Global gaming company has a diversified business, strong execution track record and commitment to sustained investment in innovation
ASX-listed Aristocrat Leisure is a leading global gaming content, technology company and mobile games publisher. The company offers a diverse range of products and services including electronic gaming machines, casino management systems and free-to-play mobile games. Aristocrat’s regulated gaming products are used in over 300 licensed jurisdictions in over 100 countries. The company operates three main segments, which are gaming operations under the Aristocrat Gaming brand, mobile gaming under the Pixel United brand, and outright sales and others such as slot machines to casinos. Aristocrat is a well-established US$15.3 billion ($20.24 billion) market cap company that has been around for 70 years.
The are many compelling points as to why Aristocrat is a good investment. Firstly, the company is a diversified business in the industry with large, leading businesses of a global scale. This includes a leading and diversified game portfolio, top-performing and growing games, along with owned intellectual property and strong franchises. The company has also a strong execution track record and commitment to sustained investment in innovation, as they invest in organic growth opportunities in new and adjacent business segments, along with accelerated growth through M&A. Recurring revenue, strong margins and profit growth are evidence of the company’s ability to expand market share via its business strategy and innovation. The company is in a large, growing market with a total addressable market for each of its business segments averaging US$100 billion. Above all, Aristocrat has strong cash flow generation, excellent liquidity and a robust financial profile to aid in its growth strategy.
The company’s latest financial year earnings showed strong growth for its gaming segment, driven by market-leading products, particularly in the North American region. Further, gaming in this region has been relatively stable for the past 25 years, even through recessions. Both revenue and ebitda for this segment grew by 30% year on year, with profit margins improving to 51.9%. For its Pixel United segment, continued market share gains were achieved through its strategic focus. Ebitda grew 1.5%, while the profit margin improved to 33%. Average bookings per daily active user increased by 10.8%, as one of the key metrics to measure segment performance.
In its outlook, Aristocrat expects continued strong revenue and profit growth from Aristocrat Gaming, through its market-leading positions and over 75% recurring revenue from gaming operations. It also expects further investments into Anaxi, which is a new brand to support its online real money gaming venture. In terms of business strategy, the company expects to continue to gain market share in all key segments, and continuously invest in innovation to improve the competitiveness and breadth of its products.
ESG-wise, Aristocrat’s goals are aligned with its peers on the ASX 20. For its business operations, the company is focused on governance and climate change. For its product responsibility, the company’s focus is on responsible gameplay, data security and privacy, and responsible sourcing. For its people and community, the company’s focus is on employee inclusion and well-being along with service to the community.
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The company’s one-year total return was –23% despite having solid financials. Aristocrat has had five years of positive profits, operating cash flow and free cash flow, as shown in the chart. Operating and net margins throughout this period have also been strong, indicating good profitability. Aristocrat’s earnings, operating cash flow and free cash flow yields are 4.3%, 5.7% and 4.7% respectively, which is more attractive than the risk-free rate of 3.6%. The company’s liquidity is excellent, with a current ratio of 3.2 times, along with good solvency as the company is net cash. Aristocrat also trades at discount to global peers, with a 13%, 15% and 2% discount for its P/E, EV/Ebitda and P/B ratios respectively, indicating that it is an attractive pick-up.
Sentiments-wise, the company has 15 “buy” calls, two “hold” calls, and no “sell” calls, with a consensus target price of over 25% its current trading price of A$33.28 ($30.87). Based on our in-house valuations of the company, we also think that the intrinsic value of the company is roughly 25% above its current trading price. They say cash is king, so investors can look to turn the odds in their favour by investing in Aristocrat Leisure.
Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/ or after consulting licensed investment professionals, at their own risk.
Photo Credit: Bloomberg
Data for Charts & Tables were sourced from Bloomberg; Stock returns include capital adjustments and dividends, and excludes currency exchange fluctuations.
