Aristocrat Leisure

Aristocrat Leisure (ALL) has a target price of $8.80 from stockmarket analyst Macquarie Research Equities.

Aristocrat Leisure Ltd (ALL): Cutting Back in Australia

Lowering Australian replacement sales — On the back of ongoing weak trends in the very large NSW club and hotel market, driven by impact of smoke-free gaming on venues, we have lowered unit sales to roughly equal to those achieved in FY07, and have taken a more conservative view in forward years.

Aristocrat Leisure (ALL) has a maintained Outperform recommendation and a 12 month price target of $14.57 per share from Australian stock analyst Macquarie Research Equities. Aristocrat Leisure is a leading international developer, manufacturer and distributor of gaming machines and systems and is the largest gaming machine company in Australia. Yesterday the stock dropped 15% on the back of volatility in the markets, and a short tem view that current premiums are unjustified. This justification was mainly attributed to management yesterday revised guidance for FY07 to "broadly in line" with the FY06, reporting NPAT result of AUS$240.1m. In constant currency terms, the result guidance is for AUS$264m, up around 10%. It is due to this result and that fact that over a longer term these metrics lay significant attraction to the company, that the analyst maintains its outperform rating on the stock. As was anticipated, the demand for video gaming product deteriorated this half, though the actual drop was significantly larger than expected. Demand has been soft for some time now as operators sit on their hands waiting to see what progress is made on server based gaming platforms. Drawing more surprise to this shortfall was that ALL major competitors had posted growth in their US sales in their most recent quarters.

The reasons for this growth for Aristocrat Leisure have lead to ALL being wrong footed by a shift in the market towards five reel stepper product. Operators are dominantly churning their stepper machines and buying new five reel product in lieu of replacing video product which would benefit ALL. To compound matters, ALL is now paying for the mistakes that were made in the initial roll out of its stepper product, with many casinos demanding extensive trial periods before signing on the dotted line. This has acted to push out the booking of unit sales. Despite the slowing of video product, ALL is still showing slip share of around 40%. This figure alleviates any concern that competitors were wrestling away ALL’s video dominance. In turn this will act to set the company up nicely when the rebound finally comes, also for the migration to video server based product. All is not roses for the company, as both Australia and Japan fail to provide the upside that was built into the expectations of the market. Delays with a new system (TITO) approval of a new game in Japan caused sales to slip once again. Analyst's forecasts were relatively modest in regards to these two divisions, so regardless the majority of downgrades stem from the operational disappointment of the US. The analysts have maintained their outperform recommendation and 12-month target price of $14.57 despite the 15% fall in the share price yesterday. Instead they are looking at the longer dated embedded value that is a function of the growth of the global gaming market. It is due to this that it is concluded this stock is more of a long term view with a gradual movement over time. Aristocrat was a previous loser of the week earlier this year.

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 (ALL) have a reiterated Outperform recommendation from analyst Macquarie Research Equities (MRE). According to the analyst, there was slight disappointments on a divisional level relative to MRE forecasts, the result was broadly in line with consensus. Any weakness in the stock will present great buying opportunities considering the stellar growth expected from this company in FY07 and FY08. There may have been a buying opportunity following the ALL price slump of 3 percent in morning trade. The gaming company announced a FY06 result of $239m versus Macquarie Research Equities’ (MRE) forecast of $254m. The result was in line with the mean forecast of $239.5 million but the stock has been sold down following a decline in sales from the Japanese division on regulatory delays in approving new games. MRE believe today's weakness presents a great buying opportunity and accordingly reiterate their outperform recommendation. The result of $239m was weighed down by a large commitment to R&D of $95.2m which was $10m ahead of forecast. MRE are very comfortable to see an increasing R&D spend so that ALL can maintain its competitive edge. MRE have noted the following observations by division:

US: The US delivered a segment contribution profit of $252.4m up 38% on pcp and 7% below MRE’s forecast. As expected, the US reported a massive margin lift in 2H06. Margins in 2H06 were 44% up from 35% in the pcp. On the outlook for this division, management expect it will continue to grow based on new jurisdictions and uplift in the replacement cycle. Management also expect further margin improvement.
Australia: Revenue growth was +2% to $276.2m, with segment contribution growth of +3% to $109.7m on a margin of 39.7%. The market appears to remain challenging, with operators uncertain as to the regulatory environment going forward (progressive smoking bans, ticket-in-ticket-out, etc.). The replacement cycle in the second-half improved slightly from what have been historic lows. Sales were driven by a range of new titles.
Japan: As expected, revenue declined to $50.4m (but ahead of MRE’s $37.1m estimate) from $373.7m in the pcp. Segment contribution profit was a loss of $5.6m, compared with a profit of $88.0m in the pcp. The segment loss includes an inventory charge of $7.4m relating to unsold K3 games.

Aristocrat Leisure (ALL) have a maintained Outperform recommendation from shares analyst Macquarie Research Equities (MRE). The gaming supplier have released its first Regulation 5 machine (Kaido) into the Japanese pachislot market on 26/27 November 2006. MRE analysts believe the venue installations to date have been very encouraging with the product installed in 1,350 venues, nine days after its release on 27 November 2006. MRE estimate ALL has sold approx.

JP Morgan have rated the Aristocrat Leisure (ALL) stock as Overweight and a share price target of $15.60. They have said that the Aristocrat Leisure company result was 5 percent higher than expectations.

ABN has rated the Aristocrat Leisure (ALL) stock with a Buy recommendation. The broker notes that the company stock is not trading at a 47 percent discount compared to competitor International Game Technology (IGT) and also comments that the gap is excessive given that the two companies have similar fundamentals.

A compilation of updates by brokers: