Desjardins SecuritiesLooks like it's not just me. GLTA
Though he's "waiting for a better hand before stepping into the action," Desjardins Securities analyst Maher Yaghi raised his rating for The Stars Group Inc. (TSGI-T, TSG-Q) to "buy" from "hold."
On Monday, investors punished the Toronto-based gaming and online gambling company following the premarket release of largely in-line quarterly results and a reduction in its full-year guidance, sending its share price plummeting by 18.75 per cent.
Mr. Yaghi called the drop "excessive."
"Indeed, the company was already targeting the low end of the guided range and management had already announced that the updated guidance would include the initial investment required for U.S. betting operations," he said. "While we acknowledge this venture comes with risk, we believe the current share price attributes no value to this opportunity even though the company has expertise in the betting segment.
"We also see a path to improvement for the poker business, which currently faces regulatory challenges in certain jurisdictions. Indeed, the company sees signs of improvement in these markets and will lap challenges starting in 4Q, which should provide a tailwind for both poker and online gaming."
Before the bell, Stars Group reported adjusted EBITDA for the quarter of US$237-million, meeting the Street's expectations. Adjusted for lobbying costs, the result was $233-million.
Based on the first half of the year and the expectation for investment in U.S. betting, the company reduced its guidance. It now expects revenue in the range of US$2.5-billion to US$2.575-billion, falling from US$2.64-billion and US$2.765-billion. The company's adjusted earnings per share guidance dipped to US$1.68 to US$1.83 from US$1.87 to US$2.11.
"The reduction in guidance to more achievable levels and the drop in the share price over the last few months are compelling reasons to upgrade our recommendation," said Mr. Yaghi. "While leverage remains elevated, we believe TSGI's FCF generation (11-per-cent FCF yield) is strong and, barring any M&A, leverage should decline meaningfully over the next few quarters."
In reaction to those changes, Mr. Yaghi also lowered his adjusted earnings per share expectations for fiscal 2019 and 2020 to $1.80 and $2.06, respectively, from $1.86 and $2.18.
His target price for Stars Group shares fell to $31 from $35. The average on the Street is $34.22.
"The recent pullback in the stock beyond [Monday's] 19-per-cent decline is notable," he said. "Also, our valuation method is not aggressive, and we do not include a long-term value for the U.S. betting venture, but we do include costs related to these operations over our forecast horizon. Moreover, management's commitment to debt reduction provides us with more confidence in TSGI's prospects. For these reasons, and with the stock trading at 8 times next year's EBITDA, we are upgrading our rating."