2 Stocks in Consumer Discretionary Space for Long Term – ALL, SGR
Aristocrat Leisure Limited
ALL Details
Ukraine Business Update: Aristocrat Leisure Limited (ASX: ALL) is a games publisher and gaming provider, which offers electronic gaming machines, digital social games, and casino management systems. As per 9 March 2022 announcement, ALL predicts no material impact on earnings arising from the crisis. Unfortunately, Russia’s operations are not viable currently and the company confirms it will suspend operating their mobile games in Russia, where Russia has contributed ~3% of total annualised Pixel United bookings in past. It is also considering strategic options for its Russian employees and will update further in its half-year results in May 2022.
FY21 Highlights:
Financial Performance Highlights; (Analysis by Kalkine Group)
Key Risks: The company faces the risk of COVID-19 protocols on business operations, growth of ALL’s share in the gaming market, and cyber security risk on information assets.
Outlook: ALL expects to complete the Playtech acquisition and get the necessary approvals by second quarter of calendar year 2022. ~$1.3 billion raised from Entitlement Offer, will be used to finance the proposed acquisition.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
Source: Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: The stock of ALL gave a negative return of ~18.25% in the past three months and a negative return of ~22.27% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $33.210 - $49.650. The stock has been valued using the P/E multiple-based-illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ average P/E multiple, considering the continuing risk of COVID-19, revenue impact on the International Class III segment, supply chain disruptions, and cyber security risks. For this purpose of valuation, a few peers like Tabcorp Holdings Ltd (ASX: TAH), Crown Resorts Ltd (ASX: CWN), Betmakers Technology Group Ltd (ASX: BET), and others have been considered. Considering the current trading levels, increase in operating revenue, bottom line, plans to scale operations, indicative upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $36.090, down by ~1.448% as of 28 March 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
ALL Daily Technical Chart, Data Source: REFINITIV
Star Entertainment Group Limited
SGR Details
H1FY22 Financial Update: The Star Entertainment Group Limited (ASX: SGR) operates in the gaming, entertainment, and hospitality segment. The company operates The Star Sydney, The Star Gold Coast, and Treasury Brisbane. On 28 March 2022, Mr Matt Bekier tendered resignation from Managing Director and CEO position, and the board accepted the resignation.
- Material Impact on Earnings: Normalised EBITDA stood at $29 million, and normalised net loss clocked $74 million in 1HFY22. COVID-19 related property shutdowns, border closures, and operating restrictions negatively impacted revenues and earnings.
- Robust Performance Sought in Sydney: The Star Sydney recorded revenue growth of 29% PcP upon-reopening on 11 October 2021. Queensland Casinos' revenue stood stable on a PcP basis. SGR opened the Dorsett Gold Coast Hotel and F&B facilities in December 2021.
- Financial Position: SGR received a complete waiver on debt covenants for December 2021 testing date. Liquidity stands at substantial levels with $520 million in cash and undrawn families as of 31 December 2021.
Key Metrics; Analysis by Kalkine Group
Key Risks: SGR held high financial leverage with high loans and borrowings, instigating a high-interest coverage ratio requirement. The company has significantly impacted profitability from related property shutdowns, border closures, and operating restrictions amid COVID-19.
Outlook: From 1 January 2022 to 13 February 2022, revenue advanced by 7% PcP. SGR is executing its long-standing growth strategy over H1FY22. The Star Residences are expected to open in Q4FY22, and The Dorsett Gold Coast Hotel opened in December 2021. Gold Coast Tower 2 apartment sales stood robust with 94% pre-sold apartments.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
Source: Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: The stock of SGR is trading near to its 52-week low level of $3.080, offering a decent opportunity for accumulation. The stock has been corrected by ~3.28% in the past one month. The stock has been valued using a P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at some discount to its peers’ median P/E multiple, considering COVID-19 uncertainties and negative net margin. For the purpose of valuation, peers such as Aristocrat Leisure Ltd (ASX: ALL), Skycity Entertainment Group Ltd (ASX: SKC), and Ainsworth Game Technology Ltd (ASX: AGI) have been considered. Considering the expected upside in valuation, higher gross margin, optimistic outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of $3.240, up by ~0.309%, as on 28 March 2022.
Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
SGR Daily Technical Chart, Data Source: REFINITIV
Note 1: The reference data in this report has been partly sourced from REFINITIV
Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.
Technical Indicators Defined: -
Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.
Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.
Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.
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