Amid a mostly brutal year for gaming equities, particularly those in the small-cap arena, there are plenty of deep-value ideas for investors to mull heading into 2023.
In a new report to clients, Roth Capital analyst Edward Engel highlights Century Casinos (NASDAQ: CNTY), Inspired Entertainment (NASDAQ: INSE) and PlayAGS (NYSE: AGS) among the names that could benefit from the January effect — the scenario in which small-cap stocks rally in the first month of the year, setting the stage for a strong annual performance by the broader market.
While acknowledging some 2022 complexity specific to Century, the analyst notes a pair of acquisitions announced this year by the regional casino operator could pay off for investors in 2023.
Both acquisitions should close in 1H23, resulting in a footprint where 72% of EBITDA is from the US vs 17% Canada and 11% Poland. We believe pending M&A and leverage concerns are core drivers of CNTY’s 42% YTD declined. Pro Forma for M&A, we model ~$45-50M steady-state FCF which implies a ~20% FCF yield. Meanwhile, we expect ~3x net leverage as these acquisitions close,” wrote Engel.
Those deals are the $195 million purchase of Nugget Sparks and the associated real estate in Northern Nevada, and the $56 buy of the operating rights of the Rocky Gap Casino Resort in Flinstone, Md.
Looking ahead to next year, it’s possible that if the war in Ukraine ends, Century can proceed with plans to divest its two-thirds interest in Casinos Poland, reducing its ex-US exposure while raising capital.
PlayAGS Cheap Gaming Equity for 2023
Slot machine maker PlayAGS was punished by investors this year. But analysts believe it has the makings of a 2023 redemption story.
“After AGS managed through the pandemic by prioritizing cash flows and liquidity, the company has turned the business around over the past four quarters by retaking lost market share and resume (sic) growth across its core footprint,” noted Engel.
PlayAGS could be an interesting gaming equity idea in 2023 due to strong casino visitation trends and the ongoing slot upgrade cycle. Additionally, the investment thesis could be supported by expansion by tribal gaming clients in Florida, Texas, and Oklahoma. Plus, the shares are noticeably cheap.
“Gaming supplier valuations historically rerate alongside market share gains; however, AGS trades at a deep discount to peers, at a ~20% FCF yield. A core concern has been leverage at ~4x where 100% of debt is variable and cash interest costs were 28% of EBITDA in 3Q22. However, with an EBITDA multiple of 4.9x, we believe AGS is the best value for longer-term investors taking a view that higher interest rates are transitory,” added Engel.
Inspired Could Be Inspired Gaming Equity Idea
Inspired Entertainment, which attempted to acquire PlayAGS earlier this year, is another name with the potential to reward investors in the new year.
The company generates more than half its earnings before interest, taxes, depreciation, and amortization (EBITDA) from the high-growth iGaming licensing space and offers investors the benefit of robust revenue-sharing pacts.
“INSE also generates ~50% of EBITDA under rev share agreements from more traditional slot/gaming machines which have been remarkably stable despite a choppy macro environment. Despite INSE’s strong organic growth profile, the stock trades at a 15% FCF yield alongside limited 2.3x leverage and 100% fixed rate debt.,” concluded Engel.
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