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14 July 2020 | Buy

Aristocrat: Strength outweighs short-term issues for growth

BUY (blue chip) – Aristocrat: Strength outweighs short-term issues for growth


Aristocrat Leisure Limited (ALL:ASX) engages in the development, assembly, sale, distribution, and servicing of games and systems in the Americas, Australia and New Zealand. The company offers gaming content, platforms and systems, including electronic gaming machines, casino management systems and digital social games, as well as social web and mobile gaming services. It also provides cabinets and gaming products.

Aristocrat is a growth company rather than a strong dividend stock so we see capital growth as focus for this investment.

Aristocrat has many positives, with physical and virtual footprints, backed by a stronger than peer balance sheet. The company is expanding its range of gaming machines to cater to all segments of the market (themed entertainment games, jackpot games, multi-game systems). The strong presence in the Asian markets provides strong long-term growth opportunities and the COVID-19 crisis has put a strong focus on the online gaming sector.

Recently, Aristocrat reported a mixed interim result and the impact from COVID-19 shutdowns on their land-based operations (sale and maintenance of poker machines for casinos around the globe) was clearly evident. The data from the digital gaming business, the segment we feel offers the blue-sky growth, fell just short of expectations, but the outlook is improving.

The recent surprise settlement of two class actions filed in the USA, following a court decision in late 2018, is a modest negative to those acquired legacy assets, but pleasingly, Aristocrat has been indemnified by Churchill Downs that will provide ~80% of the settlement funds, so the financial impact appears modest. We see this as a “slate clearing”, allowing for management to focus on growth of the business.

Overall, the long-term attraction of the business remains, as they have a stronger than peer balance sheet to invest and the ability to leverage earnings to mobile gaming. With the stock at 50% of its pre-COVID highs we see Aristocrat’s corporate and balance sheet strength pushing through the short-term issues, and the share price recovering to previous levels.