Light & Wonder extends losses as analysts downplay court injunction
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The news: US gambling company Light & Wonder extended losses in morning trade, after a Nevada district court filed an injunction restricting the company from manufacturing and selling new Dragon Train poker machines while its court case with ASX-rival Aristocrat Leisure proceeds.
The numbers: Light & Wonder shares were down 2.5% to $131.17 by 11:50am AEST. The dual-listed company was the worst performing stock across the ASX 200 on Tuesday, with shares plunging 17.8%.
Aristocrat was down 0.43% in early trading.
E&P Capital retained its 'positive' recommendation on Light & Wonder, but reduced its AEBITDA forecasts by 1.1% in FY24, 4.5% in FY26 and 4.6% in FY27. E&P noted that recurring revenue derived from Light & Wonder's Dragon Train game represents around 1% of the company's projected FY24 revenue and a 5% hit is "about the extent of the downside from this event".
JP Morgan kept its 'overweight' rating on the stock but flagged that while Light & Wonder should continue to see near-term growth, "the true value and earnings power of leased machines is long dated". JP Morgan analysts said that the earnings impact is "likely understated" at 5% beyond FY25. They revised down their EBITDA forecasts by 2% in FY24 and FY25, and cut its price target by 12% to $150.
Goldman Sachs analysts kept their 'buy' rating and $190 price target, but called the update "disappointing" for Light & Wonder, given the early successes of Dragon Train in Australia and the US. However, they described Tuesday's sell-off as "overdone" and is now trading at a -25% discount to Aristocrat.
Bell Potter maintained its 'buy' recommendation on Light & Wonder but slashed its target price from $186 to $161 due to lower free cash flow and foreign exchange headwinds. It also downgraded its earnings per share forecasts by 5% in CY24, 10% in CY25, and 6% in CY26, reflecting lost earnings from the injunction. Bell Potter analyst Baxter Kirk noted that "any damages paid by [Light & Wonder] present potential downside risk to our forecasts and may create an overhang on the stock in the near term".
Morningstar analysts made no changes to their forecasts on Light & Wonder or its $160 fair value estimate, noting "these kinds of disputes between gaming machine manufacturers are not uncommon".
The context: On Tuesday AEST a district court in Nevada filed an injunction in relation to Light & Wonder's Dragon Train series of poker machines, which fellow gambling group Aristocrat has argued in a lawsuit breached copyright for its own Dragon Link pokies.
The injunction means that, while the case continues, Light & Wonder will be restricted from manufacturing and selling new Dragon Train machines.
The court's decision, which Light & Wonder said it will appeal, found that Aristocrat is "extremely likely to succeed in demonstrating [Light & Wonder] misappropriated [Aristocrat]'s trade secrets in development of Dragon Train".
What they said: "We expect the companies will likely settle at some point or find ways to work around contentious components," Morningstar analysts said.
"Indeed, Light & Wonder noted that it is already working on new iterations of the Dragon Train franchise that are consistent with the terms of the court's ruling," they said.
The sources: Morningstar research, Goldman Sachs research, E&P Capital research, JP Morgan research, Bell Potter research
