Aristocrat Leisure Poised To Take Share

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A pullback in the gaming sector has created a buying opportunity in Aristocrat Leisure, brokers suggest, underpinned by the company's strengthening position in the North American slot market.

-Global market share expected to increase over the next year
-Strong demand for the company's product library
-Additional upside possible from weaker AUD and further reduction in US tax rates
 

By Eva Brocklehurst

Aristocrat Leisure ((ALL)) has outperformed other gaming equipment suppliers over the past year, attributed to its strong product library, amid expectations for an increase in ship share.

Several brokers believe the pullback in sector overall has created a buying opportunity, underscored by Aristocrat Leisure's strong position in the North American slot market. Global gaming stocks and slot manufacturers have been sold off over recent months.

Very strong outcomes have been witnessed from Aristocrat Leisure's Lightning Link, Dragon Link and Buffalo Grand products and both Morgans and Macquarie expect increased ship share in the participation market in North America.

Moreover, Aristocrat Leisure remains under-penetrated in many other markets, with the exception of Asia and Australia where ship share is around 60%. Data and anecdotal feedback indicates to UBS that market share is likely to increase over the next year.

The broker believes the market is not pricing in another 30% increase in earnings per share during FY19. According to UBS data, September quarter growth slowed to 21%, versus the June quarter's 33%, but this was expected and reflects a cycling of the release of Cashman Casino and Jackpot Magic in the prior corresponding quarter.

Deutsche Bank considers the business well-placed to exceed forecasts, highlighting the company is still gaining share in the 'for-sale' segment of the market which should continue for the next couple of years.

Aristocrat Leisure is also expected to experience solid growth in the digital side of the business following the acquisitions of Big Fish and Plarium during the year. There is a strong pipeline of digital games and a number of new titles are being released by Plarium.

As the company is intent on being a market leader, Morgans increases expenditure forecasts by 8% and 10% for FY19 and FY20. The broker also points out, as Aristocrat Leisure earns a significant proportion of revenue in US dollars and reports in Australian dollars, it is sensitive to movements in the exchange rate. Additional upside to the broker's forecasts and valuation would come from a further depreciation in the Australian dollar cross rate and a further reduction in the US tax rate.

Recurring revenue is now contributing more than two thirds of Aristocrat Leisure's earnings and the current cycle, UBS suggests, is being led by gains in market share and a move into participation, Class 2 and digital, areas in which the company did not previously participate to any large extent.

Oklahoma

Ord Minnett expects Aristocrat can generate profit growth of more than $202m in new land-based markets by FY21, based on 4400 slot machine shipments bound for Oklahoma, an important segment of the US native American gambling market. Oklahoma has more casinos than any other US state and around 130 tribal gaming operations.

The company's Ovation product presents benefits for tribal casinos in Oklahoma, as taxable Class 3 machines may change in favour of non-taxable Class 2 machines. Class 3 machines are traditional wagering offerings with electronic facsimiles of games such as roulette and blackjack, while Class 2 machines offer bingo and cards where players play against each other rather than the house.

The North American addressable market for Aristocrat Leisure can be divided between sales and leases across these two types of machines and the Native American Class 3 tax rate is likely to increase to 10% from 6%, from which Aristocrat Leisure's non-taxable Class 2 Ovation product can leverage increased sales.

UBS estimates the US social casino market is currently growing at around 17% annually and, with the ramp up of Lightning Link, Aristocrat Leisure should continue to outperform. The broker upgrades land-based assumptions for the North American market to incorporate a 21% share and 1% increase in pricing.

Some brokers have not updated for a while but there are seven Buy ratings and one Hold (Morgan Stanley) on FNArena's database. The consensus target is $35.29, suggesting 35.8% upside to the last share price. Targets range from $29.00 (Morgan Stanley) to $41.45 (Deutsche Bank).

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