Aristocrat is a catalyst-rich stock with earnings momentum in an expanding industry. Further, it has a balance sheet that can support both capital management and incremental acquisitions.
With FY23 almost completed, ALL updated the market on its current activity and outlook. The North American environment remains favourable with customers committing capital and the outright sales market returning to normality post COVID. CEO Trevor Croker is seeing solid game performance, particularly from premium leased games. ALL has just launched its latest game – NFL Superbowl Jackpots – across 8 states and will introduce another 5 new NFL games across its Class II and III categories. Mr Croker noted the potential longevity of the NFL themed games given its adaptability across all machine types and the development of new game theme launches.
Among several catalysts to watch for ALL, the company will showcase 90 new games the important G2E convention.
The digital business (Pixel United) endured a difficult 1H23 and moderate growth is expected. ALL dug into its cost base to ensure its guidance of a ‘moderate yoy decline in USD EBITA’ remains the outcome. The division still has a strong pipeline of games and retains its top position in the strategy/role play genre.
ALL’s push into online real money gambling (RMG) through its recently acquired Anaxi Gaming business is running hot. Deals signed with major customers during the year amount to 55% of the online market. Expansion across various states is progressing and the key titles are performing well.
The first approval has been obtained for the $1.8bn acquisition of NeoGames and completion of the deal is still expected in FY24. NeoGames provides ALL with an increased footprint in the US$22bn iGaming market, the US$11bn iLottery market and the US$48bn global online sports betting market. On completion, we think ALL will have a small net debt position around $600m in FY24 representing approximately 0.3x net debt to EBITDA. However, this net debt position will quickly diminish in FY25 leaving the possibility that ALL could extend its capital management program.
So far, ALL has bought back about half of the $1.5bn buyback program and is being tactical about its on-market purchases. We think the company will consider extending the buyback later in 2H24, possibly by a further $500m – another potential catalyst.
Adding to the appeal, ALL would not be prevented from making further bolt-on acquisitions. Organically, ALL’s consensus earnings profile is looking solid and should overshadow what will appear to be an ordinary looking FY23 result in a few weeks.
A lower AUD/USD will also add some lustre to translated earnings if the current level is maintained.
Investment View
A strengthening North American market and a modestly improving digital business provides the basis for a robust earnings outlook over FY24/25. The market is only paying 19x FY24 EPS for this and yet ALL’s recent acquisitions, the buyback (which could go higher), potential for further acquisitions and the big potential of the NFL themed games are arguably not yet in the share price.
Risks to Investment View
Growth in gaming earnings, both land-based and online, might not be as robust as expected. Increased regulatory scrutiny could impact on industry growth, such as cashless gaming machine requirements. The new markets of iGaming, iLottery and sports betting might not develop as much as anticipated which could limit earnings growth relative to the investment.
Recommendation
We have retained our Buy recommendation.
