Oklahoma Sun Shines On Aristocrat Leisure

This story features ARISTOCRAT LEISURE LIMITED. For more info SHARE ANALYSIS: ALL

-Market share accelerating
-VGT key catalyst for upside
-But is US market shrinking?
 

By Eva Brocklehurst

CIMB has returned from a tour of the main casinos in Oklahoma, whistling the Aristocrat Leisure ((ALL)) tune. The gaming machine manufacturer's acquisition of Class II operator, Video Gaming Technologies, had concerned the broker when it was initially announced. CIMB feared VGT would be unlikely to achieve much growth and would lose younger players that were more attracted to the Class III game segment. This has all changed. The broker is now much more positive on both the outlook for VGT, as well as for Aristocrat's replacement product in Macau.

CIMB believes there is now significant opportunity for VGT to grow in the medium term. Success should come as Aristocrat leverages VGT's sales force to drive sales of Aristocrat product in Oklahoma. Moreover, should neighbouring Texas allow slot machines, that state would be a "natural" for VGT, in the broker's opinion.

The broker has raised earnings forecasts by 110% for FY15 and 126% for FY16 and elevates its target to $8.13 from $5.35, retaining an Add rating. Deutsche Bank believes North American market demand, product approvals and customer acceptance remain a key risk for the stock. Nonetheless, this broker has a Buy rating with a $7.75 target. Deutsche Bank takes its positive stance from another geography – NSW. Unit sales in NSW rose 21% in the September quarter while Aristocrat's market share increased to 41.8% over the year to September.

Deutsche Bank believes Australia remains a core region as it accounts for 22% of the company's earnings. Why NSW is so positive for the company is that the overall market was actually weaker in the September quarter, down 10%. All said, Deutsche Bank considers VGT will be a key driver of Aristocrat's share price but gains in market share in other geographies will be equally as important.

Macquarie retains a Neutral rating, having observed recently that Aristocrat has become a bigger fish in the US pool but that pool may be shrinking. The broker observes new unit sales are slowing in North America while the replacement market there is soft. Aside from overall market growth, Macquarie retains a positive outlook on operations in the US and considers Aristocrat's product performance is impressive. It is just that the broker envisages little potential for upgrades or share price upside at this juncture.

Credit Suisse is also more circumspect, having observed that the Japan's product launch has been delayed, which means zero Japanese revenue in the second half of 2014. Citi is inclined towards CIMB's view of the state of play, noting that market share gains are accelerating because casinos are embracing the wider product range and there are now new revenue opportunities through VGT. Moreover, regulatory changes in Macau are expected to spur replacement demand from early in the first half of FY15. Citi believes FY15 and FY16 will be stellar growth years for Aristocrat Leisure.

On FNArena's database there are five Buy ratings and two Hold. When FNArena reported on the stock after the VGT announcement there were five Buy, one Hold and two Sell, so views have shifted up somewhat. The consensus target has also ratcheted higher over the last couple of months. It is now $6.73, suggesting 5.9% upside to the last share price, and compares with $5.79 on July 9. Targets now range from $5.90 (UBS) to $8.13 (CIMB).

See also, Aristocrat Goes To Video on July 9 2014.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms