The gaming sector, having navigated the turbulence of the COVID-19 pandemic, is on the brink of resurgence.

Firstly, the pandemic-induced restrictions significantly curtailed the operations of casinos, gaming venues, and related establishments, causing a temporary dip in revenue for many gaming companies. Yet, as the world steadily emerges from these constraints, an anticipated surge in consumer engagement with gaming activities is expected to fuel sector recovery.

Moreover, the shift towards online and mobile gaming during lockdowns has accelerated a trend that was already gaining momentum. Companies with a strong online presence or those that successfully adapted to digital platforms are likely to continue benefiting from this growing market segment.

Our exploration into the ASX gaming sector reveals select small-to-mid-cap stocks that stand out not only for their current undervaluation relative to industry giants but also for their strategic appeal as acquisition targets in the global gaming market. This insight transcends the conventional anticipation of revenue and earnings growth upon sector normalisation, suggesting that deeper, contrarian analysis could uncover opportunities that extend well beyond the immediate horizon of post-pandemic recovery

Ainsworth Game Technology Limited (ASX: AGI) is dedicated to the design, development, manufacturing, sales, and global distribution of cutting-edge gaming content and platforms, spanning electronic gaming machines, related equipment, services, as well as online social and real-money games.

In its most recent financial results, revenue increased by 20% compared to the prior corresponding period (pcp). The company anticipates a sustained growth trajectory in revenue in the upcoming periods, propelled by the commercialisation of key initiatives across pivotal regions in Australia and the Americas.

In late 2023, Ainsworth was reported to have engaged Macquarie Capital for a strategic review, exploring the option of going private to fuel its next growth phase. This move would be aimed at enhancing shareholder value by assessing the company’s strategic alternatives.

Following this news, Ainsworth reported a notable upswing in overall product performance, particularly in global markets which accounts for 79% of its revenue. The company, in its December market update, reported positive results for the six months ending December 31, 2023, projecting a normalised Profit before Tax of approximately $18.0 million, reflecting a noteworthy increase of $2.5 million or 16% from the PCP. Following the strategic review, the notable improvement in outcomes suggests the company is preparing for a possible takeover, aligning its operations for optimal attractiveness.

The most apparent suitor for a takeover is the significant shareholder Novomatic, which acquired just over 52% of the company in 2016. The alignment of Ainsworth’s Chief Executive Officer, Harald Neumann, as a former executive of the global gaming giant, further strengthens the conviction that a takeover offer may be imminent.

Tabcorp Holdings Ltd (ASX: TAH) operates a portfolio of leading Australian brands spanning wagering, media, and integrity services, with national scale and reach. Its current structure is the result of the demerger of The Lottery Corporation Limited (ASX: TLC) in May 2022, creating separate entities for Lotteries and Keno businesses under The Lottery Corporation and Wagering and Media, and Gaming Services businesses under Tabcorp.

In a significant development, Tabcorp secured an exclusive 20-year licence in Victoria, effective from August 2024. The modernised terms of this licence, fostering fair competition in taxes and fees, are estimated to contribute a substantial $140 million pro-forma increase in Group Earnings Before Interest, Tax & Depreciation (EBITDA). The licence entails an upfront payment of $600 million in June 2024 and fixed annual payments from 2025-2043, amounting to an indicative value of $864 million, financed through existing debt facilities.

For the first time in many years, Tabcorp is poised to benefit from significant tailwinds. Pressures on online players, including an augmented point of consumption tax and societal demands to curtail advertising, may lead to the exit of major international players from the Australian market or potentially prompt a takeover offer for Tabcorp, positioning it strategically in this evolving landscape.

Jumbo Interactive Ltd (ASX: JIN) is a digital lottery specialist.

The company provides lottery software platforms and lottery management expertise to the charity and government lottery sectors in Australia and globally. Jumbo was founded by Chief Executive Officer Mike Veverka in 1995 and listed the business on the ASX in 1999.

Part of Jumbo’s operational model involves purchasing lottery tickets from The Lottery Corporation (ASX: TLC) and reselling them online at a premium. Despite The Lottery Corporation’s pricing influence, Jumbo has demonstrated resilience by implementing price increases, leading to a notable revenue boost of 29% per paying user. Recent strategic moves, including a 14.8% increase in Powerball prices, have had minimal impact on demand, with a marginal decline in tickets sold.

Positioned amidst limited online alternatives and stringent industry regulations, Jumbo is well-placed to capture a growing online market share. We estimate lottery sales are tracking 10% higher than the previous year and benefiting from recent high-profile draws, such as the $200 million Powerball. Jackpots are a significant driver of revenue for any lottery retailer. The more jackpots, the more interest generated by punters. As Jumbo gears up to release its upcoming half-year results, the recent uptick in share price performance hints that the market is beginning to recognise the underlying opportunity.

The trajectory of gaming stocks post-COVID-19 lockdowns is marked by numerous promising factors including the resurgence of consumer demand and the accelerated shift towards online gaming. We feel the above mentioned companies find themselves in an evolving market, presenting as enticing options, compared to the large cap industry leaders.

These companies, having weathered the storm of COVID-19, are well-positioned for growth beyond the normalisation of sector activity. For investors with a penchant for strategic foresight, these companies have offered compelling entry points recently and are worth watching as the year progresses.