Treasure Chest: Brokers Anticipate Aristocrat Surprise

This story features ARISTOCRAT LEISURE LIMITED. For more info SHARE ANALYSIS: ALL

Two brokers believe Aristocrat Leisure’s earnings result will provide an upside surprise next week, beating guidance.

– All divisions outperforming
– Guidance-beating profit expected
– Dividend increase likely
 

By Greg Peel

Gaming machine manufacturer Aristocrat Leisure ((ALL)) has enjoyed a strong rally since back in February when most companies were publishing their first half or full year earnings reports. A move up of over 30% has well outpaced the market, following an upgrade to guidance. Aristocrat reports first half earnings next week.

This might provide cause for brokers to ease back on their recommendations but not so for Citi and Deutsche Bank, both of which believe the company is likely to surprise to the upside.

Citi retains not only a Buy rating, but a “conviction” Buy. Aristocrat remains the broker’s top pick in the sector given forecast 22% compound earnings growth over two years, a 5-6% free cash flow yield over that period and a balance sheet strong enough to allow for bolt-on acquisition and/or capital management options.

Recent upbeat North American slot survey data, domestic March quarter shipment data and a reduction in cost of debt assumptions sees the broker lift earnings forecasts. Citi is forecasting a 31% year on year increase in profit, above 20-30% guidance and 2% above consensus. The broker suggests its previous forecast was too conservative in light of the company’s medium term growth outlook.

Citi expects Aristocrat will tweak full year guidance with its first half result, either raising the low end of the range or raising the top end of the range. Deutsche Bank expects a tightening of guidance towards the top end.

Deutsche also anticipates an increase in the dividend payout ratio to 55%.

The broker is expecting a surprise to the upside in next week’s result given a stronger than expected performance from all of the Australian, North American and Digital gaming operations and Other International businesses. An easing in the Aussie dollar over the period also provides a boost.

Deutsche expects first half profit to have increased a full 49% year on year to $272.4m. Consensus sits at $245m. The broker expects an unfranked final dividend of 23c to be declared, compared to 10c a year ago.

Deutsche maintains a $21.70 price target and a Buy rating. Citi has lifted its target to $23.85 from $19.80.

That takes the consensus target in the FNArena database to $20.63, but it’s quite a way down to bottom marker Macquarie at $18.80, the broker not having updated its view since December.

Five of the six database brokers have Buy or equivalent ratings on Aristocrat. Credit Suisse sits on Neutral with a target of $20.50.
 

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