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Treasure Chest: Aristocrat’s iGaming Prize

Treasure Chest | Sep 23 2020


FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. US casinos are fast recovering from pandemic-induced closures while the introduction of iGaming is expected to further support the fortunes of Aristocrat Leisure.

-Digital earnings growth strong in second half, encompassing reduced mobility
-Should Aristocrat Leisure acquire an iGaming system provider?
-Strength of its titles puts Aristocrat Leisure at forefront of iGaming content


By Eva Brocklehurst

The digital revolution continues to provide opportunity for Aristocrat Leisure ((ALL)) with the advent of real money gambling online (iGaming), while a recovery in the US land-based business is occurring faster than many brokers anticipated.

Digital bookings and earnings over the short term are expected to be very strong and more than offset a higher Australian dollar. The outlook for the US casino business in 2021 is also improving as Citi notes around 90% of slot machines which remain on the floor are being activated.

Aristocrat Leisure is outperforming across each major category because of a superior game performance. Citi also expects outright purchases of machines to begin picking up in FY21 because of favourable earnings from casinos as well as the gearing outlook.

Digital earnings have been enjoying the reduced mobility and in the second half of FY20 growth across both social casino and social casual are likely to be up 35% and 44%, respectively. RAID has begun to monetise and move into profitability, which will drive the growth in social casual earnings.

Growth in the digital business, having run up strongly during the peak lockdown period, could ease back as mobility increases in US and European markets. However, the six months to September, the second half for Aristocrat Leisure, will incorporate the full impact of the lockdown and Citi upgrades assumptions for earnings across FY20-22.

While there is potential upside to capital expenditure budgets for slot machines at casinos over the medium term, particularly given strong demand, casinos may also favour leasing product to avoid upfront costs, which would also be a positive development for Aristocrat Leisure.

While the broker expects game fees will return to FY19 levels by FY22, as social distancing restrictions are lifted and visits return to normal levels, outright machine sales are expected to be slower to recover given relative pressure on casino budgets and a longer replacement cycle.


Ord Minnett considers it is just a matter of time before Aristocrat Leisure embraces the US iGaming market, potentially in 2025, while Credit Suisse backtracks on expectations this was going to be a narrow content adjacency and acknowledges the other extreme may be evolving.

The broker believes Aristocrat Leisure should act quickly and even sacrifice short-term returns for a strong market position in iGaming. Unlike land-based casinos, no content provider such as Aristocrat Leisure is expected to naturally capture enough share to eclipse the revenue generated by systems providers such as Game Account Network, which takes a fee across all the content it provides.

Credit Suisse incorporates $1bn in its estimates to allow for an acquisition, perhaps Game Account Network, and upgrades long-term cash net profit growth rates as a result.

The return on invested capital (ROIC) hurdle and track record leaves Ord Minnett in no doubt that iGaming could add around $7.60 a share of value to a sum-of-the-parts valuation and increases profit forecasts based on this potential.

IGaming is currently legal in six US states and has a different customer base compared with the social casinos/slots. The broker expects four more states will legalise this form of gambling in the coming years because of tax opportunities and the expansion of sports betting.

However, Ord Minnett does not believe iGaming will become as large a market (probably US$4.6bn in 2025) as sports betting, which is estimated to be US$7.6bn in 2025, because of the limited number of states where it will be legal, less public support and a slow roll-out to date.

Still, Aristocrat Leisure has an advantage because of the strength of its titles, the broker asserts, and there is overlapping R&D potential with social casino games and, therefore, distribution avenues. For example, when Aristocrat Leisure launched its online casino apps it offered products which were first introduced to customers from land-based content within its own client base: the casino.


There are some clouds on the horizon for the company, Citi asserts, as changes to Apple's iOS 14 privacy rules will reduce the effectiveness of user acquisition expenditure, given advertising to third-parties through social media platforms and websites are the most common ways to obtain new installations.

Changes will require app developers to ask users to opt in to unique advertiser identifier data collection and tracking. The implementation has been delayed until early 2021 but, the broker points out, Facebook anticipates revenue from its own audience network platform could drop by up to -50% if this occurs, potentially rendering it ineffective on iOS 14 devices.

Citi finds it is difficult to determine which component of the digital value chain will be most affected, but suspects large game developers like Aristocrat Leisure will still outperform new entrants given a already large user base.

In another area, the RAID ecosystem problems that have emerged in recent months are affecting user progression through the bronze, silver and gold tiers. Citi notes Plarium has attempted to fix issues that have been affecting player progression but there is some concern that low and mid-level players are becoming less engaged with RAID.

FNArena's database has seven Buy ratings for Aristocrat Leisure. The consensus target is $32.61, suggesting 11.9% upside to the last share price.

See also, Slow Recovery Ahead For Aristocrat Leisure on May 22, 2020.

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