Winning Ticket

Aristocrat Leisure is a slot machine manufacturer with land-based operations in Australia/New Zealand, the Americas and other international segments, as well as a fast-growing digital division.

 

Aristocrat reported a first-half FY19 net profit of $422.3m, up 16.8% on the same period last year and ahead of Ord Minnett’s $410.0m forecast, with sustained growth in North America in line with our projections. A fully franked interim dividend of 22cps was declared, versus our forecast of 24cps.

 

Operating earnings growth of 27.3% in the Americas land-based business was more than encouraging for the second-half outlook, as the digital business appears primed to showcase the benefits of a global design and development platform in FY20.

 

Aristocrat’s markets in Oregon, Washington state and Canada accounted for 80% of the growth in first-half platform sales, and we expect 2H19 to continue to see growth, albeit with average selling prices reduced.

 

We forecast net profit growth of 16.3% for Aristocrat in the second half of FY19 and 17.9% in FY20 after this transition year completes. We note the company is yet to recover from the derating in the back half of 2018 despite delivering growth and moving metrics in the right direction.

 

Aristocrat is methodically executing a digital strategy to de-risk title development for land-based slots via its digital platforms. We expect growth in both the digital and land-based segments through to FY20, with capital management opportunities available. Coupling this with strong execution by management, solid free cash flow and a well-capitalised balance sheet, we believe the risk-reward balance remains attractive.

 

We have lifted our net profit estimates for Aristocrat by 0.7% in FY19 and 1.3% in FY20, leading us to raise our target price to $34.25 from $33.25, and we maintain our Buy recommendation.

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