Posted on: July 2, 2021, 12:41h.
Last updated on: July 2, 2021, 12:41h.
Earlier this week, Scientific Games (NASDAQ:SGMS) revealed plans to part with its lottery management and sports wagering businesses and the move is drawing applause from Wall Street.
In a note to clients, Stifel analyst Jeffrey Stantial reiterated a “buy” rating on Scientific Games stock on the divestment news while boosting his price target on the slot machine manufacturer to $86 from $66. The new forecast implies upside of 11.6 percent from where the shares currently reside.
We are positive on the announcement, as we have long felt that SGMS’s lottery operations were garnering an unwarranted conglomerate discount,” said Stantial. “Meanwhile, with B2B sports betting platform providers looking like an increasingly competitive space (as operators take technology in-house), we think focusing on iGaming content will likely provide higher returns on capital for SGMS over time.”
While Scientific Games didn’t say when the transactions will be completed, it is mulling an initial public offering (IPO), a merger with a special purpose acquisition company (SPAC), or an outright sale or a combination with another company for the lottery unit and Don Best sports wagering platform.
Scientific Games Looking to Delever
While Scientific Games stock is one of the best-performing gaming equities this year, the Las Vegas-based company still sports a bloated balance sheet.
Divesting the lottery and sports wagering units is aimed at reducing that debt burden and the company is rumored to be considering an IPO in Australia to raise additional capital. Parting with the aforementioned businesses will also help Scientific Games further leverage its still sizable stake in SciPlay (NASDAQ:SCPL) to better capitalize on the fast-growing iGaming space. As Stifel’s Stantial notes, that could be a rewarding move.
“On that note, management expects their digital businesses (SCPL and iGaming) to be comparable to their land-based business within three years,” says the analyst. “Assuming LSD annual growth for the land-based business, we think this implies ~$2B in revenues for SGMS’s online offerings, or 161 percent growth vs. 2020A (+38 percent annual CAGR).”
Debt Reduction Could Open Investor Base
A lesson that remains from the 2020 coronavirus market swoon, and it’s one applicable to gaming equities, is that if the broader market environment sours, investors will punish highly indebted companies.
As such, Scientific Games’ efforts to tidy up its fiscal house could pay dividends in the form of not only potentially boosting credit ratings and lowering financing costs, but also by appealing to a broader swath of investors.
“We expect a portion of proceeds to be allocated to strategic investments back into the gaming business (tuck-in M&A, higher R&D, etc.), but still see a significantly strengthened balance sheet nevertheless,” adds Stantial. “We think this could help drive the next phase of re-rating for the shares, as we believe SGMS’s prior leverage levels had limited the addressable investor base for a number of years.”