Aristocrat (ALL) Update

Submitted by Share Trading on 30 April, 2008 - 19:31

Aristocrat (ALL) has a price target of $11.55 from Australian stock analyst UBS.

Aristocrat (ALL) AGM reveals more challenging macro environment

Guidance for FY08 NPAT to be flat on pcp, with weighting to 2H:

At today's AGM ALL gave guidance for FY08 earnings which imply c10% downgrades to UBSe and consensus estimates. They also noted profit would be weighted more towards 2H than normal 40/60 split - implying +c30% in 2H profit.

UBS FY08E NPAT -16%, c8% below management guidance:

The 3 key reasons why we are below guidance, based on our expectations that 1) US replacement demand will continue to deteriorate into the 2H, with lower expectations around growth in new units in 08; 2) Aust will deteriorate further in the 2H given the removal of TAH and TTS as customers; and 3) Incorporating the lower end of guidance for share in Japan given uncertainties around success of new games in a weak pachislot mkt.

How much earnings risk is already being priced in?:

We continue to like the ALL business, given the strong industry dynamics - strong market positions around the world, in an industry with high barriers to entry and growing globally. Whilst we believe there continues to be downside risk relative to consensus and guidance, we note that Aristocrat has gone through a substantial PE de-rating over 07 and 08 and is now trading around a mkt multiple on our lower earnings expectations. As such, despite the earnings risk, we believe the stock looks attractive on medium term basis - 3-yr CAGR EPS +20%, an ungeared balance sheet and offering c7% div yield.

Valuation: $11.55 based on EV/OppFCF basis

Our PT rolls this fwd at the cost of equity less div.

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