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eBet On The House

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Still valued at only $46 million on the stock market, eBet has a strong balance sheet, increasing recurring revenue and an enviable track record of consistent compound annual growth rate in revenue of 16%.

Look away now if you have an ‘ethical investment’ outlook and you don’t like electronic gambling: because that is what eBet Limited (EBT) does. The Australian gaming technology company is one of the leading companies in its field globally, offering integrated gaming solutions that cover the full gamut of electronic gambling operations.

This is a vexed question for some investors, who do not like the social cost of gambling - which can cause heartache for the minority of people who are problem gamblers. But electronic gaming machines (EGMs) are perfectly legal, and plenty of people like a flutter and find it fun and a big part of their social activities.

All that you can really ask is that the companies that operate in this area are upfront about what they do and try to minimise the harm that their products could potentially do to those susceptible to problem gambling: and EBT does this, though its development of card-based ‘cashless’ gaming technology, which allows patrons to set limits on the money or time they spend on the ‘pokies.’

EBT’s customers are the casinos, clubs, pubs and bars that offer gaming. It has more than 800 such venues as customers, with about 55,000 gaming machines connected. The company has operations and contracts in Australia, New Zealand, Malaysia, the Philippines, South Korea, Vietnam, Cambodia and Singapore.

EBT is divided into three divisions: Gaming Machines, Gaming Operations and Gaming Systems. The gaming machines segment distributes US gaming company WMS’ electronic gaming machines in New South Wales. It generates 17% of revenue.

The Gaming operations division provides licensed monitoring operator (LMO) services for the electronic monitoring, reporting, maintenance and systems support of electronic gaming machines, under the brands Odyssey Gaming (a wholly owned subsidiary operating in Queensland) and ebet Gaming Systems. It accounts for 48% of revenue.

Lastly, the Gaming Systems division, the company’s core technology focus, offers player loyalty and tracking systems, cashless gaming systems with both mag-stripe and smart-card technology and back-office productivity tools for pubs, clubs and casinos. The Card IT technology is the company’s flagship systems product, while its core gaming systems technology is called Metropolis, which was launched in FY13. The division also offers the Engage screen-based marketing system, which allows gaming venues to communicate with and market to their customers.

CARD IT is a market-leading technology that has achieved significant market share and player acceptance in the New South Wales market, with approximately 100 venues now using it, across a network of 9900 machines. EBT says it benefits both venues and patrons, being a seamless solution that moves away from notes and coins to card-based gaming. With more than 243,000 carded players, CARD IT was the main systems sales revenue driver in FY13.

Revenue from CARD IT is recurring, and is a big plank in EBT’s strategy to building up annuity revenue, which currently makes up just under half of total revenue. At the start of the current financial year, says EBT, 60% of FY13 revenues were contracted to flow into FY14.

EBT transformed its business - and its capital base - in FY13. In December 2012 EBT sold its 50% share of the Ebet Online joint venture in the USA. In the same month it implemented a 15-for-one share consolidation. The sale of the stake in Ebet Online freed up $5.8 million in cash that enabled the company to reduce debt further, by a net $1.4 million. At balance date the debt-to-equity ratio stood at a slim 17%.

In FY13, revenue rose by 10% to $45.5 million, while net profit more than doubled to $4.8 million - including $2.1 million from the sale of the Ebet Online joint venture. ‘Normalised’ net profit, or the earnings from ongoing operations, was lifted by 35% to $2.7 million. A maiden dividend of 3.5 cents a share was paid, 50% franked.

In FY14, a critical move for EBT is the rollout of its CARD IT technology in Queensland, approval for which followed the conclusion of a successful trial conducted at two venues, the Prince Alfred Hotel and Gaythorne RSL Club. Nine other Queensland venues have subsequently signed up for CARD IT, and if the company meets its expansion targets there could be material revenue gains – as well as opportunity to steal market share for the general maintenance, monitoring and management of pokies machines from rival Max Gaming. Further down the track, EBT is eyeing the large Victorian market.

Listed in 1999, EBT has been a strong performer in recent years. According to the Stock Doctor fundamental research website, the stock has generated a total return of 126.3% in the last 12 months, and has earned 46% a year over three years and 48.9% a year over five years. But according to broking analysts, at $3.00, the stock is trading 6.25% below its consensus target price. The forecast FY14 dividend of 8.6 cents places the stock on a prospective yield of 2.9%, not especially mouth-watering, but given that it would be only the second year of dividends, EBT is heading in the right direction, yield-wise.

Still valued at only $46 million on the stock market, EBT is a lightly traded stock. The company has a strong balance sheet, increasing recurring revenue and an enviable track record of consistent compound annual growth rate in revenue of 16%. Expected to earn 22.3 cents a share in FY14, EBT is trading on a price/earnings (P/E) ratio of 13.45 times prospective earnings, which is not expensive. EBT looks a very attractive proposition, with a strong product pipeline, opportunity in new markets in Australia and Asia, with the caveat that volume is limited and it would take some time to build up a meaningful position. But EBT does not look like it will stay under the radar for long.

View More Articles By James Dunn

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au



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