Optimum Capital Management Pty LtdInvestment Thesis for

Ainsworth Game Technology

December 2014 Prepared by Heinrich Jacobs

Managing Director & Chief Investment Officer

w: optimum-capital.com.au e: info@optimum-capital.com.au

DisclaimerOp#mum  Capital  Management  Pty  Ltd  ABN  60  154  164  020  is  the  Trustee  and  Investment  Manager  of  the  Op#mum  Australian  Equi#es  Value  Fund  (“the  Fund”)  ABN  38  923  100  447.  The  Trustee  is  a  corporate  authorised  representa#ve  (No.  467287)  of  Lanterne  Strategic  Investors  Pty  Ltd  (ABN  49  098  472  587,  AFSL  238198).  

This  presenta#on  is  not  a  recommenda#on  to  invest  in  the  Fund  and  may  not  include  all  of  the  informa#on  that  a  prospec#ve  investor  needs  to  make  an  investment  decision.  Op#mum  Capital  Management  does  not  take  into  account  the  individual  circumstances  of  any  prospec#ve  investor,  nor  does  it  give  any  advice  whatsoever  but  to  the  extent  that  it  does,  it  cons#tutes  only  general  advice  and  not  personal  advice.  Accordingly,  prospec#ve  investors  should  make  their  own  independent  enquiries  and  obtain  professional  legal,  financial,  tax  and  accoun#ng  advice  before  making  an  investment  decision.  

Disclosure  -­‐  The  author  is  a  shareholder  in  Ainsworth  Game  Technology  

Table of Contents

• Business  Overview

• History  of  Ainsworth

• Valua#on

• Risks

• Conclusion

Business Overview

Ainsworth Game Technology (AGI)

ASX  Code:  AGI  

Share  Price:  $2.10*  

Market  Cap:  $750m  

Enterprise  Value:  $695m  

Founded  in  1995,  AGI  has  grown  into  one  of  Australia’s  most  dominant  gaming  machine  operators  

• $244m  of  sales  in  2014  (+23%  on  prior  year)  • $89m  EBITDA  in  2014  (+20%  on  prior  year)  • $62m  Net  profit  in  2014  (+19%  on  prior  year)  • $72m  Net  Cash  posi#on  with  minimal  debt

Unique  Jurisdic@onal  Licenses  • AGI  has  163  jurisdic#onal  licenses  globally  and  secured  31  new  gaming  licences  in  2014  including  Mississippi,  Missouri,  Arizona,  and  Alderney

Interna@onal  Expansion  • Interna#onal  revenue  of  $100m  (+37%  on  prior  year)  and  strong  growth  in  key  market  of  the  Americas.  Interna#onal  revenue  now  accounts  for  41%  of  total  company  revenue.

*Share price at time of writing

ADrac@ve  Yield  &  Return  on  Equity  • Earnings  yield  between  8-­‐9%  • Dividend  yield  between  4-­‐5%  • Return  on  equity  ~  25%

ProductsAGI sells a wide assortment of gaming machines tailored for global markets

Market Australia Americas Europe Asia

No of products 35 32 27 7

$58.5m

$31.9m

$1.0m

$4.1m

$143.3m

$5.3m

AGI is growing its International operations and is establishing a well-diversified business with strategic relationships being developed overseas

Diverse Footprint

Source: Ainsworth’s 2014 Financial Report

Revenue by geography

History of AGI

Five Year Share Price Performance

AGI was trading at approximately $4.45 per share in March 2014 but has since traded down primarily due to softer than expected earnings in FY14

$4.45

Recentprice:$2.25

Source: Yahoo Finance

Intrinsic Value RisingHas the share price decline been warranted? The Intrinsic Value (Blue Line) of the company has steadily been rising and the share price is trading below Intrinsic Value

*Rising Intrinsic Value

Current share price mostly driven by market shortsightedness

Mis-pricing opportunity

Ainsworth Historical Financial PerformanceAGI’s strong domestic operations and international expansion is driving significant revenue gains, with more upside potential to come

Source: Capital IQ

69#98#

151#

198#

244# 256#

295#

0#

50#

100#

150#

200#

250#

300#

350#

FY#10# FY#11# FY#12# FY#13# FY#14# FY#15# FY#16#

$"millions"

Ainsworth’s Historical & Predicted Revenue Growth

Ainsworth Historical Financial PerformanceManagement has a strong focus on operational excellence through product innovation, capital discipline and strong execution. As a result, the Company’s profitability has increased.

Source: Capital IQ

Ainsworth’s Historical EBITDA Performance

7"

26"

51"

67"

85"

0"

10"

20"

30"

40"

50"

60"

70"

80"

90"

100"

FY"10" FY"11" FY"12" FY"13" FY"14"

$"millions"

!(0.01)!!!

!0.08!!

!0.22!!

!0.16!!!0.19!! !0.2!!

!0.23!!

!(0.05)!!!

!0!!

!0.05!!

!0.1!!

!0.15!!

!0.2!!

!0.25!!

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FY!10! FY!11! FY!12! FY!13! FY!14! FY!15! FY!16!

cents&p

er&sh

are&

Ainsworth’s Historical & Predicted Earnings Per Share

High Returns on Capital

Source: Capital IQ

(15%)

(8%)

0%

8%

15%

23%

30%

2009 2010 2011 2012 2013 2014

22%21%22%

16%

4%-9%

Improving Margins

Source: Capital IQ

-17.5

0

17.5

35

52.5

70

2009 2010 2011 2012 2013 2014

EBITDA Margin % Gross Margin %

%

Valuation

Which would you rather own?

1. A 1 year Term Deposit at a 3.25% yield

2. A 5 year Term Deposit at a 4.00% yield

3. Shares in a quality company with an initial 9%, 8.6%, or even 8.2% earnings yield and growing over time

What’s the pay cheque?

Share Price Current Earnings Per Share (c) Earnings Yield (%)

$2.10 0.19 9.04

$2.20 0.19 8.63

$2.30 0.19 8.26

With the share price at current levels an attractive earnings and dividend yield is being offered to investors

Share Price Current Dividends Per Share (c) Dividend Yield (%)

$2.10 0.10 4.76

$2.20 0.10 4.54

$2.30 0.10 4.34

How does it compare?

On a comparable basis with rival Aristocrat, Ainsworth looks cheap on several fronts

Comparables Ainsworth Aristocrat

Market Cap ($m) 765 4,261

Enterprise Value (EV) 695 4,075

EBITDA ($m) 85 198.8

Multiple 8.17 20.5 x

Price/Earnings 11.2 x 23 x

Return on Equity (3yr Avg) 30.5 22.6

Value of AGI

Norm. Earnings - Maint. Capex 50.06WACC 9%

Cash & Equivalents 71.929Interest Bearing Debt 0.463Shares Outstanding 322

Total Equity 235Intangibles 4.701

Earnings Value Power (EVP) $1.95Tangible Book Value (TBV) 0.72

EVP + TBV $2.67Current Share Price $2.10

Margin of Safety +27.00%

• Combining the earnings power and tangible assets of AGI you have a company conservatively valued at $2.67 per share and trading at a 27% discount.

Our conservative NO growth valuation is based on the current free cash flow plus tangible book value of the company. Since future growth is excluded from the analysis, only maintenance capital expenditures are subtracted from after-tax EBIT and growth is ignored

Target ValuationBut what about growth? Ainsworth is a growing company so we should consider a reasonable multiple on EBITDA to arrive at our implied share price valuation

EV/EBITDA 11x 12x 13x 14x

EBITDA(m) 85 85 85 85

Implied Enterprise Value(m) 935 1,020 1,105 1,190

Cash(m) 72 72 72 72

Implied Equity Value(m) 1,007 1,092 1,177 1,262

Shares Outstanding(m) 322 322 322 322

Implied Share Price $3.12 $3.39 $3.65 $3.91

Valuation Multiples

Risks

What’s the Downside?

There are a number of bear points to consider as Ainsworth operates in a competitive and regulated industry, and across geographies

• External  factors  such  as  economic  condi#ons  and  credit  markets

• AGI’s  main  customers  (casino’s  &  clubs)  may  experience  a  slow  down  and  as  a  result  purchase  less  of  AGI’s  products

• Consumer  preferences  may  change  and  AGI’s  gaming  machines  may  lose  popularity

• AGI’s  growth  in  new  Interna#onal  markets  may  slow  or  the  company  may  fail  to  obtain  licensing  and  approval’s

Conclusion• At  current  price’s,  AGI  offers  a  very  aDrac@ve  equity  and  dividend  yield  that  could  grow  over  @me  

-­‐ AGI  has  a  ~8-­‐9%  current  earnings  yield  and  ~4-­‐5%  dividend  yield

• The  current  share  price  is  not  factoring  in  the  earnings  power  of  the  company  and  the  securi@es  are  mis-­‐priced  -­‐  Net  Cash  of  $72m  on  the  balance  sheet  with  minimal  debt

• High  quality  business  with  good  track  record  of  opera@onal  and  financial  performance

• Interna@onal  expansion  to  deliver  ongoing  growth  opportuni@es

• AGI  has  a  high  quality  porRolio  of  gaming  products  in  an  industry  with  high  barrier  to  entry

• The  founder  Leonard  Ainsworth  is  a  pioneer  of  the  industry  and  holds  a  majority  ownership  stake  in  the  company

Get In Contact With UsIf  you  would  like  to  discuss  this  presenta#on  or  find  out  more  informa#on  about  our  Australian  Equi#es  Value  Fund  (applica@ons  now  open)  please  email  us  at  info@op#mum-­‐capital.com.au   Thank  you