Aristocrat Leisure reported a first-half FY18 adjusted net profit of $361.5m, up 32.5% on the same period last year and comfortably above our forecast of $327.1m, with strong profit growth across the digital and North America gaming operations. A fully franked interim dividend of 19c per share was declared, above our 18c forecast.
We noted the following key points from the release:
The developers reported low average bookings per daily average user (DAU) but higher-than-expected DAU numbers and margins, as new games were launched across multiple genres and are yet to reach monetisation potential. We remain optimistic as monetisation could be improved via portfolio mechanics and targeted user acquisition spending, which we believe Aristocrat has managed well so far, although future spending targets are unclear.
In North America, the Class III installed base grew 19.5% to 18,304 units in a flat market, in line with our 18,078 forecast. This remains our ‘litmus test’ for land-based performance, with additional growth of 18% forecast for the second half. We estimate the Dragon Link slot game has been adopted by more than 50% of casinos with Lightning Link installed. Dragon Link uptake was a key driver of North American gaming strength, but growth is expected to slow in second-half FY18 and FY19 as market penetration peaks.
Aristocrat has increased its digital exposure to 26% of first-half earnings, up from 13% in FY17, and continues to develop titles for both land-based and digital platforms, with further digital growth and capital management opportunities available. We note strong execution by management and a scarcity of earnings growth in the market, despite a challenging and structural slot expenditure decline.
In our view, cross-promotions and better monetisation should support growth, although lower-margin social gaming now comprises about half of total bookings. Our adjusted net profit estimate has increased 7.9% for FY18 and fallen 0.5% for FY19. We maintain our Accumulate recommendation and have raised our target price to $31.75 from $29.00.