Aristocrat's ALL fiscal 2024 underlying profit increased 17% to $1.6 billion, driven principally by strong performance in electronic gaming machines. The company also announced the sale of its Plarium mobile gaming business for up to USD 820 million.

Why it matters: Profit was marginally ahead of our prior forecast. The core gaming business continues to perform strongly, and iGaming is beginning to hit its stride. We make minor adjustments to our forecasts, notwithstanding the Plarium divestment. Aristocrat dominates the installed base of leased gaming machines in North America and is taking share. The number of gaming operations machines lifted 11% to over 71,000. This is more than double Light & Wonder's installed base, which is up 7% over the same period to about 33,000. The Plarium divestment follows Aristocrat's strategic review of its nongambling games, announced in May. The business is focusing on its core competency: gambling content for gaming machines, social casino, and online real-money gaming. We think this makes sense.

The bottom line: We raise our fair value estimate for narrow-moat Aristocrat by 4% to AUD 50 per share, mostly due to the time value of money. The Plarium transaction is immaterial to our valuation. Shares in Aristocrat screen materially overvalued at current prices. We think the market is ascribing too much optimism for the company's foray into iGaming. While the environment is rapidly deregulating in the United States, it is highly fragmented and contested, and we don't think Aristocrat has carved the same competitive advantage it enjoys in gaming machines. We forecast fiscal 2025 underlying net profit of $1.6 billion, marginally ahead of fiscal 2024. We expect continued growth in gaming, particularly North American leased machines, and ramping up the iGaming business to offset earnings lost from the Plarium divestment.

Business strategy and outlook

We expect Aristocrat Leisure to continue to dominate the electronic gaming machine market. With a strong balance sheet and commanding market position, Aristocrat's research and development expenditure is unmatched by peers. This investment is the lifeblood of any electronic gaming manufacturer, especially given rapidly changing technology and consumer demands, and allows Aristocrat to maintain game quality, differentiate products from lower-end competitors, and defend its narrow economic moat.

Aristocrat is among the top three global competitors in the highly competitive EGM market, alongside International Game Technology and Light & Wonder. We estimate Aristocrat's North American ship share increased to around 28% in 2022, from around 13% in 2012, behind market share leader International Game Technology at 31% but ahead of Light & Wonder at around 22%. We estimate Aristocrat commands a number-one position in Class II and Class III leased machines with about 40% of the installed base, bolstered by the Video Gaming Technologies acquisition in 2014. These leased, rather than purchased, machines represent the majority of American land-based sales and attract a fee-per-day arrangement (which can be fixed or performance-based). In our view, this revenue is more naturally recurring than direct EGM sales.

Aristocrat bulls say

  • Aristocrat operates in a market protected from new entrants, as stringent regulatory licensing requirements in major markets create barriers to entry for new players.
  • Unlike the mature electronic gaming machine industry, the fast-growing mobile gaming market provides an avenue of strong growth for Aristocrat.
  • Already boasting a portfolio of highly regarded electronic gaming machines, Aristocrat outspends rivals on R&D, allowing it to improve its competitive position and protect its narrow economic moat.

Aristocrat bears say

  • In the pursuit of continued earnings growth, Aristocrat is at risk of overpaying for acquisitions in its competitively more challenged digital gaming business.
  • Aristocrat is hostage to the financial health of casinos and venues purchasing its products.
  • With less turnover likely up for grabs in the near term, heavy discounting could weigh on Aristocrat's profitability in the fiercely competitive electronic gaming machine industry.

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