Capital Management Options For Aristocrat Leisure

This story options ARISTOCRAT LEISURE LIMITED. For extra data SHARE ANALYSIS: ALL

Brokers stay principally buy-rated on Aristocrat Leisure following first quarter outcomes that largely met consensus expectations.

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

By Mark Woodruff

In the speedy aftermath of a -5% share value fall following FY22 outcomes, Morgans advised buyers take benefit and purchase Aristocrat Leisure ((ALL)) shares.

Brokers had been usually unperturbed by the outcomes as little question had been long-term buyers, who’ve skilled a tenfold share value enhance in simply over 9 years.

Revenue and revenue of $5.6bn and $2.4bn, respectively, had been largely consistent with consensus, regardless of value inflation and a lower-quality outcome for Pixel United, the digital gaming enterprise.

Group earnings margins rose by 160bps to twenty-eight.6% year-on-year although second half margins had been materially decrease than for the primary half on elevated provide chain prices, notes Morgan Stanley.

The firm designs, develops and distributes gaming content material, platforms and programs, and its land-based gaming merchandise embrace slot machines, blackjack and roulette machines in addition to Class II (Native American bingo-based) on line casino video games.

More not too long ago, Aristocrat has developed a number one presence in digital gaming, and, in keeping with Morgans, has among the finest performing social on line casino, social informal and technique/role-playing video games on the planet.

Americas Gaming was the standout division in FY22, attaining robust development in each gaming operations and outright gross sales. International Class III additionally contributed materially to revenue development, whereas revenue from Gaming in A&NZ and Pixel United was broadly flat, the latter resulting from normalisation (post-covid) for the cellular video games market.

While Macquarie acknowledges greater prices impacted land-based and Pixel United forecasts, a few of these prices ought to unwind over the medium time period.

The Outperform-rated dealer continues to have a excessive conviction primarily based on earnings upside, a lovely valuation and dividend yield, together with some capital administration optionality.

Management’s forecast for revenue development is an efficient consequence, in keeping with Jarden, contemplating the ramp-up in prices required for actual cash gaming (RMG). It’s felt the extent of that development relies on Pixel United and whether or not gaming spend is impacted by a worsening financial backdrop.

A key takeaway for Goldman Sachs is predicted development by administration for Pixel United, given latest investor considerations concerning the soundness of this division. Credit Suisse, then again, stays unconvinced, noting the problem of igniting development from present video games in a difficult market.

Capital administration optionality and the iGaming launch

Macquarie factors out Aristocrat continues to execute on its capital administration technique.

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

Depending on leverage and market circumstances, administration will ponder additional buybacks and can have a look at ongoing M&A alternatives to help development in Pixel United and the launch of the web RMG enterprise, now branded Anaxi.

Anaxi will launch iGaming, at present authorized and working in seven US states, in three US jurisdictions by early 2023. Regulatory approval has already been obtained by Aristocrat for eight video games in North America, whereas approval for its Remote Gaming Server is due by the top of 2022.

Morgans highlights present accessible liquidity of $3.8bn and suggests the corporate has funding capability for natural funding in on-line RMG, even after the latest buyback, whereas Morgan Stanley additionally expects future development might be supplemented by way of the stability sheet.

Credit Suisse agrees concerning Aristocrat’s spare firepower and suggests a mid-size acquisition would increase EPS and create worth.

Outlook

Goldman Sachs likes Aristocrat Leisure’s strategic diversification. Not solely does the corporate maintain a top-three spot in US slot machine gross sales, but in addition a powerful digital gaming providing, together with the upcoming launch into the rising iGaming market.

The dealer favours the longer-term development outlook over short-term considerations round the spending required to attain such development and lingering provide chain pressures.

A content material benefit, in keeping with Morgan Stanley, will assist the corporate change into a significant participant within the fast-growing US i-Gaming market, whereas Digital will stay a significant revenue generator, with a portfolio that’s extra diversified than friends.

Ratings and goal value abstract

Within the FNArena database there are six Buy (or equal) rankings from brokers, whereas Credit Suisse stays Neutral-rated. The common goal value is $42.00, which suggests 16.7% upside to the most recent share value.

Following the FY22 outcome, the typical goal within the database fell to $42 from $42.53 although Citi and UBS are but to replace their analysis, and Ord Minnett has solely expressed an preliminary view (although constructive) previous to any potential goal value change.

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

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