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Scientific Games (SGMS - Analyst Report) division The Global Draw ltd. recently extended its partnership with U.K based bookmaker The Gala Coral Group. Under the terms of the agreement, Global Draw will continue to be the exclusive provider of server-based gaming terminals for the Coral Group through 2017.

The Global Draw and Coral Group relationship dates back to 1997. Coral Group was the first licensed betting chain to implement Global Draw’s gaming terminals way back in 1999. As per the extended partnership, Global Draw will launch its new Infinity 2 gaming terminals in approximately 1,744 coral shops going forward.

Scientific Games continues to bear the brunt of a sluggish domestic market due to lower play levels and higher unemployment rate. To combat this scenario, the company is looking to expand its reach beyond the U.S. In this respect, U.K. is an important growth market for the company, in our view.

We believe that the extended partnership with the Coral Group will boost Scientific Games’ penetration in the United Kingdom and drive top-line growth over the long term. Moreover, improving reach in the U.K. market will help Scientific Games to explore other European markets for server-based gaming opportunities going forward.

We believe that the company’s diversified product offerings, international development activities, recurring revenue business model and strong growth from the Internet-based business will drive the stock over the long term. Further, privatization and outsourcing of state lottery management is a major growth opportunity for Scientific Games going forward.

Moreover, this will provide Scientific Games a significant competitive edge over rivals such as GTECH, International Game Technology (IGT - Analyst Report), Bally Technologies (BYI - Snapshot Report) and Lottomatica going forward.

However, we believe that the visibility regarding this privatization process remains murky, thereby adding significant uncertainty to the stock. Further, sluggish macro-economic condition in the international markets, particularly in Italy and China is the primary headwind for Scientific Games going forward in our view. Increasing investments for product development is also expected to hurt profitability in the near term.

Thus, we prefer to remain on the sidelines. We maintain our Underperform recommendation on Scientific Games over the long term (6-12 months). Currently, Scientific Games has a Zacks #5 Rank, which implies a short-term Strong Sell rating.

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