Australia | Mar 16 2020
Aristocrat Leisure's gaming products are increasingly digital, which may be a positive when it comes to large numbers of people having to self-isolate.
-Existing digital consumption is increasing exponentially in Italy
-Main issue is whether US casinos close, and for how long
-In Australia, the company leases machines and regulations prevent participation in daily revenue
By Eva Brocklehurst
Aristocrat Leisure ((ALL)) is in an unusual position. The company's gaming products are increasingly digital, a positive when it comes to large numbers of people having to self-isolate.
Evidence from Italy is signalling a marked increase in the activity of those existing users of digital titles such as Raid: Shadow Legends. Hence, JPMorgan suggests Aristocrat Leisure is likely to experience and increase in digital revenue as a result of recent self-isolation and working-from-home policies.
Furthermore, the experience in Italy provides enough of a timeframe and examples that are sufficient to observe the benefit. Hence, as the virus spreads in other markets there could be a similar increase in consumption of digital entertainment.
Italy is the only market at this stage with both an advanced level of coronavirus cases and a relatively large digital presence for Aristocrat Leisure. Most of the improvements in performance are coming from existing activity, which is increasing exponentially. Apparently, daily sessions among users, which had a 2019 average of 6, have risen in tandem with coronavirus cases and now are at 22 for Raid: Shadow Legends and 20 for Vikings: War of Clans.
Meanwhile, downloads and active users are stable, with new downloads not increasing substantially. Hence, it appears consumers affected by the virus are increasing their use of existing digital entertainment rather than finding new titles. JPMorgan, not one of the seven stockbrokers monitored daily on the FNArena database, has an Overweight rating for Aristocrat Leisure and a target of $37.50.
Credit Suisse recently upgraded to Outperform from Neutral, given the weakness in the share price and continued momentum in the digital business. The business is also entering a period of weak comparables for social casino revenue.
Digital accounts for around 40% of group revenue and, while modelling 10% revenue growth for the division in FY20, the broker's data indicates the run rate for Aristocrat Leisure may be modestly ahead of that, depending upon sales erosion for legacy games.
Citi assesses the under-geared balance sheet is also an asset in the current environment. The vast majority of the company's $2.8bn in gross debt does not mature until October 2024. Free cash flow generation is high, with the broker calculating $580m is available after dividends are paid.
The impact of coronavirus is highly uncertain at this stage but Citi calculates it should eliminate earnings growth in FY20. This is dependent on whether casinos close, and for how long. Gaming operations are expected to bounce back relatively quickly.
Credit Suisse suspects the pandemic may have some impact on the land-based revenue if people avoid casinos in North America, and to a lesser extent in Europe and Latin America. Aristocrat Leisure is the leading generator of revenue among slot machine manufacturers in North America.
Citi centres its case on a three-month closure for all Las Vegas casinos and half of the rest of the casinos in the US. Casino closures account for around -9% of the broker's FY20 downgrade to earnings estimates. Otherwise, North American earnings could prove relatively defensive, given the mix towards fixed-fee product.
In Macau, Credit Suisse assesses that Aristocrat Leisure has virtually no revenue share exposure, as casinos there prefer outright purchases. Meanwhile, in Australia, the company leases machine and regulations prevent participation in daily revenue. On the other hand, the broker compares this with North America, where a drop in yield goes straight to the profit line. Credit Suisse currently models a flat yield for North American revenue share in FY20.
The database has has seven Buy ratings. The consensus target is $36.23, suggesting 51.8% upside to the last share price. Targets range from $32.10 (Citi) to $39.60 (UBS).
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