Stock: Aristocrat Leisure

Stock code: ALL

Share Price: $3.21

Broker Sell Recommendations:

Shadforth Financial Group (4th April 2011, share price was $3.21 that day)

Novus Capital (14th March 2011, share price was $3.36 that day)


Chart: Share price over the year to 08/04/2011 versus ASX200 (XJO)

In its former glory days, Aristocrat Leisure’s near-monopoly status in most clubs and casinos in Australia made it a solid bet – it was a high-revenue business that offered considerable upside. But times have changed and today Aristocrat Leisure is a much riskier proposition.

Regulatory risks in the gaming industry, a high Australian dollar, the need for fast-paced and constant product innovation, and the rising threat of internet gaming companies both locally and internationally, present immediate challenges for the stock.

In November last year, the company issued a profit downgrade and the shares tumbled by almost 19 per cent in one day.

And investor confidence in the stock remains low as new challenges appear on the horizon.

The Federal government is toughening up on the gambling industry. Julia Guillard’s gambling advisory committee, lead by Andrew Wilkie and Nick Xenophon, is scheduled to publish measures to tackle problem gambling, due out in May. The plan is to give clubs and punters a choice: they can either gamble on slower machines with slower jackpots, or gamble on faster machines fitted with new “pre-commitment” technology to limit the amount they can lose; the punter must first enter what they’re prepared to lose over a day or week, and once that amount is reached, they’re restricted from playing the faster machine for 24 hours.

Chris Elliott, a stockbroker at Shadforth Financial Group has a sell recommendation on Aristocrat. Elliott says: “[ALL] offers little yield and even less growth due to the fickle nature of the gaming industry. A high Australian dollar and the Japanese disaster doesn’t help. Carrying a debt/equity ratio of about 160 per cent and slumping revenue – down 25 per cent in 2010 – we suggest investors sell or avoid.”

Cleo Nanni, from Novus Capital also has a sell on ALL. Nanni says: “Competition in the global poker machine market is fierce. This puts pressure on company revenue. In my view, the stock appears to be trading at a significant premium. The shares were trading at $3.44 on March 10, 2011. I expect the share price to retreat in coming months.”

But not all analysts are so bearish. According to broker consensus data compiled by FN Arena, 5 brokers hold Buys on ALL, and 2 have Holds. The highest 12 month price target is $4.20, and the lowest 12 month price target is $2.60. The average 12 month price target is $3.58.

Perennial Investment Partners also upped its stake in the stock recently, from 7.42% to 8.55% – buying 6.2 million shares between 12 Jan and 1 April 2011.

Share Price Performance

Long-term shareholders in Aristocrat have not been rewarded for their loyalty to the gaming stock. Back on 1 Jan 2003, a share in ALL cost $4.68, or a 10,000 share holding was worth $40,680. Today, that holding is worth less, at $32,100.

The chart below compares the performance of ALL (in blue) to the ASX/S&P 200 index, or the index of the top 200 companies in Australia. As you can see over the previous 10 years, ALL has exhibited significantly more volatility than the underlying index, represented by higher peaks and lower troughs. Clearly, this stock is not for the more conservative punter.

Company Description

Aristocrat Leisure (ALL) is a market leader in the gaming industry in Australia and New Zealand, and offers gaming, jackpots, games software, video lotteries, and electronic games software products internationally – focusing on the key markets of North America and Japan. The company also develops, manufactures and distributes gaming machines and systems in South Africa and Europe.

ALL’s range of products include its casino management systems that manage slot and pit accounting as well as standardised reporting. It manufacturers an ever-growing range of games – everything from circus themed Big Top Jackpot, to its themed games like Rose Tattoo, with custom-made footage of Angry Anderson. The company also produces the cabinets for the games, lottery products, electronic poker tables as well as technical services for gaming machines and equipment around the world.

Company Investor Centre: Aristocrat Leisure


Aristocrat reported a net operating profit of $54.6 million, which was a steep drop from $116.4 million in 2009. Revenue fell 25.1 per cent to $680.5 million.

Reported net profit was $77.2 million, compared to a loss of $157.8 million in the prior year – which included a $187.3 million one-off provision.

While sales in the US were off 8% in US dollar terms, Australian revenue was worse, down 34%. However the worst revenue performance came from Japan, its most difficult market, down almost 55% in Yen terms. The best performing market for ALL was Macau.

As Shadforth’s Elliott points out, ALL’s cash flow offers “little yield” and little hope for juicy dividends for shareholders. However the concern is whether the company has the balance sheet strength to ward off competitors with constant product innovation, a requirement for increasing market share.

In August 2008, ALL announced a 3-5 year strategy to double the group’s share of gaming operations market in North America and to better manage volatility in Japan.

2008A 2009A
Sales Revenue ($m)
1,080 909
253 213
EBIT ($m)
213 170
Adjusted NPAT($m) 140 116 55
Reported NPAT ($m)
101 -158 77
Price/Earnings 23.1 17.7 37.2
Dividend Yield (%)
9.3 1.1 1.7
Net Profit Margin (%)
13.0 12.8 8.0
ROE (%)
72.8 75.2 28.7
ROA ($)
15.4 15.9 9.2
Net Debt/Equity (%)
195.6 48.9 152.1


Company Earnings Report: Aristocrat Leisure Full Year Earnings Report – June 30th, 2010


The risky aspect of the gaming industry is that regulations both in Australia and internationally can change suddenly, either benefiting or disadvantaging companies like ALL.

A government can suddenly lift the tax rate on gaming revenue, reducing gaming demand in that jurisdiction. It can suddenly ban particular gaming machines in casinos and pubs, impose smoking bans, or permit or restrict particular companies from operating.

On top of this, gaming earnings are notoriously volatile as consumer demand ebbs and flows. International earnings are directly impacted by a high Aussie dollar (almost half of ALL’s revenue is sourced from the US).

These numerous uncertainties make Aristocrat a risky play, and certainly not a stock of choice for lower-risk investors.

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