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Here’s why gaming solutions firm Quixant is likely to turn a corner

Publication Date: 18 Jul 2019 - By Samuel Smith By Samuel Smith
Actionable
Differentiated

Equity Fundamental Equity UK Consumer

Quixant (LON: QXT) was founded in the UK in 2005 by the company’s current senior management. It designs, develops and manufactures gaming platforms and display solutions for manufacturers of pay-to-play gaming machines.

From its Cambridge, UK headquarters, Quixant has established a global presence, with subsidiary companies located in Italy, Germany, France, Finland, Slovenia, USA, Taiwan and Japan. In order to minimise labour costs, most of its products are manufactured at its facility in Taipei, Taiwan.

The group’s main competitive advantage is its vast library of intellectual property. It combines this knowhow with its insights and experience in the gaming and slot machine industries as well as its computer and electronic hardware and software expertise to provide superior products. 

As a result, it is able to gain and retain market share quite effectively. By also providing the platform for gaming solutions, it enjoys substantial switching costs, giving it an additional competitive advantage. A final competitive advantage is its manufacturing base in Taiwan, giving Quixant a powerful combination of intellectual property strength, a sticky customer base, and production cost efficiencies that drive greater profitability.

Looking ahead, the company plans to leverage these competitive advantages to drive further growth organically. This will happen as their superior product and pricing enable them to secure further long-term relationships with key gaming and slot machine manufacturers while also continuing to build their brand to be recognised as a market leader in even more countries.

In 2018 the company showed strong growth momentum. Revenue was up 5% overall, led by the gaming division posting 9% growth and gaming platforms growing by 14%. Meanwhile, adjusted pre-tax profit was up 3% and adjusted diluted earnings per share grew by an impressive 14% on the strength of net cash from operating activities surging by 40%. 

Net cash at year end had more than doubled from the previous year, giving management the confidence to increase the dividend by 19% year-over-year. All of this growth came as a result of the core gaming division gaining 13% additional market share as it now supplies 61,000 platforms.

The main drivers of this growth were enhanced features being added to the Gaming Ecosystem, expanding Quixant’s routes to market, and launching new products via Densitron to target the broadcast market. 

Going forward, the best growth opportunities will probably come through enhancing the company’s structure to create more scalable operations as well as exploiting the recent market opening in Japan, where gaming is a wildly popular pastime. 

Conclusion: The main challenge facing Quixant right now are the shortages in the electronic components industry. This has stressed the company’s supply chain for memory components (DRAM) and sub $1 commodity passive components such as resistors, capacitors, and inductors. Fortunately, management anticipated this issue early on and was able to build ample stock to maintain profit margins and productive efficiencies.

Given the company’s numerous competitive advantages, strong balance sheet, solid growth momentum, and relatively cheap stock price [down over 50% since last September], now looks like a good time to buy.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Samuel Smith

 

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