In Brief: Light & Wonder, Codan, Mitchell Services & More

This story features LIGHT & WONDER INC, and other companies. For more info SHARE ANALYSIS: LNW

Weekly Broker Wrap: analysts remain bullish on Aristocrat and Light & Wonder; Codan catches a juicy US Department of Defence acquisition; Mitchell Services damp but not drowned out and private health insurers fight for new customers.

-One dragon’s loss is another dragon’s gain
-US army communications contract a nice earnings boost
-Extreme wet weather takes a bite not a mouthful on a driller’s earnings
-Is promotional activity in private health insurance good for the goose and not the gander?

By Danielle Ecuyer

Quote of the week from ANZ Bank post the RBA cash rate decision and August CPI reading: 

“We continue to expect the RBA to commence cash rate cuts in February 2025, predicated on underlying inflation and labour market tightness easing further in H2 2024. But the risks have tilted to a later rather than an earlier start. We forecast a shallow easing cycle of 75bp in 2025.”

Judge slays Dragon Train

In the US District Court in Nevada, Light & Wonder ((LNW)) lost the intellectual property case filed by Aristocrat Leisure ((ALL)) with the judge awarding Aristocrat a preliminary injunction relating to Dragon Train on misappropriation of trade secrets, reputable harm and public interest.

Light & Wonder’s response “we respectfully disagree with the judge’s decision and will promptly file an appeal”.

The market shot first sending the shares down -18% on the day, before brokers had time to dig into the details.

Jarden highlights Dragon Train’s financial impact is less than -5% of FY25 EBITDA guidance. Although the analyst estimates the impact might be slightly higher, the share price reaction is perceived as “overdone”, noting the injunction included “any continued or planned sale, leasing, or other commercialisation of Dragon Train”.

The company expects machines in A&NZ will remain on floors, but a question mark hangs over whether the existing North American machines will need to be removed.

J.P. Morgan believes Dragon Train has been an important factor for positive investor sentiment, as well as sales and earnings “momentum”.

Both brokers cut earnings forecasts slightly in 2024/2025 by between -1.2% and -2% for Jarden, respectively and -2% for J.P.Morgan.

Target prices fall to $150, down -12% for J.P.Morgan, and $175 from $176 for Jarden. Buy equivalent ratings remain unchanged.

FNArena daily monitored brokers have an average target price of $168.40 (down -$4 this week) with exclusively Buy equivalent ratings.

Aristocrat received a bump up in earnings forecasts and target price from Jarden to $59 from $56. The analyst expects a pick-up in market share across US gaming and re-attaining lost market share in A&NZ.

FNArena daily monitored broker have only Buy equivalent ratings with an average target price of $57.467. UBS is the high-marker with an upgraded target of $63.50 from $56.

Codan buys an earnings booster

The Codan ((CDA)) share price received a sugar hit this week post the announced acquisition of US-based Kagwerks (SKT2 LLC bda Kagwerks) for -$33m, with an additional five-year royalty payment agreement based on agreed sales targets from 1% to an upper 5% limit.

Moelis notes the purchase will be funded via an increase in the debt facility to $200m from $170m and is expected to add revenues of $49m to $57m in the first year, with estimated EBITDA accretion of $8m to $11m, ex-costs for FY25.

Moelis highlights Kagwerks provides a boost to Codan’s radio communications operations. It currently provides communications equipment to the US Department of Defence, over 3000 DOCK products to the US army to date. Kagwerks was selected in 2022 for the Defence Department’s Warrier Program which runs through to 2029 with the DOCK products as the “centrepiece”.

The broker forecasts EPS growth between 22% to 24% for the next three years, upgrading EPS for FY25 by 2.3% and 6% in FY26. Target price rises to $18.14.

Canaccord Genuity also like the Kagwerks acquisition lifting FY25 EPS forecast by 1% and FY26 by 4%. Target price increases to $16.76 from $15.34. Both brokers are Buy equivalent rated.

Wet weather bashes coal producing areas

Bridge Street Capital Partners casts an analytical eye over Mitchell Services ((MSV)) which is described as a “high-quality national leader in drilling services” including metallurgical coal on the east coast of Australia.

Extremely heavy rain events on the east-coast coal producing areas is believed to have impacted on the company’s earnings forecasts. Coronado Global Resources’ ((CRN) recent trading update highlighted rainfall over three times the ten-year monthly average in the Curragh complex.

On a more positive note, the company has successfully renegotiated all the main expiring contracts in FY24 plus some additional wins.

Mitchell Services remains Buy equivalent rated by the broker post adjusting earnings forecasts for the wet weather. The stock is believed to be fundamentally undervalued with a target of 60c and an attractive forecast FY25 dividend yield of 8.4% based on management’s payout ratio of up to 27% of net profits.

FNArena monitored broker Morgans has a Speculative Buy rating and 55c target price.

Is competition eating private health insurers profits?

Competition in the private health insurance market is hot, hot, hot according to Macquarie’s health insurance promotional tracking tool.

Over 59% of brands are currently indulging in some promotional activity with enticements out to November.

The larger plays are the most “aggressive” the broker highlights. The offerings peaked at 22 over the past twelve weeks out of a total 34 brands with 20 currently still active.

Funds are offering three types of promotions including free periods, waived waiting periods and bonuses like gift cards. The free weeks offering is used in about 80% of promotions with Medibank Private ((MPL)) and nib Holdings ((NIB)) currently promoting eight free weeks alongside the AHM Brand.

The tracker supports commentary from Medibank and nib regarding high levels of competition for new customers over the last six months. Macquarie highlights the aggressive promotional behaviour increases the cost of customer acquisition which may challenge policy growth targets for FY25.

The analyst calculates every circa 25bps of policyholder growth for Medibank equals around 0.3% EPS and 0.6% for NIB.

Both stocks are Neutral rated with $3.66 and $6.30 target price, respectively.

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