworth's international opportunity in perspective, Australia has 198,000 gaming machines while the United States alone has 890,000.
Over the past three years, sales outside Australia have grown at an average rate of over 50% per year and now make up over 40% of Ainsworth's total revenue. At these rates it will only be one or two years before international sales overtake Australia.
Ainsworth is also working to position itself as an online real money gaming and social gaming platform. Ainsworth's approach will be to license its existing gaming machine software as the platform for online gambling operators. These online gaming initiatives are in their infancy, so shouldn't be weighted too heavily in any valuation – but provide plenty of upside if Ainsworth is able to gain traction.
Down on their luck
Ainsworth shares have been punished over the past month for missing analysts' expectations – despite the company posting annual net profit growth of 18% and sales growth of 23%.
The company currently trades for less than 16 times trailing earnings, hardly a demanding valuation for a business that just posted record results, is still growing sales at more than 20% a year, and pays a 3% dividend. Not to mention that Ainsworth has no debt, $72 million of excess cash, and returns on equity of 26%.
By reverse engineering Ainsworth's current market value we can estimate that investors are expecting Ainsworth to grow at less than 5% for the foreseeable future. That is a low hurdle for a company that has a ten year average annual growth rate of 14% and that grew 23% in the most recent full year.
Know the odds
Investing in Ainsworth isn't a one way bet however; there are still plenty of risks.
Success in the gaming machine industry, much like consumer entertainment gaming, is driven by blockbuster titles – a few machines that become hugely popular. For the past few years Ainsworth's A560 range of modern gaming machines has kept it well ahead of the competition but that could all change if competitors are able to bring out a comparable machine of their own.
Also, since Ainsworth generates over 90% of its revenue from the sale of expensive new machines it is more exposed than most companies to any economic downturn. When the economy cools many punters will still want to gamble, but gaming venue operators become more likely to delay their investment in new machines.
