Goldman Sachs recent price target $33.10. The full report below:
Aristocrat Leisure
(ALL.AX)
Investing for long term growth in Digital; Retain Buy (CL)
17 September 2018 | 9:58PM EST We continue to believe Aristocrat is well placed among our coverage space (ANZ gaming sector) given its increasing exposure to the US$138bn games market, which has grown at a double digit rate for more than a decade, according to a recent New Zoo report. Further, with expectations for a relatively benign step up in competition from land-based slot manufacturers, the stock's fundamental outlook remains very robust.
ALL continues to have one of the highest upsides (+14%) relative to the sector median (ex Aristocrat) of +9%, with both top line revenue and bottom line EBITDA/ EPS growth estimates the highest in the coverage space. As such we are comfortable to retain a Buy rating (on CL) despite some evidence of a heavier investment phase in 2H18. The stock remains attractive, trading on c.19x FY20E P/E, delivering 3 Year EPS CAGR to FY21E of +27% relative to the sector median (ex Aristocrat) trading on c.18x and delivering a 3 Year EPS CAGR to FY21E of 7%.
Further, with our NPAT estimates still modestly above the Bloomberg consensus median (GSe: NPATA +1% to 8% over FY18E to FY20E) we believe Aristocrat's successful navigation of new product releases provide a strong potential catalyst for further upside to materialise again in the coming months. Exhibit 1 : Aristocrat (ALL.AX) has one of the highest upsides in our coverage space (+14%)
ANZ Gaming sector coverage: % upside to 12m target price (as of Sep 17 close)
Source: Goldman Sachs Global Investment Research Exhibit 2 : Aristocrat screens attractive relative to sector, with 3 Year EPS CAGR of c.27% vs the sector (ex ALL) of c.7%
ANZ Gaming sector comps
Source: Goldman Sachs Global Investment Research
Digital: New product releases may require heavier investment short term
Consistent with management commentary at the 1H18 result in respect of the outlook for Digital, we note that the number of downloads across ALL's three digital game app publishers, Product Madness, Big Fish and Plarium have all increased in 2H18 vs 1H18, which in our view reflects recent game launches, which skewed 2H18, as well as increased promotional spend on focused titles, i.e., promotions and marketing for User Acquisition (UA) across existing games, particularly Cooking Craze (Big Fish Casino), FaFaFa Gold and Lightning Link Casino (Product Madness) and Lost Island (Plarium).
Outlook statements:"In Digital, Aristocrat will continue to focus on integration of acquisitions, as it builds and leverages scale in line with its strategy. The Group expects further growth in its social casino and social games business, with increased investment in user acquisition associated with the launch of new apps across all business units". Aristocrat 1H18 result presentation, 24 May, 2018.
However, with the rate of downloads seeming to increase in 2H18 YTD relative to the mixed revenue trends in digital (i.e., we note a slowdown in Product Madness revenue growth in 2H18 -- slightly faster than we originally expected due to slower growth Heart of Vegas more than offsetting new apps), solid low single to high single digit growth in Plarium and Big Fish leads us to cut our digital top and bottom line estimates for FY18 and FY19.
While we remain positive on Product Madness's recently released Lightning Link Casino app, which appears to be performing in line to slightly better than Cashman Casino over a similar time frame since launch (first four months), given its size relative to the existing Product Madness business (c.6% currently vs Cashman at the time of its launch in 2H17 at c.10%), we believe more of the Lightning Link Casino growth will begin to show through in 1H19, likely underpinning an uptick in the revenue growth trend versus apparent weakening seen recently. Exhibit 3 : Aristocrat's combined digital businesses have seen an uptick in downloads 2H18 YTD, which we believe is reflective of higher UA spend and new game launches
Aristocrat Digital: Total downloads (Big Fish, Plarium, Product madness)
Source: Sensor Tower Exhibit 4 : Product Madness revenue growth has slowed in 2H18 given slow down in Heart Of Vegas
Aristocrat Digital: Publisher net revenues % chg vs pcp
Source: Sensor Tower Exhibit 5 : Product Madness revenue does see periods of variable growth around product releases (i.e., Cashman in 2H17 ( Mar-Sep 17)
Revenue growth: Rolling 3m % chg vs pcp (Product Madness vs social casino industry proxy)
Source: Sensor Tower Exhibit 6 : Big Fish's social casino revenue growth has seen >12 months of consecutive growth, after period of weakness
Revenue growth: Rolling 3m % chg vs pcp (Big Fish (social casino) vs social casino industry proxy)
Source: Sensor Tower Earnings and price target changes
Our new FY18E/FY19E/FY20E EPS change by -4.4%/-1.7%/-2.3%, reflecting our view of a slightly stronger investment phase in digital in 2H18 than we previously expected, as evidenced by the strong up-tick in downloads in 2H18 vs 1H18 and a slightly slower rate of revenue growth in Product Madness than we previously anticipated.
To effect these changes we (1) modestly increase the level of design & development expenditure (D&D) in FY18-FY20E, now 11% of sales throughout vs 10.9% to 10.4% previously, as well as (2) increase the level of sales and promotional spend in Product Madness and Plarium; and (3) make a modest reduction in revenue growth estimates across Product Madness in the near term. Offsetting these changes, we lower our tax rate assumption to align better with the run rate implied by 1H18. Our new FY18 implied tax rate is 28% vs 29.5% previously. We also introduce our estimates for FY21 and roll forward our SOTP to FY20 base year (was FY19E).
Our new 12m TP decreases 6.2% to A$33.10, slightly more than the earnings changes given the higher multiple we ascribe to Product Madness 17x (vs weighted average of group 14x). Exhibit 7
Earnings and price target summary
Source: Company data, Goldman Sachs Global Investment Research
We roll forward our SOTP valuation to FY20 (was FY19) and mark to market recent trading multiples on U.S .casinos (now 14x) We now value Big Fish on 13x EV/EBIT (the implied multiple on acquisition) on our FY20E estimates, which gives a value of A$2,270mn, versus previously adopting a conservative and backwards looking value related to acquisition cost (A$1,320mn). This reflects enhanced visibility over future year earnings following the 1H18 result. Exhibit 8
Source: Goldman Sachs Global Investment Research Key Risks
Stronger competition in core land-based slot markets (North America, ANZ)
Digital: Slowdown in mobile gaming/ social casino market and success of new games launches.
FX: Higher A$/US$ would adversely impact reported earnings Appendix: P&L estimates
Our A$/US$ estimate in FY18E/ FY19E/FY20E/FY21E is 0.75/0.77/0.80/0.80.
We note that our FY19E-FY21E NPAT would increase by > +5% applying a current spot fx rate of c. 0.72 A$/US$ given c.2/3rds of Aristocrat's earnings are derived from US. operations.
Exhibit 9
ALL: Group P&L (A$mn)
Source: Company data, Goldman Sachs Global Investment Research Nick Basile
+61 2 9320-1388 [email protected]
Goldman Sachs Australia Pty Ltd
ALL Price at posting:
$28.28 Sentiment: Buy Disclosure: Held
(20min delay)
