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Ainsworth Game Technology: Game on

Ainsworth Game Technology Limited’s (ASX: AGI) share price has risen 150% in the last three months on the back of improving results and its first ever profit, in its 2011 financial year.

It now appears that institutional investors are becoming interested and a capital raising is on the cards according to a recent article in the Australian Financial Review (AFR).

According to the report in the AFR, the proceeds may be used to repay convertible notes held by founder and Executive Chairman, Len Ainsworth. You may remember his name, he’s one of the founders of Aristocrat Leisure Limited (ASX: ALL), but left Aristocrat in 1994, after being diagnosed with cancer. He recovered, and founded Ainsworth Game Technology in 1995 to compete with Aristocrat.

Shareholders recently approved the sale and lease back of the company’s Newington property, with the proceeds of $22.3m being used to repay debts owing to a company controlled by Len Ainsworth. With current debt of $60m, this will definitely improve the company’s balance sheet strength.

In news out today, AGI will be added to the All Ordinaries Index from 16th March 2012. This will likely see more interest from institutional investors, some of whom are restricted from investing in stocks outside the All Ordinaries.

Ainsworth Game Technology Limited is engaged in the design, development, production, sale and servicing of gaming machines – otherwise known as poker machines, or pokies – and other related equipment and services.

Now producing profits

In August 2011, the company reported its maiden full year profit of $23.1m, on the back of revenues of $98m. In February 2012, Ainsworth reported a first half profit of $40.5m, with earnings per share of 15 cents, almost double the FY 2011 result of 8 cents (although, this included a tax benefit of $21.7m).

Revenues jumped 56% to $68.3m for the first half of 2012. The company’s key market of The Americas achieved revenues of $12.4m, an increase of 85% over the previous corresponding period.

Product margins continue to improve with gross margin improving from 62% in 2010 to 66% in the current period thanks to recurring revenue streams and product licencing.

Cash flows of $15.4m more than doubled over the prior corresponding period.

Where to from here

The company has established an office in Las Vegas, and expects sales volumes will increase further in the second half of 2012. It has invested heavily in research and development (R&D), with R&D representing 10% of total revenues. The company expects continued growth in market share in both domestic and international markets.

Foolish bottom line

With further repayment of debt, interest costs will fall, further improving profits. The company expects the second half of 2012 to produce a similar before tax result as the first half, which which should mean a full year profit before tax of around $37m-$38m. This equates to a P/E around 12, and looks undemanding for a company growing so quickly and future potential growth. Definitely one for the watchlist.

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More reading

The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool’s disclosure policy. 

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