Ainsworth has the numbers

I DON'T go to casinos. Never have. But I don't begrudge others who enjoy it as their entertainment.

120118 Poker machine pre-commitment

I DON'T go to casinos. Never have. Investors live and breathe probability and the numbers just don't stack up. But I don't begrudge others who enjoy it as their entertainment.

I still cannot understand why so many people play poker machines. It seems utterly mindless to me, but that they do has been a boon for Len Ainsworth, founder and former head of poker machine manufacturer Aristocrat Leisure and now the major beneficiary of Ainsworth Game Technology's (AGI) success.

Recently, Ainsworth reported its FY13 results. Let's take a quick walk through the numbers. Revenue $198.1 million, up 32 per cent, and earnings before interest, tax, depreciation and amortisation $74.1m, up 39 per cent. Net profit after tax was down, but that's because last year the company didn't pay any tax and this year it did. On that basis, you are better off looking at the pre-tax or operating numbers for signs of change. And, remember, there are recession-like conditions out there.

When presenting the results, management noted: "Further revenue growth is expected within all international markets." That was stating the obvious.

Growth in South America was 77 per cent, but total revenue was just $19m. Think about that for a minute: the company's revenue from all of the South American continent was just $19m - and it has only relatively recently started selling its products there.

In the US, the biggest market for mind-numbingly boring poker machines, total revenue was just $49m. Ainsworth now has 602 gaming operations units installed at casinos across the US after the installed base grew 186 units from 416 at December 31 last year. And keep in mind the individuals at Ainsworth have plenty of experience managing much bigger operations in the US of A.

In Australia, the company enjoyed revenue growth of 21 per cent, the lowest annual growth since 2008.

Before you worry the company's growth is going to fall off a cliff, note there are still market share gains to be had. One of our brokers recounted a conversation with the company's chief financial officer: "In Victoria, at venues where they temporarily installed machines pending approval of a product called Players Paradise, the venues kept the temporary machines after the new product was installed."

Management went on to note that profit after-tax in the first half of FY14 is at least 15 per cent ahead of the $22m reported for the half year ended December 31 last year.

Total units sold in FY13 was 2021, compared with 1288 in FY12. The second half saw 1196 units sold, compared with 825 in 1H13 and 1052 in the previous corresponding period. In other words, it's ramping up. A key indicator of future orders - "units on trial" - looks healthy, with 354 on trial at the end of June, representing a significant increase on the 229 trial units at December last year and 142 on trial at June 30 last year.

Importantly, not only is the company selling more units but each unit is generating stronger returns. For other businesses, this is tantamount to selling more product at a higher price. After releasing its new range of games into the gaming operations market, Ainsworth saw a 39 per cent increase in its average revenue per machine per day during the year. Across the course of the year the company achieved a yield of about $39 a day, compared with $10 less a day in FY12. In some venues in the US this is as high as $60 a day.

OK, so the company is growing strongly and has enormous potential.

As you know, the remaining part of the puzzle is value. The company's shares are not a bargain at the moment and, while we own plenty in The Montgomery Funds, we'd want to buy more if the price fell towards $3. That may seem like a long way away, but in the stockmarket it's amazing how often the odds fall in your favour.

Roger Montgomery is founder of Montgomery Investment Management and author of Value.able: How to Value the Best Stocks and Buy Them for Less Than They're Worth, available at www.rogermontgomery.com.