“It’s go time!” proclaimed B Riley Securities analyst David Bain as he resumed coverage of AGS yesterday with a $16-per-share price target and a “Buy” rating. The stock was trading at $8.78 a share at the time.
“We view AGS as an uncomplicated gaming-supplier story with multiple visible upside levers to consensus estimates and its stock valuation,” Bain wrote. He noted that the stock trades for as much as a 42 percent discount to its rivals in the manufacturing field.
Bain projected 30 percent free-cash-flow growth for AGS in 2024, which would be the highest among its peers. He believed this will reduce the company’s leverage to 2.9 time cash flow by the third quarter, which would spur investor activity.
Although AGS reduced its interest payments through a first-quarter refinancing arrangement, Bain believed it will lower its cost of capital again in the first quarter of next year. He credited the increased cash-flow generation for this potential development.
The analyst reported that AGS “is already testing its first mech reel cabinet launch on casino floors with strong early results.” This was not factored into the financial guidance that the company gave Wall Street, he said.
Furthermore, that guidance didn’t take into account market disruption from the International Gaming Technology/Everi Holdings merger. “However,” Bain chronicled, “historical large-supplier mergers have worked to shift ship share gains toward the non-big four providers.
“Previous mega-merger supplier transactions have a negative short and even intermediate-term disruption on the merged company ship share, due to product overlap, overall branding confusion, and sales and support personnel turnover,” Bain wrote.
Although such mistakes are by now well known — and the IGT/Everi merger has less overlap than most — Bain was of the opinion that “AGS and peers will look to fill any air pockets both before and after the merger close.”
A shrinking field of suppliers also increases AGS’s attractiveness as a takeover target: “The merger leaves AGS as one of the last small pure-play gaming suppliers. … It also potentially becomes more important to slot managers contemplating floor diversity.”
Looking at AGS’s product portfolio, Bain opined that it positioned the company to beat financial estimates throughout the year. Citing Eilers & Krejcik data, he reported that the Spectra UR43 and newly released UR49 were holding two of the top-five spots in the portrait upright-performance category, “the broadest segment of the [casino] floor.”
Beyond that, AGS would have approximately 180 active consumers by year’s end, up from 150 in the third quarter of 2023. “Multiple new categories remain over the long term for AGS to enter, in our view, including route operations,” Bain wrote. The latter would bring 200,000 machines on line. Other growth areas include Australia (another 200,000 units), video-lottery terminals, and the international market.
Another extractor of value was seen in AGS’s table division, which Bain deemed “unique.” He noted that the few table-technology suppliers in the market were customarily valued higher than slot or operating-systems suppliers.
Bain observed that AGS’s table games return 55 percent cash-flow margins on 85 percent recurring revenue. The company also sells premium side bets, progressive technology, table signage, and card shufflers.
“Casino customers can also purchase a full site license for its table products,” Bain reported. “Of note, we believe AGS’s growing shuffler portfolio is the only true alternative to a competitor’s high-priced legal table shuffler ‘monopoly,’” an allusion to the former Shufflemaster.
He continued, “We believe investors sometimes forget AGS’s shuffler team comprises heavyweights, including an original architect of the shuffler and David Lopez, AGS’s CEO, who was with Shufflemaster for 14 years and held titles including interim CEO, EVP, and COO.”
Bain concluded by returning to his theme of a “valuation disconnect” between AGS’s stock price and its prospects. “We believe there is little reason for [this], particularly given AGS’s product momentum and visibility for entrance into new categories longer term,” he wrote.
