Description

Nexteq PLC (NXQ.L)

Figures stated herein are in USD unless otherwise stated.

Company Overview/Recent Developments

Nexteq plc (NXQ) is a Cambridge, UK-based manufacturer of computer platforms, gaming cabinets, touch screen displays and graphical interfaces for the gaming, industrial, broadcast and medical sectors. The company has offices throughout Europe, North America and Asia, manufacturing and engineering operations in Taiwan and software engineering and customer support teams based in Italy and Slovenia. Approximately 60% of NXQ’s revenue is derived from gaming customers, 25% of revenue is derived from industrial equipment manufacturers,  8% of revenue is derived from medical customers and 7% of revenue is derived from broadcast customers. Through NXQ, global slot machine manufacturers outsource non-core aspects of their machines, including the computer platform and low-level software, enabling them to prioritize game design, the most critical component to player enjoyment. Broadcast customers use NXQ’s touchscreens and tactile objects to replace outdated mechanical controls, freeing them up to focus more on audio and video signal processing in their production control room equipment. Industrial equipment manufacturer customers configure control of their devices by integrating NXQ’s electronic display modules which feature flexible embedded computer options. Quixant is NXQ’s gaming business and Densitron, its industrial components business, houses its broadcast, medical and industrial verticals. NXQ changed its company name from Quixant to Nexteq in May 2023 to better signal its "multi-vertical growth strategy”. 

NXQ’s share price has been rangebound over the past 4 years, fluctuating within reach of its current share price of 119p after hitting an all time high of 500p in September 2018. The nosedive in share price coincided with a ~40% decline in the company’s earnings from FY2018 to FY2019 stemming from a significant order book reduction by its then-largest customer, Ainsworth Game Technology (Ainsworth), an Australian gaming company, due to competitive pressure. The revenue hit from Ainsworth’s reduction of its order book was magnified and extended by the subsequent COVID crisis which adversely impacted the gaming sector more broadly, disrupted supply chains and hampered NXQ’s operating results over the ensuing three years. Nevertheless, NXQ’s financial performance during H1 2023 and the FY2023 trading update released three weeks ago indicate that the company has rebounded from the Ainsworth and COVID-inflicted setbacks, as its earnings and operating margins are eclipsing record levels attained in 2018. The company is also more diversified across products, verticals and geographies, very well capitalized and arguably better positioned than ever to play offense rather than defense.

Per the company’s most current data, NXQ has 23% of the addressable gaming market (of $310mm), 3% of the addressable broadcast market (of $220mm) and less than 1% of the addressable industrial equipment market (of $6B) with its current products. NXQ’s market share within the gaming sector has risen at a CAGR of 16.5% from ~5% in 2014 to ~23% today in part because the company has no direct competitors within the gaming platform space. The company’s market share within the broadcast sector has risen at a CAGR of 28% from ~1.7% in 2020 (NXQ’s first full year of operating within the broadcast vertical) to ~3.6% today. NXQ plans to further expand market share in both foregoing high-growth verticals by continuing to leverage its in-house engineering expertise, experienced global sales network and low-cost manufacturing base in Taiwan. The company also expects the industrial display market to grow from $6B to $8.3B (a 6.1% CAGR) by 2030 and its industrial vertical should continue to grow in line with that rate. Based on the NXQ’s historical gaming and broadcast growth rates and projected growth rate for the industrial segment as a whole, the company is positioned to organically grow its top and bottom lines by 10%+ annually over the near to medium term.

Catalysts 

What’s most exciting about NXQ at present is that the company has multiple tailwinds that are likely to boost earnings above the 10% baseline organic growth expected over the next few years. Firstly, NXQ announced in its FY2023 trading update released on January 17th that the company is well positioned to “deliver transformational earnings enhancement over the medium term” by pursuing “value-accretive product development” and “select M&A opportunities.” This language is compelling because NXQ’s management has historically been very subdued with forward-looking statements, has never before mentioned M&A opportunities in a trading update and has a history of being unwaveringly honest, whether positive or negative. In the same announcement, NXQ indicated that its year-end net cash position is $27.9mm (~28% of its current market cap) which is the most cash the company has had in its history. Furthermore on product development, NXQ launched its innovative and cost-effective IQ, IQON and QMAX line of gaming PCs in February 2022 and its Quantum and Qinetic gaming cabinets and sports betting kiosks in October 2022 and secured a $4mm mass production purchase order for its turnkey gaming cabinets within months of their release. NXQ has been very active on gaming product releases over the past 2 years and is slated to release its IQ 2 gaming PC, its most powerful cost-effective platform to date, this week at the ICE London 2024 conference. Another growth driver for NXQ is its recent strategic focus on opportunities within the LatAm gaming market. NXQ has assembled a multilingual LatAm team whose focus is on the growing LatAm gaming market which is expected to grow from $2.9B in 2024 to $4.7B by 2029 (or a CAGR of 10%). In particular, Brazil legalized sports betting in December 2023 and legislative efforts are underway to potentially legalize land-based casinos in the future. 

Management 

NXQ’s leadership team is relatively young, intelligent and motivated. CEO Jon Jayal (41), an electrical engineer and CFA, has been in the role since 2016 and served as COO before that from 2012-2016. Jayal was also an employee when the company was established in 2005 and was one of the key members of the design team that developed Nexteq’s first gaming computer product. CFO Johan Olivier (46) has been with the company since 2021 and is a chartered accountant with 20 years of accounting and financial reporting experience. Jayal and Olivier receive fairly modest compensation, $735k and $548k respectively in FY 2022, approximately half of which was contingent upon NXQ hitting strict adjusted profit before tax targets. Likewise, all CEO and CFO share-based compensation is contingent upon hitting ambitious multi-year EPS growth targets. NXQ co-founders Nick Jarmany and Gary Mullins remain involved with the company as members of the board of directors, with Nick serving as non-executive deputy chair and Gary serving as a non-executive director. Nick and Gary have substantial equity ownership interests in the company as well, 16.9% and 3.3% respectively. 

Valuation 

NXQ currently trades at 7.7x TTM earnings which is quite undemanding for a company with 28% of its market cap in net cash, high insider ownership, quality management and a dominant and expanding competitive position within its niche. Additionally, NXQ has a clear pathway to 10%+ organic EPS growth over the next several years as well as a high likelihood of accretive M&A, LatAm expansion and incremental product development over the next 12-18 months that would further boost growth projections. NXQ also trades at a steep discount to its average P/E ratio over the past 10 years of 27.5 notwithstanding the fact that the company is in better shape than its ever been. NXQ also trades at a significant discount to peer firms within the gaming sector—Everi Holdings Inc. (EVRI: NYSE), Ainsworth Game Technology Ltd (AGI: ASX), International Game Technology PLC (IGT: NYSE) and Light and Wonder, Inc. (LNW: NASDAQ)—which trade at TTM P/E ratios of 8.7x, 44.3x, 53.6x and 60.7x respectively, or an average of 41.8x. With a modest assumption of 15-20% EPS growth over the next few years and multiple re-rating to 12-15x earnings, NXQ’s share price could double or triple over the same period. 

Risks and Mitigants

Risk Factors

• NXQ’s success is dependent on the continuing execution and leadership of CEO, Jon Jayal
• NXQ is heavily reliant on the gaming sector which is inherently cyclical and may experience headwinds during economic downturns  
• Supply shortages and component/wage inflation could impede NXQ’s operations and hurt profit margins 

Mitigants

• NXQ insiders own ~21% of company shares and are economically aligned with minority shareholders
• Significant growth runway with prospective M&A, new product development and LatAm expansion
• Strong balance sheet with net cash of $27.9 million
• No direct competitors within the gaming platform space

Catalyst

• Prospective M&A
• New product development
• LatAm expansion