Meet Light & Wonder, The New Star In Gaming

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

New research highlights the recent performance by Light & Wonder in Australia and the potential for replication in the US.

-Former successful Aristocrat Leisure CEO chair of the board at Light & Wonder 
-Along with over 60 senior and mid-level managers and game designers
-Rapid land-based share gains in Australia over the past year
-Around 70% of revenue currently derives from the USA

By Mark Woodruff

Market discussion of ongoing growth and sustained outperformance for Light & Wonder ((LNW)) should come as little surprise to investors given the composition of the management team, achievements since listing on the ASX, and prospects for expansion in the US and international markets.

According to first-time research by Morgans, the company is one of the leading and fastest growing suppliers of land-based slot content, which is deployed across its three complementary verticals of (land-based) Gaming, SciPlay (social) and iGaming, which is the moniker for online gaming.

Light & Wonder, which has a primary listing on the Nasdaq, as well as being listed on the ASX, designs, develops, manufactures, and distributes gaming machines and video gaming terminals in markets across the Americas, the Middle East, Africa, Europe and Asia-Pacific.

Around 70% of revenue originates from the US, while Australia provides less than 10%.

Since the ASX listing on May 22 last year, shares have moved from a low of $90 to just over $167 and have since retreated to around $148. Jarden suggests management has capitalised on this weakness by increasing the cadence of buyback activity over the last few quarters.

Chairman Jamie Odell lends substantial credibility given his former title as CEO of rival and local market leader, Aristocrat Leisure ((ALL)). During his tenure, Aristocrat gained significant market share and became established as a global leader in gaming.

In total, Light & Wonder employs around 65 former Aristocrat senior and mid-level managers and game designers, and most members of senior management are incentivised to perform via participation in an equity scheme arrangement.

Already, this experienced team has increased land-based share in Australia to around 30% from 10% in less than 12 months, and Morgans believes such a performance can be replicated in the US.

Last month, Jarden also referred to the company’s incentivised and world-class game design team, which is developing greater breadth and depth of games and cabinets.

Further market share gains for Light & Wonder are expected by this broker at the expense of incumbents such as Nevada-based International Game Technology (IGT)/Everi Holdings in Gaming, Israeli-based Playtika in social casino, and IGT and possibly Evolution Gaming (headquartered in Stockholm) within the iGaming sector.

When a merger deal between IGT and Everi was announced a few months ago, Canaccord Genuity highlighted feedback and anecdotes from industry participants suggesting this transaction would potentially provide an opportunity to take market share from both players.

Morgans notes Light & Wonder’s digital segments are also performing well, with the social casino division, SciPlay, significantly outpacing the rest of the market.

Less convinced, but still positive

Expecting difficulty in capturing and maintaining material market share in the electronic gaming machine market, Hold-rated Ord Minnett (whitelabeling Morningstar) is the only broker of five (whose research is monitored by FNArena) without a Buy (or equivalent) rating for Light & Wonder.

This broker was, however, impressed by quarterly reporting in May showing a 13% increase for underlying earnings compared to the previous corresponding period, primarily driven by the core gaming business.

Much of this success was attributed to the new Dragon Train game, which the analyst noted is enjoying “exceptional success” in Australia.

R&D is the lifeblood of any electronic gaming manufacturer, highlighted the broker, noting continuous product development allows Light & Wonder to not only maintain product quality, but also helps differentiate products from lower-end competitors.

A North American slot survey also reinforced this broker’s view Light & Wonder and Aristocrat Leisure are duopoly suppliers within an industry where a small number of firms dominate the market.

Capital management

While Morgans’ forecasts do not include any dividends, in line with previous trends, a deleveraging balance sheet provides optionality for the return of funds to shareholders and the potential for inorganic investment (M&A).

Management has a track record of consistently returning value to shareholders via share buybacks and recently announced a new three-year repurchase program of up to US$1bn. Given strong cash generation, the analyst sees potential for further buybacks in the future, contributing to ongoing shareholder accretion.

Jarden notes the early completion of the US$750m authorised on-market buyback, which was value accretive for existing shareholders. Jarden analysts point out many instances of companies initiating buybacks but not completing them and considers delivery by Light & Wonder an incremental positive.

Outlook

In April, Macquarie pointed to robust and resilient underlying US casino revenue trends.

Also, unique strength in IP and content offerings positions Light & Wonder well to extend cross-platform market share, opines Morgans, driven by strong content and product launches in the near-term.

Last week, Morgans initiated research coverage on Light & Wonder with an Add rating and 12-month target price of $172. This raised the average target price of three covering brokers monitored daily in the FNArena Database to $166 from $163, suggesting nearly 13% upside to the latest share price.

Macquarie and Ord Minnett have ratings of Outperform and Hold, respectively, while outside of daily monitoring, Jarden and Canaccord Genuity are Buy-rated with an average target of $170.50.

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