On the cusp of its full year result (16 Nov), Aristocrat has reaffirmed much of what the market is expecting. It has also given a glimpse of its expansion into online real money gambling (RMG).
Current performance. Some supply chain issues and flooding in NSW affected trading through July and August, but this has largely subsided. The ongoing recovery in US casino revenue trends is supporting positive capex intentions on slot machines. We think ALL can achieve a more normal slot machine replacement run rate of ~75k in North America in FY23f compared to the COVID-affected 40k/50k in FY20 and FY21. A shift in the AUD against the USD could also benefit ALL this year.
Real money gambling push. ALL recently acquired Roxor Gaming, a London-based, Gibraltar-licensed supplier of online casino real money gambling content. The price was not disclosed but is likely to be small given the diminutive size of the business. Roxor has a background in game development, boasting a library of more than 150 games, but the attraction for ALL lies in the online RMG capability.
ALL is building organically and by acquisition towards a much larger position in online RMG, particularly in North America where the company has real depth in land-based content and existing relationships.
By 2030, we think the North American iGaming market could be around US$12 billion in size. ALL could organically build a share of the market between 5-15% of customer revenue and with margins likely to be around 40%, this would generate annual EBITA of about $120 million. This would equate to approximately 5% of group earnings. If ALL was to make further acquisitions in this space, the business would become even more meaningful in time.
ALL’s balance sheet remains poised for action. The $500 million on-market buyback announced at the interim will not prevent management from making further acquisitions in the order of $750 million to $1 billion that could be immediately EPS accretive, in our view. The FY22 balance is likely to show net cash of ~$614 million giving the Board plenty of scope to simultaneously consider acquisitions and further capital management.
Investment view
At ~18x consensus FY23f EPS, ALL is not expensive when considering the 15% compound annual EPS growth expected by the market through to FY24f. The potential for this to be enhanced through acquisitions and perhaps further capital management (maybe a higher dividend payout ratio) adds to the appeal.
Risks To Investment View
The risk in making acquisitions was demonstrated recently by the proposed Playtech transaction which was blocked by key shareholders. If ALL cannot find suitable acquisition targets at a reasonable price, it may not achieve its growth ambitions in real money gambling.
Recommendation
We have retained our Buy recommendation.
