Sega Sammy Earnings: Steady Start Into New Fiscal Year; Maintaining Fair Value Estimate at JPY 2,680

Sega Sammy's June-quarter revenue and operating income fell 3% and 15% year over year, respectively, to JPY 105 billion and JPY 19 billion, which was well anticipated, given the high base of strong pachislot sales a year ago, amid the launch of a hit product "Smart Pachislot Hohuto No Ken" in April 2023. Meanwhile, performance of the entertainment content business was solid, partly offsetting the reactionary decline in pachislot and pachinko sales. Management aims to release a few new Full Game titles in the second half, and also planned to launch its first smart Pachinko product and a featured title in the September quarter. We believe these visible pipelines will continue to support steady sales growth throughout the year, and we maintain our both our earnings forecasts and fair value estimate of JPY 2,680 per share. We think the shares are slightly undervalued currently, as the market underappreciates the firm's steady long-term growth outlook.