Desjardins sees "risk in the name" We can't just post the positive, happy views... Here's Desjardins view on The Stars Group.
Desjardins Securities analyst Maher Yaghi continues to see “risk in the name” for Stars Group Inc. (TSGI-T, TSG-Q), believing its balance sheet is “stretched” as it continues to transition its business model.
On Wednesday, the Toronto-based company, formerly Amaya Inc., reported second-quarter revenue of $305-million (U.S.), in line with Mr. Yaghi’s projection ($307-million) as well as the consensus ($302-million and up 7 per cent year over year. Adjusted EBITDA of $147-million topped the consensus of $137-million.
Though he called the revenue growth from its casino and sportsbook segment of 50 per cent year over year “impressive,” Mr. Yaghi expressed concern about the underperformance from its poker business. That segment’s revenue fell 5.9 per cent from the previous year, versus his expectation of a 1.0-per-cent drop.
“The decline was mostly due to cannibalization from new products (casino) and decreased revenue in Australia, the Czech Republic and Poland,” he said. “Following the 1Q17 release, management guided to lower poker growth in 2Q17 due to a tough comp vs the previous year, but actual 2Q17 results still disappointed. The company indicated that it is looking to generate flat poker revenue growth in 2017 due to the encouraging response to the launch of its new loyalty program. We estimate this growth will require the company to increase revenue by 2.0 per cent year over year in 2H17. We believe this is achievable as past loyalty programs did generate significant traction for the company. However, we note that there is risk to achieving this target as the growth rate for 2H17 would imply a significant turnaround in poker revenue growth versus the 5.6-per-cent decline recorded in 2Q17. Should this goal be reached, we see the company exceeding or at least being at the high end of 2017 revenue guidance. Overall, we have been highlighting poker’s sluggish growth as a reason not to be bullish on the stock, as it still represents 66 per cent of the company’s revenue. We are waiting for growth to pick up before warming to that segment again.”
Based on the quarterly results, Mr. Yaghi raised his revenue and EBITDA projections for both 2017 and 2018. However, his adjusted earnings per share estimates fell to $2.08 and $2.20, respectively, from $2.11 and $2.22.
He kept a “hold” rating for the stock, lowering his target to $27.50 (Canadian) from $30. Consensus is $28.55.
“We believe the stock’s current potential upside is not high enough to compensate for the elevated balance sheet leverage, even though prospects have recently improved,” the analyst said. “We would wait until we see less risk in the company’s future liquidity position as well as stabilizing poker revenue before becoming more bullish on the name.”