DesjardinsStill looking for more than 40% appreciation in SP. GLTA
In the wake of weaker-than-anticipated first-quarter results and seeing a "more muted" outlook for growth in poker over the remainder of the year, Desjardins Securities analyst Maher Yaghi sees "mounting risk" for his bullish call on The Stars Group Inc. (TSGI-T, TSGI-Q).
Accordingly, he lowered his rating for its stock to "hold" from "buy."
"Guidance for 2019 is potentially at risk if we do not see a material reversal in results in
the coming quarter," said Mr. Yaghi. "Hence, while we still like the long-term prospects for the business, we believe a more cautious view is warranted until we have more confidence in the company's operational performance."
On Wednesday before the bell, the Toronto-based company reported quarterly results that fell short of expectations on the Street, which Mr. Yaghi noted had already declined almost 10 per cent since the company's investor day event in late March.
"While the results were negatively affected by foreign exchange fluctuations, they were also materially affected by operational issues related to poker and betting," he said. "In poker, the company saw a 4.5-per-cent decline in constant-currency revenue in its international segment. These declines were the result of market disruptions in app availability and payment processing in countries such as Russia. We believe these issues are likely to persist for another 1-2 quarters before year-over-year comps improve.
"In betting, while stakes saw growth, betting net win margins saw a sizeable reduction due to unfavourable sports results and increased promotional spending. While a return to normal win margins is likely in the coming quarters, we are still surprised by the significant decline in margins toward the end of the quarter over only a few sporting events "” which underscores the erratic nature of this business."
With the results, Mr. Yaghi lowered his revenue and earnings forecasts for both fiscal 2019 and 2020. He's now projecting earnings per share for this fiscal year of US$1.86, down from US$1.93.
With those changes, he lowered his target for Stars Group shares to $35 from $37.50. The average is $34.71, according to Bloomberg data.
"While we see solid long-term upside potential from these levels, we believe a more cautious view is warranted in the short term as our new 2019 estimates are now below the bottom end of management guidance; without a material reversal as soon as 2Q19 in poker trends, the odds of a guidance reduction later this year could increase, potentially limiting upside for shareholders," said the analyst.