GGRAsia – L&W 2025 EBITDA target difficult without M&A: analyst

L&W 2025 EBITDA target difficult without M&A: analyst

Apr 20, 2023 Newsdesk Industry Talk, Latest News, Top of the deck

Brokerage B. Riley Securities Inc says it “may be difficult” for gaming equipment and online content provider Light & Wonder Inc to achieve the intended target of US$1.4-billion adjusted earnings before interest, taxation, depreciation, and amortisation (AEBITDA) in 2025 “without significant M&A [mergers and acquisitions]”.

That is according to a Wednesday memo stating the brokerage had initiated coverage of the gaming supplier.

In May last year, Light & Wonder said it was aiming by 2025 to achieve annual consolidated adjusted EBITDA of US$1.4 billion. That would represent a compounded annual growth rate of 15 percent over the period, from AEBITDA of US$793 million in 2021.

“Without transformative market share gains in its gaming division (circa 73 percent of EBITDA), we find it difficult to calculate to AEBITDA of US$1.4 billion by calendar year 2025, even if we assume outperformance within its other business TAMs [total addressable markets] and steady gaming share gains,” wrote analyst David Bain.

B. Riley Securities initiated the coverage of Light & Wonder with a “neutral” rating and a 12-month price target of US$57 per share.

“By divesting its lottery and sports betting business at strong valuations, Light & Wonder successfully executed one of the fastest de-levering stories, reducing net leverage from 6.3 times in fourth-quarter 2019 to 3.3 times in fourth-quarter 2022,” stated the analyst.

“We believe Light & Wonder brings broad first-quarter 2023 operating momentum into second-quarter 2023,” he added.

According to the brokerage, Light & Wonder’s enterprise value to EBITDA was “16 percent above the casino supplier peer average, and its 6 percent free-cash-flow yield compares to peers at 10 percent”.

“While we believe Light & Wonder’s business mix, product specialty depth, and strong management, support a valuation premium to most suppliers, our sum-of-the-parts valuation, which uses above-peer multiples to segment EBITDA, does not justify share price upside from current levels,” said Mr Bain.

On Wednesday, B. Riley Securities also initiated coverage of casino equipment maker and digital gaming content provider International Game Technology Plc (IGT), with a buy rating and a 12-month price target of US$43 per share.

“We expect IGT to generate circa 71 percent of its calendar year 2023 EBITDA from its global lottery business,” said the institution.

“IGT generates circa 25 percent of EBITDA from gaming, and IGT’s consensus gaming EBITDA growth far outpaces all peers … The remaining about 4 percent of IGT’s business is digital content delivery, a high-growth, asset-light business,” wrote Mr Bain.

IGT’s gaming segment shows the “fastest EBITDA growth” compared to its peers, stated the brokerage. “Potential drivers include market share improvements and IGT’s structural cost-saving programme,” added the analyst.