Aristocrat Leisure Update

Submitted by Craig Strzelecki on 21 May, 2007 - 19:58

Aristocrat Leisure have a retained Outperform broker call from sharemarket analyst Macquarie Research Equities. International Game Technology (IGT), one of Aristocrat's (ALL) major competitors globally, climbed as much as 9% on speculation of a possible private equity bid in New York on Friday night. The suggestion is that Apollo and TPG are in the midst of considering a Leveraged Buy-Out (LBO) of IGT. These are the same two private equity firms that took casino operator Harrah's Entertainment private late last year. Broadly, the attraction of gaming companies to private equity (PE) firms is in the strong free cashflow conversion and low capex requirements. By way of illustration, in FY07 for Aristocrat Leisure the analysts forecast ~$340m of FCF, generated with a capital expenditure bill of around $25-30m p.a. Additionally, gaming device manufacturing companies such as IGT and ALL have strong and well established barriers to entry as a result of their investment in R&D, player loyalties to various brands of gaming product and the intellectual property associated with math models and pay tables. However, one of the traditional problems that PE firms have faced in the gaming space is securing the relevant licences (in IGT's case, ~300 licences that would need to be secured) and regulatory approvals. Additionally, any bid for IGT may have to overcome anti-trust hurdles. In the case of Aristocrat Leisure, there is the additional complication of the substantial shareholding of the Ainsworth family who account for approximately 30% of shares outstanding. While it is never possible to comprehensively rule out the structuring of a deal that would see the family shareholding dislodged (or restructured), on face value it seems a difficult assignment. The analysts have noted for sometime the unleveraged Aristocrat Leisure balance sheet, which they consider could benefit substantially from the introduction of some gearing to lower the cost of capital. At current levels, this represents an attractive fundamental entry point for the stock. On a 12mth rolling fwd p/e basis, Aristocrat Leisure with its EPS growth profile of +20% for next 3 years trades at a discounted 22.4x PER relative to IGT at 24.3x.

Aristocrat Leisure Limited is listed on the Australian Stock Exchange (ASX) under stock code ALL. You can view their investor website here. ALL was listed on the ASX on 9 July, 1996. This company designs, develops, manufactures and markets gaming machines, gaming systems and other gaming equipment and services. David Simpson is the chairman for Aristocrat Leisure and the managing director is Paul Oneile. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade ALL. Check your charts and good luck with your share trading!

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