SHUFFLE MASTER INC

Ticker Symbol: SHFL Industry: Casino and Gaming Recommenda on: BUY Annual Earnings Forecast
Descrip on Total Revenue Net Income

Prepared by: Eric Johanson, Accel Investments www.accelinvestments.com

Company Data Price Date of Price 52-Week Range Market Cap ($mm) Current Yield (%) 12-Month Price Target

$14.61 8/22/2012 7.55-18.77 803.51 n/a $16.40

2009A

2010A

2011A

2012E

2013E

EPS COMPANY PROFILE:

$179,344 $201,302 $227,771 $14,974 $23,083 $31,590 $0.28 $0.43 $0.58

$274,472 $38,871 $0.69

$298,953 $46,466 $0.82

Shue Master (SHFL) is a global casino-gaming supplier that leases, licenses and sells its products. It operates in four segments: 1) 2) 3) 4) U ty Auto shuers and roule e chippers Proprietary Table Games Let it Ride, Three Card Poker, Fire Bet, etc. Electronic Table Systems eTables, Table Master, iTable, Rapid Table, etc. Electronic Gaming Machines Equinox slot machine cabinet, Pink Panther, Cats Hats & Bats, etc.

INVESTMENT THESIS: SHFL maintains a dominant posi on in the casino equipment industry, resul ng in steady Free Cash Flow genera on and growth ($28mm in 2009, $48mm in 2011). SHFLs impressive nancial performance is highlighted by three year growth trends in Revenue, Net Income, Gross and Net Margins, and Return on Equity, along with record revenue and growth in Q2 2012. Approximately half of the companys revenue is recurring, coming from stable long-term product leases. Recurring revenue has grown in each of the past 14 quarters, from $18.8m in Q1 2008 to $28.9m in Q2 2012. The company is commi ed to diversifying its product suite beyond automated shuing machines, and will con nue to generate revenue growth through its new Electronic Gaming Machines and interna onal penetra on into La n America, Australia and Asia. VALUATION: 12-Month Price Target of $16.40 is based on applying a 20x mul ple to F2013 EPS es mate of $0.83. The mul ple-assump on is above its peers, but jus ed given its superior growth prospects over the next several years. Market price tends to follow Quarterly EPS and earnings are expected to con nue an upward trend.

Market Price
20 18 16 14 12 10 8 6 4 2 0 0.30 0.25 0.20 0.15
Market Price

Quarterly EPS

EPS Forecast EPS Trend

0.10 0.05 0

3/1/2009

7/1/2009

11/1/2009

3/1/2010

7/1/2010

11/1/2010

3/1/2011

7/1/2011

11/1/2011

3/1/2012

7/1/2012

11/1/2012

3/1/2013

7/1/2013

11/1/2013

3/1/2009

7/1/2009

11/1/2009

3/1/2010

7/1/2010

11/1/2010

3/1/2011

7/1/2011

11/1/2011

3/1/2012

7/1/2012

11/1/2012

3/1/2013

7/1/2013

11/1/2013

COMPETITVE LANDSCAPE: SHFL has a virtual monopoly in the automated shuer (U ty) business. They also hold a dominant posi on in the Proprietary Table Games segment, with all compe tors being small independent developers. These segments yield high margin (50-70% opera ng margin) and provide stable recurring revenue via long-term leases. SHFLs strong branding and deep infrastructure present high barriers against new entrants. The eTables and slot machine segments are extremely compe ve, with companies gh ng each other for market share to grow their businesses. SHFL has succeeded by carving out a niche in the Australian market, along with releasing its new Equinox slot machine resul ng in 62% slot machine revenue growth in 2011. SHFL currently trades at above-peer mul ples. These high mul ples are jus ed due to its high-margin U ity and PTG segments, above-peer growth trends, and favorable balance sheet posi on. Comparable companies in the eTable and slot machine businesses are WMS Industries (WMS), Interna onal Game Technology (IGT), and Bally Technologies (BYI).
Comparables Valuation
*Data provided by Capital IQ VALUATION MEASURES Stock Price (as of 8/22/2012) Shares Outstanding (millions) Market Cap ($millions) Enterprise Value ($millions) Trailing P/E P/CF EV/EBITDA PEG Ra o (5 yr expected) INCOME STATEMENT ( ) Sales ($millions) Opera ng Prot Margin EBITDA ($millions) Net Prot Margin Net Income ($millions) Diluted EPS ROE BALANCE SHEET (mrq) Total Debt/Equity Current Ra o CASH FLOW STATEMENT ( ) Opera ng Cash Flow ($millions) Levered Free Cash Flow ($millions) WMS IGT BYI SHFL $14.61 55 $803.55 $834.59 22.48 18.25 10.30 0.99 $16.11 $11.95 $44.78 54.45 267.1 42.24 $877.19 $3,191.85 $1,891.51 $865.12 $5,010.00 $2,350.00 14.01 16.83 19.64 21.39 7.52 n/a 4.38 6.90 8.68 2.27 1.06 0.72

$689.70 $2,060.00 14.38% 23.72% $197.40 $726.60 9.29% 10.26% $64.07 $219.60 1.15 0.71 7.40% 17.12%

$879.76 21.74% $270.74 11.50% $101.15 2.28 48.49%

$246.18 22.50% $81.05 14.71% $36.22 0.65 15.13%

6.84% 177.17% 259.00% 2.65 2.04 2.25

8.91% 3.08

$156.80 $41.00

$490.70 $424.62

n/a n/a

$68.06 $44.02

Price Performance vs. Benchmark:

700% 600% 500% 400% 300% 200% 100%
3/1/2009 6/1/2009 9/1/2009 12/1/2009 3/1/2010 6/1/2010 9/1/2010 12/1/2010 3/1/2011 6/1/2011 9/1/2011 12/1/2011 3/1/2012 6/1/2012 9/1/2012

700% 600% 500% 400%

SHFL S&P 500 SHFL WMS IGT BYI
3/1/2009 6/1/2009 9/1/2009 12/1/2009 3/1/2010 6/1/2010 9/1/2010 12/1/2010 3/1/2011 6/1/2011 9/1/2011 12/1/2011 3/1/2012 6/1/2012 9/1/2012

300% 200% 100% 0%

0%

GROWTH OPPORTUNITIES:
Revenue by Segment 2011

Utility Segment: Approximately 30k Shue Master shuers in use (21k sold and 8,300 leased). 60-65% shuer penetration on 47k 15% 19% worldwide card tables today (17k tables hand-shued). 6-8 year product lifecycle for shuer upgrades - MD3 upgrade opportunity on 7k sold MD1 and MD2s. MD3 is faster, more reliable, and has upgraded technology for optical card recognition. Approximately 4,500 new card table installs expected over the next 3 years.
29% 37%
Utility Proprietary table games Electronic table systems Electronic gaming machines

Proprietary Table Games: Higher hit rate than industry for new games (SHFL 10%, industry 1%). Prop table games gaining popularity in international markets. Opportunities for new placements: PTG currently 15% of 47k total card tables worldwide. Progressive upgrades are biggest growth opportunity in PTG segment: 87% of total PTG tables can still be upgraded for progressive bets. Opportunity for multiplier eect: if a new PTG is installed, opportunity for royalty, shuer, and progressive upgrade. SHFL can eventually leverage PTG content to e-tables and online space.

Electronic Gaming Machines: Posted 21% increase in EGM revenue y-o-y as of Q2, primarily driven by Equinox sales in Australia (16% ship share in Australia, #1 in Queensland). New content being developed; Flintstones, and new Asian-themed content. Replacement opportunities on old eStar product, and new markets (Victoria, Latin America, Asia).

E-Table Games: Worst performing of all 4 business segments, SHFL is now investing in this segment to catch up on lost revenues. Biggest opportunity for growth is Asia Rapid Baccarat in Macau to circumvent table game cap. Next generation Table Master product in local markets. iTable roulette in the US 8 installs with 9 orders.

Online: The largest opportunity for growth in the gaming industry is online. Several countries and US States have legalized online gaming, with more expected to follow. As the online space continues to grow, SHFL is investing heavily to create an online presence. Former Zynga VP Louis Castle was hired as Chief Strategy Ocer. SHFL designed a proprietary gaming model for all of its PTG content, and is actively looking to partner with current online gaming operators. A proposed buyout of OnGame (bwin.co.uk online poker operator) was canceled in Q3 2012 at managements discretion due to OnGames inability to meet short-term targets.

BALANCE SHEET ANALYSIS: SHFLs balance sheet appears free of red ags, with improving trends by almost any measure. Over the past three years, cash levels have increased and net debt has been reduced by 80%. Liquidity and activity ratios are healthy, with improvements in Current and Quick Ratios, Inventory Turnover, and the Cash Conversion Cycle. Low levels of accruals suggest earnings are not being manipulated by management.

Capital Structure
*Percent of Long-Term Capital Structure Liabilities and stockholders' equity 2009 2010 2011

Liquidity/Activity Ratios
32.42% 1.24% 54.67% 21.80% 0.87% 61.24% 12.39% 0.95% 74.66%
Description Current Ratio Quick Ratio Inventory Turnover Ratio 2009 2.16 1.33 2.67 2010 1.61 1.05 2.83 2011 2.36 1.69 3.50

Long-term debt, net of current portion Other long-term liabilities Total stockholders' equity
Total liabilities and stockholders' equity

$285,469 $303,960 $312,887

Defensive Interval Ratio Days Sales Outstanding (DSO) Days on Hand of inventory (DOH) Days of Payables Outstanding (DPO) Cash Conversion Cycle

102.85 73.9878 136.778 31.3553 179.411

110.98 74.6602 129.094 33.1007 170.654

122.81 63.6396 104.232 21.4204 146.452

RISK TO RATING AND TARGET PRICE: Risks to target estimate and valuation multiples include, but are not limited to: (1) a decrease in leased products due to slower than expected growth in Asia and reduced casino operator spend, (2) increased competition in lucrative Proprietary Table Games and Utility segments, (3) lower than expected ROI on Electronic Table Systems R&D, (4) declining sales growth on Equinox Electronic Gaming Machine cabinet. Upside risks include, but are not limited to: (1) a faster than expected ramp up in the ETS segment, (2) faster than expected conversion of online revenue opportunities, (3) continued operating eciency and margin improvements

WALL STREET OPINION:

Strong Buy Buy Hold Underperform Sell

Analyst Recommendations Current Quarter Previous Quarter 2 1 2 1 2 4

RECENT NEWS: July 30, 2012 SHUFFLE MASTER GRANTED INTERACTIVE GAMING LICENSE IN NEVADA Shue Master has received a license by the Nevada Gaming Commission for interactive online gaming. This will allow Shue Master to be a business-to-business partner with land-based casino operators in order to provide online poker games as well as play-for-fun versions of its suite of proprietary table games. Shue Master is developing its own content platform to oer its proprietary table games for real-money gabling in legalized online markets and freeto-play on websites, mobile devices and social networks.

May 30, 2012 SHUFFLE MASTER PURCHASES LAND IN LAS VEGAS FOR NEW CONSOLIDATED FACILITY Shue Master recently purchased nearly nine acres of land o the strip (Jones Blvd and I-215) for $2.2 million. The land will be home to 110,000 square feet of new oce and manufacturing space, bringing together all local departments, services and local employees to one location.
"This is a very exciting time of growth for Shue Master and we are clearly 'on the move' literally and guratively," said Gavin Isaacs, Chief Executive Ocer. "When we rst moved into our current location nearly 15 years ago, the company generated $27 million in annual revenues and had just two product lines. Fast-forward to today, Shue Master generates close to 10 times those annual revenues and oers 5 diverse product categories to customers around the globe. Given our signicant evolution over the years, a new consolidated facility will serve to promote greater eciencies in the business and allow us to create the right infrastructure for future growth."

June 27, 2012 SHUFFLE MASTER ANNOUNCES DECISION NOT TO PROCEED WITH ONGAME NETWORK ACQUISITION Shue Master canceled the planned acquisition of the online poker platform, Ongame Network Ltd, due to the deals potentially dilutive eect on Shue Masters short-term nancial results.
"We remain ardent believers in the growth opportunities for online gaming and continue to focus intensely on the space," said Gavin Isaacs, the Company's Chief Executive Ocer. "When we signed the denitive agreement in February, we believed that general market conditions and Ongame's sales pipeline supported the purchase being neutral or modestly accretive to the Company's EBITDA. Business conditions in Europe have deteriorated since February and as a result, it has become evident to us that Ongame's operations post-acquisition will not achieve the near-term results we initially expected and will require a larger ongoing investment than anticipated. Although we believe in its eventuality, there is also uncertainty surrounding the timing of legalization and the rollout of online poker in the U.S. at both the state and federal levels," continued Isaacs. "Although we are disappointed in the outcome, after thorough due diligence we believe this is the right thing to do for our Company and our shareholders. We will continue to pursue opportunities to achieve our growth objectives in the online space, including leveraging and protecting our strong intellectual property and brands, and will investigate all prospects both organic and acquisitive that make strategic and nancial sense."

January 9, 2012 SHUFFLE MASTER ACQUIRES FIRE BET Shue Master acquires Fire Bet, a side bet for craps, expanding its progressive oerings in the Proprietary Table Games segment. With over 330 installs in the US, Fire Bet is the most popular proprietary side bet for craps.