In the wake of consensus-beating interim results, Aristocrat Leisure may undertake further capital management following a strategic review of assets.

-Aristocrat Leisure delivers robust interim results 
-Additional capital management from strategic review?
-Ongoing momentum expected for land-based gaming
-Outperformance compared to peers

­By Mark Woodruff

In a raft of positives for Aristocrat Leisure ((ALL)), recent interim results beat consensus expectations carried by strong momentum in land-based gaming, the interim dividend was lifted by 20%, plus the ongoing share buyback was extended by $350m. 

Macquarie's forecasts already include an additional $1.8bn of buybacks to FY26, which is in addition to the current $1.85bn program.

And now, further capital management is on the horizon due to an upcoming strategic review within the Pixel United division, which could generate up to $2.9bn of sale proceeds (or $4.60 per share), according to the broker.

Aristocrat is a global leader in the design and distribution of land-based gaming machines and digital gaming content. The latter has three segments, Pixel United, Aristocrat Interactive and Gaming, all of which experienced margin expansion in the first half.

Pixel United/Social Gaming, as the latter term implies, involves the provision of content to paying users who are not betting real money. The rebranded Aristocrat Interactive (a merger of the former Anaxi and NeoGames businesses) does cater to this taste, via online real-money games. 

Gaming provides the third, and largest, revenue stream via traditional gaming machines located in pubs, clubs and casinos. While Aristocrat sells poker machines, most revenues in this division flow from a daily cut of revenue earned by a rented machine.

As mentioned, US Gaming experienced very strong growth in the first half, with market share gains across both outright sales and Gaming Operations in the first half, highlights Jarden. Outright sales were also strong for the rest-of-the-world (ROW), though there was some ceding of market share in the A&NZ region (Hello, Light & Wonder ((LNW)).

Management's outlook statements support ongoing momentum within this core land-based gaming business and improving profitability in Pixel United, suggests Macquarie, while Aristocrat Interactive remains a nascent opportunity.

Guidance for net installs of around 6,000 units in Gaming Operations suggests to Citi current momentum will carry through to the second half. The installed base of leased machines in North America increased by more than 10% to over 67,000. 

Ord Minnett points out the stark contrast between this performance by Aristocrat and that of London-based International Game Technology and ASX-listed Light & Wonder whose installed base expanded by only around 3% over the same period.

Interim results 

Earnings and profit (NPATA) beat consensus forecasts by 9% and 10% respectively, driven by better-than-anticipated margins, explains Morgan Stanley.

Group revenue rose by 4% on a constant currency basis, reflecting the strong performance from North American gaming, strong sales in Asia, and growth in the new Interactive division, explains Morgans.

Profit rose by 16% in reported terms, while EPS increased by 20%, which this broker attributes to a strong operational performance and accretion from the share buyback program.

Morgan Stanley attributes robust profit growth to ongoing strong market share, as well as growth in land-based gaming. Management's disciplined execution in Pixel United, with a focus on market share gain and efficiency, also contributed. Its thought scaling of content in Aristocrat Interactive provided an additional boost.

A lower design and development (D&D) spend, combined with a reduction in user acquisition (UA) guidance to 21%-24% from 24-27%, underpins Citi's positive earnings revisions for Aristocrat.

An interim fully-franked dividend of 36cps was declared. In future, dividends are likely to be partially franked, notes Morgans, reflecting an increase in the proportion of earnings from outside Australia.

Management reiterated FY24 guidance for constant-currency NPATA growth and expects to deliver -$60m in cost savings from optimisation on an annualised run-rate.

The strategic review 

Placement of a new permanent CEO is now on hold pending a strategic review of Pixel United's social non-casino games, which has underperformed since covid by comparison to the Social Casino sector, explains Morgans.

Excluding RAID, non-casino has been a drain on resources, observes Jarden, making the review of social casual (Big Fish) and mid-core (Plarium) fully understandable.

Interest in Big Fish is likely to be low, cautions the broker, while a shift to profit share for Plarium (excluding UA spend) could be considered.

Citi feels this review removes a key question mark overhanging the stock price, as these assets have a weak earnings outlook and little synergy with the rest of the portfolio.

The outlook

The outlook for earnings upgrades remains promising, according to Macquarie, with the broker's forecasts yet to include meaningful revenue synergies from the NeoGames acquisition that was completed in April this year. 

The investor day next month will likely be a share price catalyst when management provides greater detail around the Aristocrat Interactive division, in Jarden's opinion.

In the medium-term, investor debate is expected to centre on whether the company can realise above-cost-of-capital returns across this new business.

Aristocrat's R&D expenditure is unmatched by peers, highlights Ord Minnett, but Jarden has some concerns over the sheer size and scale of D&D (annualising at -$850m) in terms of maintaining efficacy and the resultant ability to drive real returns.

More positively, and perhaps the key takeaway from interim results, Morgans highlights an under-geared balance sheet which provides optionality for inorganic investment and the return of funds to shareholders.

This broker upgrades its rating for Aristocrat Leisure to Add from Hold and raises the 12-month target price to $50 from $47.

Following interim results, the average target price in the FNArena database increased to $50.20 from $47.60, which suggests just under 7% upside to the latest share price.

Of five covering brokers, four have a Buy (or equivalent) rating, Ord Minnett maintains a Hold recommendation.

Outside of FNArena's daily research monitoring, Jarden maintains a Buy rating and $47.20 target price.

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