Aristocrat Leisure: +14.9%
Australia-based Aristocrat Leisure has many convincing reasons to stay in our global portfolio. Despite gaining 14.9% and strongly outperforming the benchmark ASX 200 which lost 0.5%, our in-house valuation of the company based on updated financials indicate that the company’s current share price of A$38.57 ($35.08) is well below its intrinsic value, which is roughly 20% above its trading price.
To recap, Aristocrat Leisure operates three business units. They are Aristocrat Gaming, which covers gaming operations and outright sales such as slot machines to casinos; Pixel United which covers mobile gaming; and Anaxi which covers online real money gaming.
Through organic business development and accretive M&A totalling roughly US$3 billion ($4.03 billion) over the last decade, the company has managed to grow its ebitda by around 31% CAGR over the past eight years. Furthermore, over 70% of the company’s business has recurring revenue. In terms of business outlook, the company’s recent venture and expansion into online real money gaming is expected to strongly contribute to the company’s growth as it can leverage its leading content portfolio and global footprint.
In terms of prospects, the total addressable market for the Gaming, Pixel United and Anaxi segments are around US$200 billion, US$77$ billion and US$81 billion respectively. Given the company’s growing market share through top-performing games and portfolios across multiple platforms, capturing the prospective market should be very achievable.
For the company’s most recent 1HFY2023 ended March 31, operating revenue was up 12.2%, mostly driven by the strong performance of its Gaming segment. Operating cash flow was up 22% over the same period, while the earnings per share was up 17.4%. Despite increases in working capital due to higher inventory for more efficient customer order fulfilment, the operating cash flow was higher, mostly attributable to strong business performance and increased interest income due to higher interest rates.
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Over the near to medium term, Aristocrat Leisure intends to invest in its design & development unit to improve its competitiveness and breadth of product, along with focusing on gaining market share in all key segments, through organic growth and M&A.
Aristocrat Leisure has not only performed consistently well over the past few financial years but also offers growth prospects and a solid balance sheet. Having over eight years of growing revenue and net income is perhaps an indicator of a good business, but recording positive and consistent operating cash flow and free cash flow is something only great businesses can achieve. When it comes to financial safety, the company has a solid current ratio of 3.2 times, is net cash and has an interest coverage ratio of 17.5 times, indicating strong liquidity and solvency. Compared to global peers, Aristocrat Leisure trades a 2%, 3% and 8% discount for its P/E, EV/Ebit and P/B ratios respectively, indicating that it is an attractive pick-up.
The stock has 14 “buy” calls, two “hold” calls and no “sell” calls, with a consensus target price of around 15% of its current trading price.
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.
Data for Charts & Tables were sourced from Bloomberg; Stock returns include capital adjustments and dividends, and excludes currency exchange fluctuations.
