Casino operators are flagging a year-on-year increase in 2017 on budgeted spending for gaming equipment, and if it comes to pass it would be a decade-long first, says brokerage Telsey Advisory Group LLC in a new report.
The commentary from analyst David Katz follows the recent casino industry trade show and conference Global Gaming Expo (G2E) held in Las Vegas Nevada.
“On the heels of the recently concluded G2E, casino operators are broadly indicating that they are budgeting slightly more in gaming equipment in 2017 than in the prior year,” wrote the analyst in a Friday note.
But his institution counselled investors in listed casino equipment firms not to overplay the significance of the possible development.
“Although this is the first time this condition has been true for a decade and is unarguably positive, the improvement is slight and susceptible to overstatement and exaggeration by the market,” wrote Mr Katz.
Referring respectively to International Game Technology Plc, Scientific Games Corp and Everi Holdings Inc, the memo stated: “There is without question a positive context for IGT’s turnaround, Scientific Games’ progress through leverage and Everi’s nascent entry into Class III markets.” The Class III market is a reference to video slot machine technology in commercial casinos.
All three firms have been involved in merger and acquisition activity that has rendered them highly indebted at a time when cash flow from traditional industry activities such as sale of slot machine cabinets has been under pressure due to factors including moderating spend by operators, and where clarity on the long-term prospects of newer areas of sectoral operations such as online and social casino is still awaited by the market.
“We remain vigilant on expectations for [earnings] inflation, which presently remain appropriate,” noted Mr Katz. He added: “Despite the progress and merits in other business segments such as lotteries and technology, the stocks trade off the slot aspect of the business for the time being.”
In May Everi stated it had completed a previously announced debt refinancing transaction of a first lien term loan – with an outstanding balance of approximately US$462 million that was scheduled to mature in 2020 – and of senior secured notes worth US$335 million that were scheduled to mature in 2021. IGT’s net debt as of June 30 stood at US$7.00 billion, according to its second-quarter results.
At the end of June, Scientific Games had total outstanding debt of US$8.18 billion, according to its second-quarter results, issued in late July. Scientific Games said in an October 2 press release that its wholly-owned subsidiary Scientific Games International Inc would – “subject to market and other conditions” – conduct a private offering for US$350-million in senior secured notes due 2025.
The net proceeds of the notes, together with cash on hand and borrowings under the company’s existing revolving credit facility would be used to finance the planned acquisition of sports wagering specialist NYX Gaming Group Ltd and its subsidiaries, and to refinance some debt of the target business.
“The acquisition of NYX, which is expected to be cash flow accretive immediately, should add to the technology offerings and positioning and is presently not included in consensus, could be recognised positively in the quarter,” said the Telsey analyst, in commentary on Scientific Games.
The institution added: “Scientific Games has seemingly convinced its casino customers that it intends to sustain its range of brands and product lines and should show signs of improvement in participation games. Everi has introduced key new products including both Class II [tribal gaming] and Class III cabinets and content. IGT should be able to make a case for a reversal of the losses of the past many years with its broader, more evolved for sale and participation games.”
The brokerage’s analyst Mr Katz – who recently flagged that a lottery deal renewal in Italy could have an impact on the financing position of Scientific Games and IGT – said for IGT that was “a short-term issue that does not alter the long-term capital structure of the company”.
The analyst further noted: “The relatively thin free cash flow for Everi is poised to accelerate meaningfully in 2018 as the company approaches a possible refinancing of its high-cost debt…”
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