Aristocrat Leisure Limited
ALL Details
Update on Ukraine Business Situation: Aristocrat Leisure Limited (ASX: ALL) is a games publisher and gaming provider offering electronic gaming machines, digital social games, and casino management systems. On 9 March 2022, ALL reported that is taking all necessary steps to ensure the well-being and safety of its employees (~1,000) based in Ukraine’s Pixel United organisation.
- Safe Relocation: ALL is helping employees and their families in Ukraine to relocate to safer locations. The relocated staff is working remotely, aided by existing Pixel United studios in Europe. ALL has set up a special task force in Poland to help staff and families on the ground.
- Suspending Russian Operations: Given the current situation in Russia, it is not viable to continue operations. Hence, ALL has decided to suspend operating mobile games in Russia which have attributed ~3% of total annualised Pixel United bookings in the past. ALL is considering strategic options concerning its Russian based employees. ALL will update on the situation during its half-year results in May 2022.
- Expects No Material Impact: ALL doesn’t expect a significant material impact on earnings due to the Ukraine crisis. It continues to leverage its wide network of studios and operations across the US, Israel, Europe, and its combined global capabilities, to mitigate the effective impact. ALL plans to open a new office shortly in Wroclaw, Poland, thereby expanding current operations in the country.
FY21 (Ended 31 September 2021) & AGM 2021 Takeaways:
- The company derived ~80% of the revenues in FY21 from recurring sources, up from ~50% about four years ago depicting the strength of its business.
- ALL reported an NPATA (normalised profit after tax and before amortisation of acquired intangibles) of ~$865 million, up by ~81% Y-o-Y in FY21 due to excellent portfolio and product performance, and margin expansion in its Gaming and Pixel United segments.
- During FY21, ALL committed ~$528 million investment in D&D to strengthen its product portfolios and incurred ~US$521 million in User Acquisition, to expand Pixel United organisation further.
Financial Performance of FY21 Vs. FY20; (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. The ongoing Ukraine Russia war may affect the company’s mobile gaming division and overall profitability.
Outlook:
- The company plans to build online RMG capabilities in-house and intends to continue investing and use a ‘build and buy’ approach to scale up the online RMG platform infrastructure.
- ALL expects further growth in its Pixel United bookings and anticipates spending ~26% - 29% of overall Pixel United revenues on User Acquisition (UA).
Valuation Methodology: EV/EBITDA 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 ~19.54% in the past three months and a negative return of ~23.09% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $32.170 - $49.650. The stock has been valued using the Enterprise Value to EBITDA 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 EV/EBITDA multiple, considering the continuing risk of COVID-19, supply chain disruptions, revenue impact on the International Class III segment, and its mobile gaming division exposure to Ukraine Russia war tension. For this purpose of valuation, a few peers like Tabcorp Holdings Ltd (ASX: TAH), Crown Resorts Ltd (ASX: CWN), Skycity Entertainment Group Ltd (ASX: SKC), 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 current market price of $35.610, as of 10 March 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia. 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.
Investors with a high-risk appetite should evaluate this stock given the technical support and resistance levels and consider associated risks with the Ukraine-Russia situation, COVID-19 related restrictions, and the company’s share in the gaming markets.
ALL Daily Technical Chart, Data Source: REFINITIV
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.
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 unfavourable movement in the stock prices.
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