Aristocrat Grows From Strength To Strength

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Analysts raise targets for Aristocrat Leisure following in-line FY24 results while the recent sale of a mobile gaming business lends support for capital management.

-All three divisions deliver for Aristocrat Leisure in FY24
-Earnings margin expansion, improved cost efficiencies
-Plarium sale supports buybacks or acquisitions
-Macquarie expects an ongoing share price re-rating

By Mark Woodruff

Analysts remain overwhelmingly Buy-rated on Aristocrat Leisure ((ALL)) despite the stock surging over 120% in 2024, following broadly in-line FY24 results and management’s guidance for positive’ constant currency profit growth in FY25.

Strength in North America Gaming and Pixel United was offset by weaker International Gaming, explains Macquarie.

Morgans highlights a 340bps year-on-year expansion in earnings margin to 32%, driven by a favourable mix and operating leverage across all three segments: Gaming, Interactive, and Pixel United.

Aristocrat designs, develops and distributes gaming content, platforms, and machines, while also developing, marketing, and operating social games and iGaming (the term for online gaming).

The largest division, Gaming, generates revenue through traditional gaming machines installed in pubs, clubs, and casinos.

It should be noted: within the Gaming division exists Gaming Operations, a specific segment where Aristocrat leases or licenses electonic gaming machines (EGMs) to operators, earning revenue through a share of the machines’ performance rather than outright sales.

Ord Minnett highlights this participation model is a key driver of Aristocrat’s EPS growth and already contributes around 50% of the company’s EBIT.

This broker also anticipates an EPS boost from a growing share of the replacement machine market in casinos and increased contributions from the Interactive segment, where the focus is on online real-money gaming (RMG).

Looking ahead, management anticipates market share gains, as well as revenue, and profit growth in Gaming; enhanced investment efficiency in Pixel United following asset sales; and accelerated growth in Interactive, supported by scaled content that broadens access across North America and Europe.

Although total revenue increased by only 5% for the financial year, including five months of contributions from the NeoGames acquisition, management’s focus on higher-margin recurring revenues and improved cost efficiencies drove margin expansion in both the Gaming and Interactive segments. Jarden describes this as an “exceptional” outcome.

A standout feature of FY24, according to Morgans, was the sales increase driven by approximately 7,100 net unit additions to the Gaming Operations installed base in North America, surpassing management’s May guidance by 18% and bringing the total to around 71,000 units.

Operating earnings slightly exceeded consensus forecasts, providing a strong platform for continued EPS growth, according to Ord Minnett.

Pixel United

For FY24, Pixel United offset flat year-on-year revenue growth by optimising user acquisition (UA) spending, notes Morgans, with the Social Casino channel achieving over US$1bn in bookings for the first time.

Citi has grown more optimistic on Social Casino, which involves providing content to paying users who do not wager real money, citing resilient bookings and higher-than-expected margins.

Ahead of the results, management announced the sale of Plarium Global, a mobile gaming business within the Pixel United segment, for up to US$820m, including US$620m guaranteed and the balance contingent on performance hurdles.

Goldman Sachs highlights this deal as aligning with Aristocrat’s strategy to concentrate on core areas land-based gaming and iGaming, with proceeds likely to support buybacks or acquisitions.

Macquarie emphasises the company’s robust free cash flow generation after capex, projected to reach $1.7bn in FY25, will facilitate further buybacks estimated at $750m annually and enable Aristocrat to return to net cash flow by FY27, providing opportunities for M&A.

Dividend payout of 78cps for FY24 marks an increase of 22% compared to the previous corresponding period, reflecting a dividend payout ratio of 34%.

Land-based gaming

Management reported improved gaming margins in the second half, attributed to cost base leverage as the company scales and cycles elevated supply chain costs. These margins are expected to remain sustainable into FY25.

Second-half growth in gaming operations and effective cost control drove a 260bps increase in the earnings (EBITA) margin, with Citi forecasting an additional 150bps margin expansion in FY25, supported by a favourable mix shift.

Providing striking context, Macquarie highlights Aristocrat’s premium machines currently represent only about 4% of the total gaming floor in North America.

Citi suggests the upcoming release of Phoenix Link is poised to drive the next phase of growth in Class III gaming operations.

Plarium sale

Macquarie points to improving earnings quality and returns for Aristocrat following the sale of the Plarium Global mobile gaming business.

Jarden explains the strategic sale to Modern Times Group will strengthen the company’s balance sheet, enabling potential capital redeployment and a stronger focus on casino games operations.

Management anticipates mid-to-high single-digit dilution in FY25 net profit (NPATA) due to the sale but believes this impact could be offset by strategic focus and reinvestment.

Citi upgrades its earnings (EBITA) forecast for Digital/Pixel United (ex Plarium) by 8% in FY25.

Outlook

Jarden remains constructive on Aristocrat, citing the resilience and strong structure of the gaming sector and the company’s ongoing market share growth prospects.

For a sustained positive re-rating, the analysts highlight the importance of completing the management-led Digital strategic review, including a clean exit from the underperforming Big Fish casual segment.

The need for a clearer, profitable path to achieving the US$1bn Interactive revenue target by FY29 is also emphasised, as well as a step-change in capital management to address an under-leveraged balance sheet.

Macquarie anticipates a continued re-rating, supported by attractive earnings growth, strong cash generation, and balance sheet flexibility, while Citi notes upside potential to consensus estimates due to further Gaming Operations market share gains and Interactive segment growth.

For the six brokers monitored daily by FNArena, five have Buy (or equivalent) ratings for Aristocrat Leisure, while Ord Minnett suggests investors Accumulate (in between Buy and Hold).

Since FY24 results on November 13, the average target price increased to $70.75 from $66.25 suggesting just over 5% upside to the latest share price at the time of writing.

Outside of daily monitoring, Goldman Sachs (Neutral) raised its target to $70 from $62, while Jarden (target to $61 from $59) downgraded to Neutral from Overweight (one notch below Buy in the broker’s rankings) after recent share price outperformance.

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