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.
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.