Aristocrat Leisure: Investing for the future
About the author:
- Author name:
- By James Lawrence
- Job title:
- Date posted:
- 03 December 2018, 8:06 AM
- Sectors Covered:
- Gaming, Professional Services, Fixed Interest
FY18 result – a mixed bag
Aristocrat Leisure (ALL) reported a FY18 result that saw revenue of A$3,624m come in-line with our forecasts (with a differing mix) but EBITA of A$1,129m fell 6.5% short of expectations due to weaker margins in the Americas and Digital divisions and higher than anticipated Design and Development costs. NPATA of A$729.6m missed our forecast by 4.8% while a final dividend of 26cps was declared, below our forecast of 30cps.
Moderating revenue growth and margin expectations
Following the result we have reduced our revenue growth expectations for the Americas and Digital segments and at the same time lowered our expected margins for those divisions. Design and Development expenditure is expected to increase in absolute dollar terms while remaining consistent as a percentage of sales with that seen in FY18.
Aristocrat wants to maintain its leading market position across its business segments and consequently needs to invest significantly in staff and technology to remain in this position.
Changes to forecasts
The resulting impact of changes to our model have seen our NPATA forecasts reduced by -7.7% for FY19, -6.5% for FY20 and -5.5% for FY21. The lower earnings expectations have also resulted in the reduction of our dividend forecasts. The company is forecasting an earnings skew to 2H19 which reflects the timing of the digital game releases and corresponding User Acquisition spend.
We set our share price target using a blended approach which incorporates a PE-based valuation and a Discounted Cash Flow (DCF) valuation. We have reduced our share price target following model changes and after lowering the market PE multiple following the recent share market declines.
Key risks include increased regulation and competition, slowing customer demand, acquisition integration and the AUD/USD exchange rate.
There is still plenty to like about Aristocrat Leisure (ALL) with the company retaining a dominant market position in the Americas and Australia/New Zealand. Additionally, we expect management to leverage their learnings from the Product Madness division and report approximately 30% growth from the digital division in FY19.
Following the recent share price declines the stock is now trading on a FY19 PE of 16.2x which we see as compelling. We retain our Add recommendation.
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