Casino machines are becoming more sophisticated. Gamblers want high-tech components and glossy graphics. To satisfy this demand, a growing number of gaming machine manufacturers are turning to Quixant (QXT). The Cambridge-based company has developed a suite of software and hardware to suit the needs of all gaming machine companies. Although historically the group has only served the smaller players in the industry (known as 'tier two' companies), there have been a rising number of big players ('tier one') looking to outsource their hardware and software components. We think this revolution in the gaming machine world could provide a big boost to Quixant.
- Good growth in the casino machine market
- Opportunity to expand customer base to larger companies
- Strong balance sheet
- Potential acquisition opportunities
- Wide bid-offer spread
- High exposure to one customer
In January, industry leader Novomatic acquired Quixant's largest customer, Ainsworth. Tier one giant Novomatic has recently started to outsource smaller components of its machines to specialists. Now that it has acquired Ainsworth, many experts think that the group is likely to turn to Quixant for its larger-scale 'main platform' work. Broker FinnCap puts an expected value on deals with tier one customers at between $10m and $20m. True, there is a risk that Novomatic could bring all of Ainsworth's operations - which contribute about a fifth of Quixant's revenue - in house. But as the software is a crucial part of Ainsworth's manufacturing process, this seems unlikely.
The wider marketplace is also attractive. Brazil is expected to legalise gambling in the coming months, which would add an estimated 500,000 gaming machines to the global market. Quixant has several customers that are well positioned to address this market with machines and games that have been developed around Quixant gaming platforms.
There is a lot to like about Quixant's track record, too. Revenue and profits have achieved a compound annual growth rate of 33 per cent and 19 per cent, respectively, over the past five years. Cash profit margins in the core business are consistently in excess of 20 per cent and in 2016 the group achieved a return on capital employed (ROCE) of 28 per cent.
The balance sheet is in good shape, giving management scope to invest in future growth opportunities. Indeed, Quixant has already repaid the debt taken on to fund the acquisition of screen manufacturer Densitron for £7.7m in 2015. This deal added a whole new suite of products and contributed $37m of revenue last year. Plus, management can use Densitron's commercial platform to sell Quixant's own products to a wider industrial market outside of gaming.
Cash generation is encouraging and in the year to December 2016 net operating cash flow of $12m matched reported operating profits, while limited capital expenditure meant free cash flow came in at $8.7m.
QUIXANT (QXT) | ||||
|---|---|---|---|---|
| ORD PRICE: | 392.0p | MARKET VALUE: | £258m | |
| TOUCH: | 390-395p | 12-MONTH HIGH: | 415p | 188p |
| FORWARD DIVIDEND YIELD: | 0.7% | FORWARD PE RATIO: | 23 | |
| NET ASSET VALUE: | 52ȼ** | NET DEBT: | 0.2% | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (ȼ) | Dividend per share (ȼ) |
|---|---|---|---|---|
| 2014 | 31.9 | 7.2 | 9.5 | 1.6 |
| 2015 | 41.8 | 9.2 | 11.3 | 1.9 |
| 2016 | 90.4 | 13.8 | 16.4 | 2.5 |
| 2017* | 102 | 15.8 | 18.5 | 3.1 |
| 2018* | 117 | 18.3 | 21.9 | 3.7 |
| % change | +14 | +16 | +18 | +19 |
Normal market size: 750 Matched bargain trading Beta: 0.58 *FinnCap forecasts **Includes intangible assets of $14m, or 21ȼ a share £1=$1.29 | ||||
