Both Quixant (QXT:AIM) and its share price have been on a great two-year run but we believe 2018 could be even better. Rapid growth, a technological edge and decent pricing power could help the shares reach 600p. If, as we hope, a contract with a tier-1 manufacturer comes the shares could move even higher.

Quixant is a Cambridge-based company that designs the logic boxes that control pay-to-play digital gaming machines – one arm bandits, quizzes, bingo, casino games, etc. The logic box basically acts as the brains behind the games.

Outsourced logic boxes are fast becoming the norm across the vast and competitive gaming machine industry because it frees game manufacturers to concentrate on game design and development, the key selling point that pulls players from one terminal to another. Quixant’s all-in-one boxed solution offers a low-cost, high-quality and innovative solution.

LARGE MARKET SERVED BY FEW

There are about 8m gaming machines installed worldwide, according to estimates, yet 90% of them are made by just five top tier manufacturers; a couple in the US, one in Australia, two more in central Europe. That covers gaming machines installed from Las Vegas to London, Monte Carlo to Macau.

To date Quixant’s success has been built on supplying smaller game machine makers outside that group. But importantly, management are on cozy terms with all of the tier-1 suppliers top brass, with small scale projects undertaken with each of the big five.

Large scale adoption of outsourced logic boxes is widely believed to be a matter of when, not if, and the impact on Quixant revenue would be significant. Quixant management says that a typical tier-2 contract would be for approximately 10,000 logic boxes, in a good year. A similar tier-1 order would be 10 times that amount.

WIDER OPPORTUNITIES

In the interim, gambling liberalisation in several global markets (Japan, Singapore) continues to expand Quixant’s overall opportunity. There’s even talk of Brazil going down a similar path, where analysts see scope for 250,000 gaming machine installations, if rules do change.

Quixant has won a hard-earned reputation for outperforming forecasts while at the same time delivering excellent cash-backed profit. In the first half of 2017, pre-tax profit growth ran at 77% to $9.2m after adjusting for modest amortisation and share-based payments, on a 38% increase in revenue.

Analysts at independent broker Canaccord are forecasting $16.8m of adjusted pre-tax profit for the year to 31 December 2017 rising to $20.3m this year, roughly chiming with consensus. That implies a 2018 price to earnings multiple of 23.9. (SF)

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