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Advantage Accruing To Aristocrat Leisure

Australia | Nov 19 2020


Aristocrat Leisure has a big advantage over its gaming competitors – liquidity, allowing the pursuit of user acquisition and product development

-To continue investing in development and user acquisition
-Outperformed on fees per day gaming
-Margin compression warrants caution


By Eva Brocklehurst

Aristocrat Leisure ((ALL)) has proven digital cash flow could be maintained over a period when most of its land-based customers were locked down for varying lengths, underscoring the advantage of fronting difficult times with plenty of liquidity.

Citi asserts the company's  FY20 results actually understate current earnings for the land-based business and remains comfortable with looking through short-term risks because of the strong balance sheet, while Ord Minnett considers the growth in daily average users in digital cannot be overlooked.

The company will continue to pursue investment in the development of its gaming products and acquiring digital users. Combined digital bookings increased 31% in FY20 and Aristocrat Leisure now has around $2bn in liquidity.

Macquarie notes design and development was already 12% of revenue in FY20 and now forecasts 12.5% through FY21. Only qualitative FY21 guidance was provided and that was simply for continued growth.

Goldman Sachs found the result of high quality, with better-than-expected outcomes for US land-based business both in terms of sales and growing the installed base. The broker believes the business is well-placed to leverage a strong balance sheet and spend ahead of its peers in capturing further market share.

UBS observes Aristocrat Leisure remains under-penetrated in most markets, with outright sales in Asia and Australia the exception. Anecdotal feedback suggests market share will increase over the next 12 months.

On the downside, Macquarie notes the pandemic has materially affected outright sales with revenue down -43% in FY20. Traditionally outright sales conversions account for around 20-25% of overall revenue and there is limited visibility as to how the recovery will pan out. Nevertheless, the broker assumes volumes recover in FY23.


Citi expects FY21 digital revenues and earnings will grow by 10% and 21% respectively, despite the cycling of a tough second half in social casino. Bookings for social casinos are expected to decline by -6% and earnings by -16%.

While fees per day in gaming operations have come under pressure from discounts and extended payment terms, Aristocrat has outperformed most of its competitors. Citi attributes this to its leadership in game performance across all slots segments and a higher proportion of active machines relative to competitors.

Within the digital space, user acquisition expenditure was 28% of revenue in FY20, at the upper end of guidance. This level of expenditure is expected to continue throughout the coming year.

There are three new social casual titles ready for launch and another two casual games are expected in the second half. Macquarie assesses the ongoing release of content supports the approach to diversify the earnings mix.

UBS finds a structural slowdown in social casinos is not yet apparent and Aristocrat's scale provides a big advantage in navigating any changes in digital advertising strategies. The broker expects the digital business to earn US$893m in FY21 and while acknowledging its estimates may appear optimistic, highlights they actually imply a significant deceleration in growth.

If the bull case scenario is met, on the other hand, the broker suggests Aristocrat's share price could reach $50 in two years. UBS believes growth in the short term will be driven by penetration of existing markets and a move into adjacent markets.

US Casinos

While the US casino industry faces a new round of pandemic-driven restrictions, particularly in the midwest, a recovery remains on track and Citi expects the proportion of active machines will stabilise around October levels over the first half, before recovering in the second half.

Aristocrat won market share in the North American gaming segment over the year and at the end of October, more than 80% of North American gaming machines were operational including 90% of class II and 75% of class III.

UBS accepts the main cloud over the business is the shape of the recovery for US casinos but notes Aristocrat led the way in participation in the September quarter. As the majority of casinos remain open further gains are expected based on anecdotal feedback, and land-based business in the US is expected to earn US$1.5bn in FY22.

Macquarie notes significant margin compression occurred in the land-based business and urges caution regarding expectations for margins to return to pre-pandemic levels. For the Americas, a 47% segment profit margin is anticipated in FY22.

US margins are the key reason why consensus estimates range widely. Ord Minnett agrees and also takes a cautious approach. One question the broker raises is why it is taking so long to unveil the company's real-money-gaming (RMG) strategy? Aristocrat is likely to buy, not build, this segment and the broker assumes multiple small-medium acquisitions, as cash is the lever for investment.

All up, the broker incorporates significant upside subsequently, because of RMG, while suspecting downside risk exists if Aristocrat Leisure cannot repeat the RAID game success.

Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $37 target. FNArena's database has six Buy ratings and one Hold (Macquarie).

The consensus target is $36.42, signalling 5.3% upside to the last share price. This compares with $33.68 ahead of the results. Targets range from $30.00 (Morgan Stanley, yet to update on the results, to $40.60 (Citi).

See also, Treasure Chest: Aristocrat's iGaming Prize on September 23, 2020

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