Why Ainsworth Game Technology Limited shares have been smashed today

The Ainsworth Game Technology Limited (ASX: AGI) share price is on course to have a horrendous finish to the week following the release of a trading update this morning.

At the time of writing the gaming technology company’s shares are down a massive 29% to a 52-week low of $1.37.

What was in the update?

A number of short term factors have caused profit expectations for the second-half of FY 2018 to be rebased.

Ainsworth Game Technology’s management had previously provided second-half guidance of profit before tax (excluding currency movements) to be “modestly ahead” of the $42.2 million it achieved in the prior corresponding period.

This would have taken its full-year profit before tax to at least $58.4 million after posting profit before tax of $16.2 million in the first-half of FY 2018.

However, according to the update, profit before tax in the second-half is now expected to be around $20 million, 52.6% lower than the prior corresponding period.

This means that full-year profit before tax will come in at approximately $36 million, well short of its guidance and 37.2% lower than FY 2017’s $57.4 million.

What happened?

Management has placed the blame on its domestic sales being adversely affected by factors including competitive activity, regulatory approval delays in product submissions, and delays to scheduled key game releases until the first-half of FY 2019.

Furthermore, Latin America sales are lower due to a preference for second-hand gaming machines and North American profits have been hit by the strong growth of its low margin PacMan product.

Should you buy the dip?

Based on its updated guidance I estimate that Ainsworth Game Technology’s shares are changing hands at 19x FY 2018 earnings.

While these issues may be short term and management “confidently expect to improve our performance in FY19”, I wouldn’t be in a rush to pick up shares until there has been evidence of a turnaround.

Instead, I would consider high-flying industry peer Aristocrat Leisure Limited (ASX: ALL), which I suspect is stealing market share away from Ainsworth Game Technology.

Or alternatively, investors might even want to consider buyers of these products such as Crown Resorts Ltd (ASX: CWN) and Star Entertainment Group Ltd (ASX: SGR).

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Crown Resorts Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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