Light & Wonder’s debt ratio decreases, credit outlook stable
Light & Wonder's (NYSE: LNW ) efforts to reduce debt are paying off, with Fitch Ratings recently affirming the gaming equipment maker's credit rating at 'BB' with a 'stable' outlook.
Light & Wonder's free cash flow (FCF) margins are beating peers on the back of its recent reunion with social casino developer SciPlay, and the company's debt profile is increasingly conservative - at a time of high interest rates Times are favorable.
“The recent acquisition of SciPlay in October, in which LNW purchased the remaining 17%, increased leverage by half,” the research firm noted. “Nonetheless, leverage remains strong due to strong free cash flow generation, strong liquidity and Conservatively, Fitch expects LNW's credit profile to remain 'BB'. This valuation is offset by the company's high exposure to gaming, which tends to lead to earnings volatility."
Light & Wonder's earnings before interest, tax, depreciation and amortization (EBITDA) fell to 4.3x at the end of last year and is expected to fall further to 3.7x by the end of 2023, confirming Pay off debt reduction plans.
Light & Wonder reduces debt quickly
In 2021, the company formerly known as Scientific Games raised about $7 billion in cash by selling off its lottery and sports betting units.
The deals dramatically reduced debt, won praise from Wall Street and simplified Light & Wonder's investment thesis. While this is happening, the company is able to direct some of its revenue into faster-growing segments, including iGaming. While the company has a poor credit rating, the slot machine maker's debt metrics are at least consistent with that rating.
Fitch added: "Continued momentum in LNW's gaming equipment and systems cash flows in 2024, coupled with stable digital cash flows, will enable LNW to maintain its EBITDA leverage metric in line with 'BB' in 2023 and 2024. "Notably, LNW's strong free cash flow generation expectations and strong liquidity are consistent with the ratings."
Light & Wonder has the ability to repurchase at least another $200 million worth of its own stock. With large acquisitions unlikely in the near future, the company is likely to make progress in reducing debt to a desirable range of 2.5x to 3.5x.
Digitization could boost Light & Wonder’s growth
The SciPlay transaction described above is designed to strengthen the buyer's presence in a high-growth industry. The data suggests this is a smart move for Light & Wonder.
"The number of monthly paying users increased from 577,000 on September 30, 2022 to 602,000 as of September 30, 2023, although the number of monthly active users decreased by approximately 200,000 to 5.7 million due to revenue during the same period.", Hui Qi concluded. “This improvement stems from SciPlay’s focus on introducing new content, features and live events into its games, which increased payer conversion rates by 0.9% to 10.6%.”
Digital gaming is a space fraught with competition and earnings volatility, but Light & Wonder's strong free cash flow generation mitigates some of those risks.
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Source: www.casino.org
