NYX GAMING GROUP LTD 11 PCT DEBS V.NYX.DB

RE:RE:RE:RE:RE:Target price cut

[petrofac]

CANACCORD
Lowering Target Price Q3/16: Growth thesis intact, near-term margin pain NYX Gaming delivered an excellent quarter of revenue growth as top line performance of $54.4M outpaced consensus of $51.0M. As highlighted in our preview note (Q3/16 preview: Looking for the start of a trend) we believed consensus was achievable and held our $55.2M estimate firm. We view the revenue result as supportive of our growth thesis for the stock. However, while sales shot out the lights, adjusted EBITDA gasped its way to a disappointing $14.5M (Street $18.3) amid higher than expected personnel and administrative costs. We expect that this is another quarter that will see consensus estimates tighten up further as management provided some directional outlook on EBITDA margin; we have increased our operating expense forecast and kept our outlook flat over the near-term which negatively impacts our near-term adjusted EBITDA and EPS expectations. We remain BUY rated and as previously noted peer multiples have compressed since Q2/16 which has prompted us to lower our target to C$4.00 (from C$5.00). Investment highlights • Consensus-beating revenue supports our growth thesis. It is encouraging when a company beats consensus revenue with a near miss against our revenue estimates giving us confidence that our growth thesis is intact for 2017E. We expect that NYX Gaming can continue to add customers and grow share within existing customers so we have only modestly adjusted our next year's sales outlook downward. • Q3/16 EBITDA weak, 2017E largely maintained. Weakness in the adjusted EBITDA result rattled the stock as $14.5M came up short of consensus of $18.3M and our estimate of $19.0M. Higher opex, mainly from personnel costs, drove margin down to 26.7% (Street 35.9%). Q4/16E margin will likely mirror Q3/16 with management targeting a 40% margin in Q4/17E. We have moderated our outlook somewhat; evidence of margin expansion is needed before trending the margin to 40% in Q4/17E. • We expect analyst estimates to tighten up. Though management did not provide guidance it was helpful to receive direction on margin profile. We think that this could be another step towards analysts tightening up the range of expectations. We believe a tighter range could be a near-term catalyst for price movement as the investment community starts to see the story through the same lens. • Simplifying the capital structure on the horizon. New CFO Mr. Eric Matejevich indicated that a priority (not the priority) is simplifying the capital structure. We applaud this acknowledgement of a complex structure and would view any steps toward this goal as positive for the stock.