Capital Management Options For Aristocrat Leisure

Australia | Nov 18 2022

This story features ARISTOCRAT LEISURE LIMITED. For more info SHARE ANALYSIS: ALL

Brokers remain mostly buy-rated on Aristocrat Leisure following first quarter results that largely met consensus expectations.

-First quarter revenue and profit for Aristocrat Leisure meet consensus forecasts 
-Americas gaming outperformed, A&NZ Gaming flat
-Macquarie expects higher costs will unwind
-Potential capital management upside?
-iGaming set for US launch in early 2023

By Mark Woodruff

In the immediate aftermath of a -5% share price fall following FY22 results, Morgans suggested investors take advantage and buy Aristocrat Leisure ((ALL)) shares.

Brokers were generally unperturbed by the results as no doubt were long-term investors, who have experienced a tenfold share price increase in just over nine years.

Revenue and profit of $5.6bn and $2.4bn, respectively, were largely in line with consensus, despite cost inflation and a lower-quality result for Pixel United, the digital gaming business.

Group earnings margins rose by 160bps to 28.6% year-on-year though second half margins were materially lower than for the first half on increased supply chain costs, notes Morgan Stanley.

The company designs, develops and distributes gaming content, platforms and systems, and its land-based gaming products include slot machines, blackjack and roulette machines as well as Class II (Native American bingo-based) casino games.

More recently, Aristocrat has developed a leading presence in digital gaming, and, according to Morgans, has some of the best performing social casino, social casual and strategy/role-playing games in the world.

Americas Gaming was the standout division in FY22, achieving strong growth in both gaming operations and outright sales. International Class III also contributed materially to profit growth, while profit from Gaming in A&NZ and Pixel United was broadly flat, the latter due to normalisation (post-covid) for the mobile games market.

While Macquarie acknowledges higher costs impacted land-based and Pixel United forecasts, some of these costs should unwind over the medium term.

The Outperform-rated broker continues to have a high conviction based on earnings upside, an attractive valuation and dividend yield, along with some capital management optionality.

Management’s forecast for profit growth is a good outcome, according to Jarden, considering the ramp-up in costs required for real money gaming (RMG). It’s felt the extent of that growth is dependent on Pixel United and whether gaming spend is impacted by a worsening economic backdrop.

A key takeaway for Goldman Sachs is expected growth by management for Pixel United, given recent investor concerns regarding the stability of this division. Credit Suisse, on the other hand, remains unconvinced, noting the difficulty of igniting growth from existing games in a challenging market.

Capital management optionality and the iGaming launch

Macquarie points out Aristocrat continues to execute on its capital management strategy.

Apart from declaring a 26cps final fully franked dividend, the company has now completed 68% of its $500m on-market share buyback, and in September repaid its US$250m Term Loan B facility.

Depending on leverage and market conditions, management will contemplate further buybacks and will look at ongoing M&A opportunities to support growth in Pixel United and the launch of the online RMG business, now branded Anaxi.

Anaxi will launch iGaming, currently legal and operating in seven US states, in three US jurisdictions by early 2023. Regulatory approval has already been received by Aristocrat for eight games in North America, while approval for its Remote Gaming Server is due by the end of 2022.

Morgans highlights current available liquidity of $3.8bn and suggests the company has funding capacity for organic investment in online RMG, even after the recent buyback, while Morgan Stanley also expects future growth will be supplemented via the balance sheet.

Credit Suisse agrees regarding Aristocrat's spare firepower and suggests a mid-size acquisition would boost EPS and create value.

Outlook

Goldman Sachs likes Aristocrat Leisure’s strategic diversification. Not only does the company hold a top-three spot in US slot machine sales, but also a strong digital gaming offering, along with the upcoming launch into the growing iGaming market.

The broker favours the longer-term growth outlook over short-term concerns around the spending required to achieve such growth and lingering supply chain pressures.

A content advantage, according to Morgan Stanley, will help the company become a meaningful player in the fast-growing US i-Gaming market, while Digital will remain a meaningful profit generator, with a portfolio that is more diversified than peers.

Ratings and target price summary

Within the FNArena database there are six Buy (or equivalent) ratings from brokers, while Credit Suisse remains Neutral-rated. The average target price is $42.00, which suggests 16.7% upside to the latest share price.

Following the FY22 result, the average target in the database fell to $42 from $42.53 though Citi and UBS are yet to update their research, and Ord Minnett has only expressed an initial view (though positive) prior to any potential target price change.

Outside of the database, Goldman Sachs (Buy) lifts its target to $42.80 from $42.50 and Overweight-rated Jarden’s target increases to $39.29 from $39.13.

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