Aristocrat Leisure has a meaningful number of staff in both Ukraine and Russia, mostly within its Plarium sub-business. The company is providing as much support as it can to help its Ukrainian staff including relocating to Poland.
Ukraine and Russia act as digital tech hubs, accounting for almost half of ALL’s Digital staff. The company employs more than 7,000 people, but we estimate that around 1.2-1.3k of these live in Ukraine while about 500 are in Russia. Among measures ALL is taking to help its Ukrainian staff, daily buses are being provided for relocation to Poland. We do not expect all Ukrainian staff to leave as some may bravely choose to stay and defend their country. This is a sombre moment, and we wish them and their families well.
The Plarium business will clearly be disrupted by the Russian invasion of Ukraine, but we expect ALL will be able to fully replicate the Ukraine studio functions into other tech hubs in Poland, Finland and Israel.
Separately, the feasibility of ALL’s Russian operations may come into question.
ALL’s revenue does not seem to be affected by the situation as recent App Annie data shows no deterioration in rankings for its three key games as at 7 March 2022.
Investment view
The share price has been subdued since early February due to tech/gaming sector weakness and the obvious concern about the Ukrainian situation. But we see this as an opportunity to accumulate stock with near term catalysts such as the May interim result and further land-based datapoints likely to be positive.
We highlight ALL’s very strong balance sheet with net cash heading towards $1 billion in FY22f and more in subsequent periods if the Board keeps its powder dry. Further debt reduction is possible, but we think management’s preferred pathway is for merger and acquisition activity.
ALL could fund acquisitions of $750 million to $1 billion on a Digital business with a multiple of 9-10x EBITDA that would be 6.5-8.0% accretive to FY23f EPS, in our view.
We think this would be superior to either a similar sized share buyback or further debt reduction.
The recent disappointment on the foiled Playtech acquisition will not deter ALL, but we expect the company will remain disciplined and focused.
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.
