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Aristocrat Thrives On Stimulus

Australia | May 18 2021


Aristocrat Leisure has flagged a surge in net profit in the first half, benefiting from increased attendance at casinos as alternative entertainment options remain limited

-Fiscal/monetary stimulus boosts player expenditure
-Participation should grow as the vaccine roll-out progresses
-iGaming likely to eventually impact on social and land-based casinos


By Eva Brocklehurst

Aristocrat Leisure ((ALL)) has bounded out of the blocks, its post-pandemic recovery occurring much faster than many expected as unprecedented stimulus fires up the US economy.

In a preliminary look at the first half result, with accounts released on May 24, operating earnings were reported at $750m and net profit at $412m, with little detail other than North America, Australia and the digital business are ahead of the prior comparable period.

Credit Suisse struggles to find specific items that could have generated so much profit in a half year, while noting Oklahoma Class II and III delivered an outstanding yield. Additionally, the company added installations around the US while its competitors seemingly lost installations.

The broker subsequently upgrades estimates for net profit in FY21 by 24%, given the strong US land-based operations and the digital performance, but remains wary of the fiscal/monetary stimulus that exists and the lack of entertainment options in the US and Australian economies, suspecting the stellar performance may be temporary.

Hence, FY22 and FY23 net profit estimates are not upgraded while the broker calculates Aristocrat will be in a net cash position by FY23. Aristocrat has gained share in social casino, which is 27% of group revenue, and Credit Suisse is now modelling 30% revenue growth for the social casino business.

Citi points out the rapid roll-out of vaccines in the US has meant stronger attendance at casinos and stimulus cheques have boosted expenditure per player. This delivered the very high rate of profitability that flows through to the fee-per-day gaming operations.

Pent-up demand, stimulus and a new customer demographic are underpinning the business as Citi also notes younger players have been visiting casinos, given the lack of alternative entertainment options.

Also on this theme, while the US has been significantly disrupted, UBS flags the fact that around 90% of participation machines are now switched on and this should grow as the vaccine roll-out progresses.

Despite the outright replacement market still being down -40-45% the broker believes the commentary regarding increased market share is an indication of a strong product portfolio. Moreover, first half gains are not only likely to stem from a quicker recovery in revenue but also disciplined cost control.

Macquarie highlights the low level of gearing and lack of debt maturities over the short term which place the business in a strong position relative to the competition. Unlike pure slot manufacturers, Aristocrat Leisure can offset any disruption with higher growth in its digital business.

Moreover, the company is still under-penetrated in most markets, with Asian and Australian outright sales the exception. Macquarie is of the view that the company's upgrade to first half earnings is more about margins within the land-based segment. From an operating machine perspective the broker now expects the active installed base to exceed the 75-85% range yet considers this captured within forecasts.


UBS is increasingly confident about a $1.1bn profit forecast for FY22 and Macquarie also envisages a means whereby net profit can exceed $1bn in FY22, without M&A, although there are risks to consider.

These include currency conversion, US tax reform and the cycling of pandemic-related volume benefits. Despite the recovery being ahead of expectations, Macquarie highlights the likelihood Aristocrat will need to mitigate the eventual cannibalisation of land-based casinos and social casinos.

The broker also expects the gap to company's superior product will narrow eventually. While diversification would reduce this risk, and there are M&A options given the balance sheet capacity, the timing  is unclear and, therefore, M&A does not warrant inclusion in forecasts.


Citi expects digital earnings will be broadly in line with the prior half and margins are likely to stabilise at around 35%. Longer-term margin upside is likely to be driven by monetisation of RAID and a shift of users to Plarium Play, which avoids platform fees.

Digital business may account for around 40% of profit in FY22, having grown materially over recent years. Yet Macquarie notes the digital business is skewed toward two products and this creates concentration risks.

Another consideration within digital is iGaming in North America. IGaming involves online gambling with real money. While the initial growth is likely to be expansionary Macquarie expects an inflection point will be reached in time where there is an impact on both social and land-based casinos. The broker expects Aristocrat Leisure to participate in iGaming and find the most profitable position within the value chain.

There is potential for a re-rating and expansion into iGaming is the next catalyst, in Ord Minnett's view, as Aristocrat can develop games and distribute them across several channels. IGaming is currently legal in six US states.

FNArena's database has six Buy ratings and one Hold (Macquarie). The consensus target is $40.65, suggesting 1.6% upside to the last share price. This compares with $37.20 ahead of the update. Targets range from $37.31 (Morgans, yet to comment on the update) to $44.50 (Citi).

See also, Aristocrat Signals Bullish Rebound on April 6, 2021.

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