Australia | May 24 2019
Brokers are encouraged by the outlook for Aristocrat Leisure after the company's first half results, expecting the digital business will reveal its potential in the second half.
-Retains strong North American share of land-based gaming
-Australian margins improve, with a shift in sales mix towards recurring revenue
-Digital expected to return to growth in the second half
By Eva Brocklehurst
Aristocrat Leisure ((ALL)) expects continued growth over the rest of FY19, with some skew in earnings into the second half. Brokers are encouraged by the outlook, as the digital business in FY20 should reflect the benefits of the company's design developments.
Aristocrat Leisure is on track for $1bn in profit by FY20 on UBS estimates, as the land-based business continues to expand its revenue share and the outlook for digital improves with the release of major game titles. The broker suggests there is further upside as the market becomes more comfortable about the digital execution. The company has been adding features to Product Madness to arrest sales erosion and has reported positive signs early in the second half.
UBS predicts this will come with double-digit revenue growth and should occur in the second half of FY19. While the market has been rightly focused on the outlook for digital business, the broker highlights a North American ship share of 23% in land-based gaming, and remains of the view that the company is re-entering an upgrade cycle.
North America was the highlight for most brokers, as the company retains a dominant position with strong growth in outright platform sales and installed gaming operations. Deutsche Bank has observed from recent survey and peer results in North America that Aristocrat Leisure is continuing to gain share in class III and class II as well as hold share in the more competitive outright sales segment.
Operating leverage appears to have returned earlier than Macquarie expected. The overall margin in the Americas was 55%, slightly lower than the prior comparable half but a material improvement sequentially. Macquarie expects ship share, excluding adjacencies, and based on buyer feedback, should hold around 24% given the superior game performance.
Morgans notes a significant opportunity in adjacent markets in North America with moves into the Washington CTS and video lottery terminal markets showing good early traction. There are indications this new volume can be sustained to at least FY21.
The Australian performance was also firm, and the company leads the market, with margins improving because a shift in sales mix towards recurring revenue. Still, Credit Suisse is concerned about the company's poor disclosure in Australia, which having experienced lower volumes and slightly higher prices provided no explanation regarding the 7% revenue growth. A weaker second half in Australia is envisaged. The broker has difficulty calculating the effects of the new licensing pricing model.
Margins contracted in the digital business, as expected, because of an increase in the number of bookings in the lower-margin casual segment. In digital, Credit Suisse found it useful that the company disclosed that no game has revenue large enough to cause an insurmountable drag on earnings should it fail to gain traction.
Digital, which represents around 27% of segment profit, is considered likely to return to growth in the second half. Segment profit fell -7% on a pro forma basis in the first half, driven by increased user acquisition expenditure to support additional game releases.
Macquarie suggests the company's rigorous approach to digital games development, where only games that meet performance hurdles go through to being launched, should drive discipline in user acquisition expenditure. Wilsons expects the digital business will remain a concern for a while as confidence needs to improve despite the company alluding to a better second half.
Ord Minnett expects margins to vary in the digital business between 30% and 35% as the portfolio undergoes changes. However, higher margins are expected in the long-term. The broker assesses the company is methodically de-risking title development for land-based slots and digital platforms.
Growth exists in both areas through FY20 and capital management opportunities should become available. Ord Minnett suggests, coupled with strong execution by management, the risk/reward balance is attractive.
Wilsons, not one of the eight stockbrokers monitored daily on the FNArena database, had conservatively moved to Hold ahead of the results but now believes it was too cautious. Rating is upgraded back to Buy with a target of $32.15.
FNArena's database shows six Buy ratings and one Hold (Morgan Stanley). The consensus target is $32.65, signalling 13.6% upside to the last share price. Targets range from $29 (Morgan Stanley) to $42 (Deutsche Bank).
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