Aristocrat Leisure: A strong result in difficult times

About the author:

James Lawrence
Author name:
By James Lawrence
Job title:
Analyst
Date posted:
18 November 2020, 10:30 AM
Sectors Covered:
Gaming, Professional Services, Fixed Interest

  • Aristocrat Leisure (ASX:ALL) reported a solid set of numbers across the board with the land-based division impacted significantly by COVID-19, while the digital division saw very strong growth.
  • Following earnings changes, our blended target price has increased (Morgans clients can login to view price targets and detailed reports) and we retain an Add rating on ALL.
  • We continue to be attracted to ALL's portfolio of assets and believe the business remains attractively priced on a FY22 PE of ~23x with good prospects for organic and acquisitive growth.

FY20 result – a quick snapshot

Group revenue was down just 6% on the pcp at $4,139m while EBITA fell 43% to $771m.

The Land based division (renamed Aristocrat Gaming) saw revenues fall 32% to $1,780m while negative operating leverage saw EBITA fall 56% to $611m.

The Digital division was the shining light with revenue up 32% and EBITA up 37% as consumers shifted to online gaming due to COVID-19.

Group operating cashflow was again strong with the Group reporting only a 5.8% decline to $1,023m and leverage (net debt to EBITDA) came in flat at ~1.4x.

A final dividend of 10cps (fully franked was declared).

The North American market is open for business

Aristocrat Leisure (ASX:ALL) noted that 92% of North America casinos were open as of 12 November and at the end of October 75% of the company's Class II and 90% of its Class III Gaming Operations machines were operating.

The blended Average Daily Revenue (ADR) of US$35.55 was solid given the current environment and adjusting for venue closures due to COVID, the ADR lifted to US$51.01, up 1.1% on the pcp. The company continues to report strong performance from key game titles and noted that it had 14 out of the top 25 leased games.

Digital is well placed for (more moderate) growth

Digital bookings rose 31% to US$1,612m as RAID: Shadow Legends continued to scale strongly.

The game constituted 23% of total bookings ($368m) during FY20 and ALL noted that they spent approximately 50% of the total US$450m user acquisition spend on RAID.

The game was reportedly modestly profitable in 2H20. We forecast USD revenue growth of ~15% for this division in FY21.

Changes to forecasts

We have made very minor upgrades to our NPATA estimates over the FY21 and FY22 forecast years with increases of 1% to $723m and $967m respectively.

Keeping an Add rating

Our ALL target price has increased  (Morgans clients can login to view price targets and detailed reports) following earnings changes and we retain an Add rating on ALL.

The underlying business fundamentals are improving, and the strong balance sheet provides optionality for acquisitions or capital management.

Key risks include:

  1. Increased regulation and competition.
  2. Slowing customer demand.
  3. Acquisition integration and the AUD/USD exchange rate.

Another key risk relates to COVID-19 and the timing of the reopening of gaming venues in North America and Australia.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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