Analyst sees “continued momentum” at Light & Wonder

September 10, 2023 1:44 PM
Photo: CDC Gaming Reports
  • David McKee, CDC Gaming Reports
September 10, 2023 1:44 PM
  • David McKee, CDC Gaming Reports

Low leverage, “a strong balance sheet” and well-performing games added up to “continued momentum” across the board for Light & Wonder. That was the verdict of Truist Securities analyst Barry Jonas, following meetings with LNW CEO Matt Wilson and Senior Vice President of Investor Operations Nick Zangari in New York. Boosting his price target on the stock from $78 per share to $86, Jonas stuck with his “Buy” rating.

Story continues below

Wilson voiced “full faith” in his $1.4 billion cash-flow target for 2025, set last year. “The figure has been highly debated among buy-side investors,” Jonas wrote, but LNW has stood by it.

LNW management is pinning its hopes for hitting the $1.4 billion on potential video lottery terminal (VLT) expansions in Oregon and Canada. Not computed into the sum were possible VLT expansions in Chicago, where Mayor Brandon Johnson is advocating for slot-route legalization, and in North Carolina, where a pro-casino push recently died in the state legislature.

“Additionally,” penned Jonas, “there is an opportunity for additional operating efficiencies enhancing margins, which were not fully reflected in the initial targets” and are unaffected by the recent retirement of CFO Connie James. Her successor remains to be chosen and an executive-search firm is looking for one. “Interim CFO Oliver Chow is well known within the organization and we believe is a credible contender for the permanent role,” opined the analyst.

Jonas described LNW as “acutely focused” on luring the best game designers. Its Frankenstein slot machine debuted as the number-one wide-area progressive, while Dragon Train, which debuts stateside in the first half of next year, has been seeing auspicious play in Australia.

In other North American news, LNW units were described as comprising 47 percent of the premium installed base, having experienced 12 consecutive quarters of growth. They, Jonas said, “are now in a better position to displace more competitors as they further grow.”

As for the e-placement market, it “also appears healthy, as management sees further runway for operator slot capex spend given the post-COVID focus to keep casino floors fresh. Additionally, COVID supply-chain challenges are rolling off and presenting margin upside.”

LNW is also closing the acquisition of the 17 percent outstanding of SciPlay for $500 million. The consummation of the deal is anticipated in the fourth quarter of this year. “Management,” Jonas penned, “believes the transaction will clean up the company’s story, leading to a cleaner board structure and streamlined costs. … Additionally, management is scaling its direct-to-consumer offering, which could mitigate various fees.”

Jonas dissented from others on Wall Street when he offered that LNW’s igaming segment was “ramping below the expectations of some,” which he attributed to a dearth of live-dealer product. He estimates that live-dealer games could eventually represent 30 percent of the igaming market.

LNW is presently beta-testing igaming offerings in Michigan and will “refine” its games before debuting them in other states, “where there appears to be sizable demand, especially from more regulatory-sensitive operators.” Igaming constitutes only a “modest” share of the $1.4 billion projection, the analyst added.

With a leverage of 2.9 times EBITDA, the company is within its leverage goal of 2.5 times to 3.5 times and at the lowest such level in its history, Jonas noted. “Management believes the company’s strong balance sheet sets LNW up for success and further optionality, though noted large-scale M&A is not a primary focus and any adds to the platform will be smaller/tuck-in” acquisitions, he wrote. With $315 million in dry powder remaining, “management will continue to be opportunistic in repurchasing its shares.”