Gaming CFOs Mostly Upbeat, Strong Dollar Could Pinch Suppliers

Casino industry chief financial officers (CFOs) are mostly optimistic, but a strong dollar could be a drag on other gaming companies, says a sell-side analyst.

In a report to clients today, Roth Capital analyst Edward Engel noted recent conversations with financial bosses of casino operators were constructive and could augur well for capital return plans in 2023.

Not only are gaming dividends/buy-backs at decade highs, but based on our conversations operators are pressing on with CapEx initiatives,” wrote the analyst. “We believe this creates a supportive backdrop for 2023 slot sales/placements, as well as casino floor investments like cashless gaming and tech that better captures player data/analytics.”

Share repurchase programs are the capital return effort of choice in the industry, as only a scant amount of casino operators restored and grew dividends following the start of the coronavirus pandemic.

As for demand trends, those remain sturdy, particularly on the Las Vegas Strip. Engel added North American gross gaming revenue (GGR) in August likely tracked 1% to 2% ahead of the year earlier period.

Supplier Recovery Is Notable

Among the lessons learned by casino operators amid multi-month shutdowns in 2020 is that efficiencies and margins matter. An obvious result of that is a renewed emphasis on higher margin gaming offerings – namely slot machines.

“Gaming suppliers have largely recovered to pre-COVID levels, where industry unit sales and installed bases have either recovered or exceeded 2019. In 2Q22, industry unit sales reached 95% of 2Q19 levels, vs a 90% recovery in 1Q22,” said the analyst. “Meanwhile, the North American installed base is +2% on a two-year basis, as new casino openings and a reacclerating replacement cycle grow the market. With CFOs remaining confident ahead of a strong pipeline of upcoming new openings/expansions, we expect further growth for gaming suppliers in 2023.”

Last month, Inspired Entertainment offered $10 a share in cash for AGS, valuing the target at $370 million. Those discussions ultimately fell apart.

Strong Dollar Headwinds

Thanks to five interest rate hikes by the Federal Reserve, with more on the way, the US dollar is clobbering other major currencies this year, and that’s a drag on companies that convert sales in greenbacks back to the currencies of their home countries.

As Engel points Bragg (euro) and Inspired (British pound) are among the gaming companies contending with exchange rate hurdles. He lowered his price target on Inspired to $16 from $19.

“Global iGaming operators reported mixed 2Q22 results; however, B2B suppliers grew alongside newly regulated markets like the US. Specifically, companies like BRAG and INSE delivered double-digit iGaming growth as they chip away market share from industry leaders. That said, FX headwinds in Europe offset some growth in 2H22 and 2023,” concluded the analyst.