PlayAGS Tumbles on Apollo Offering, Analysts Question Timing

By | November 15, 2022

Shares of PlayAGS (NYSE:AGS) plunged Tuesday after the gaming device manufacturer announced the sale of more than 8.2 million shares held by private equity firm Apollo Global Management (NYSE:APO), prompting sell-side analysts to question the timing of the offering.

PlayAGS stock
A slide from a PlayAGS investor presentation. The stock slid today on news Apollo is selling its shares. (Image: PlayAGS)

The stock finished lower by 13.39% on volume that was more than 20 times the daily average. Las Vegas-based PlayAGS isn’t directly selling any shares nor will it receive proceeds from the offering. Apollo’s stake in the gaming company represents about 22% of the shares outstanding.

The shares being sold by Apollo are the last of the private equity giant’s stake in PlayAGS following similar transactions in 2018 and 2019.

J.P. Morgan and B. Riley Securities are the underwriters for the offering.

Tough Timing for PlayAGS Stock

News of the share sale arrives less than a week after PlayAGS stock tumbled following its third-quarter earnings report. The shares recovered about half the earnings-induced slide over the past several days, but those gains were wiped today.

The announcement of Apollo liquidating its stake in the slot machine maker also arrives about two months after takeover talks with Inspired Entertainment (NASDAQ:INSE) ended, which also sent PlayAGS stock lower. There was speculation that Apollo may have loomed large in those discussions, but that was never publicly revealed. Still, analysts say the timing of the share sale is questionable.

Specifically, the announcement follows a Q3 earnings report that while seemingly right down the middle, was met with a -21% decline in the shares the following day,” wrote Stifel analyst Jeffrey Stantial in a report  to clients. “AGS has partially recovered, though still -11% T1W. We have yet to hear of anything credible justifying the sell-off from a fundamentals perspective, though the timing of the secondary sale shortly thereafter could potentially draw scrutiny.”

He did, however, note Apollo’s sale removes a “longstanding overhang” from PlayAGS stock, which often traded at deep discounts relative to peer due to the private equity firm’s position in the shares. The analyst added Apollo’s sale was likely more “mechanical” than anything else as the financial company has been involved with PlayAGS for a decade and its remaining stake was small.

Stantial reiterated a “buy” rating and an $11 price target on PlayAGS.

PlayAGS Stock Still Cheap

In a note to clients today, Roth Capital analyst Edward Engel also questioned the timing of the Apollo sale, noting the private equity firm may have been concerned with PlayAGS’s efforts to de-lever its balance sheet as interest rates rise. Much of the gaming company’s debt is variable rate, meaning it’s hard to reduce those liabilities when borrowing costs climb.

Conversely, the analyst added that it is somewhat surprising Apollo decided to part with its PlayAGS stake now, particularly if another suitor comes calling for the gaming company.

“AGS trades at an 17% yield to our 2023E FCF, or 5.1x EBITDA. This is a wide discount to supplier peers trading at a 9-12% yield and 6-8x EBITDA. Given this wide discount, we find Apollo’s sale surprising, particularly given potential cost synergies if AGS is targeted by an acquirer,” concluded Engel. “Of all the stocks in our coverage, we believe AGS benefits the most from slowing rising rates, where lower interest rates would support both the valuation and deleveraging.”

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