The digital business continues to bolster Aristocrat Leisure ((ALL)), with the company noting higher bookings and increased engagement. No specific earnings impact was provided in the trading update.
Still, land-based business has stopped as gambling venues are closed in key markets. Hence, Aristocrat Leisure has suspended its interim dividend and reduced remuneration, its largest operating expense, by more than -70%. Around 1000 personnel have been stood down until June and 200 jobs have been removed. Board fees have also been reduced by -20% and the CEO has taken a -30% reduction in base salary.
Aristocrat has $1bn in available liquidity and no debt refinancing requirements until FY24. All up, along with the cost reductions, Morgan Stanley estimates this delivers an additional $300-500m in free cash flow. Earnings may be under pressure for the short term but the balance sheet is not, and Citi assesses Aristocrat Leisure can withstand an extended period of closures, even for six months or longer.
The broker estimates the company is burning a net total of -$30m per month, which can be comfortably accommodated by the $1bn in liquidity. A gradual recovery is expected to begin in the fourth quarter but not normalise until FY22.
Citi reduces estimates by -13-15% to factor in a full three months of closures across the US, partially offset by the cost reductions. Morgans also reduces estimates for FY20 by -28% in FY21 by -14%. The broker assumes no dividend in FY20.
Future Consolidation
Still, given the highly leveraged US land-based competitors, the company is expected to be a beneficiary of consolidation over the medium term. Citi expects US casinos will sustain stretched balance sheets, with capital expenditure under pressure.
When North American casinos do re-open, Morgans expects average fee-per-day revenue to be down sharply on the average reported in FY19. Outright sales are likely to stall as casinos slow expenditure and reduce gearing that would have increased during the shutdown.
Digital Remains Hot
Ord Minnett reports social casino titles have jumped in top grossing rankings across the Android and Apple stores as gamblers seek a digital substitute. Players are not only staying for longer but also returning to the game more frequently.
Meanwhile, ship share in the March quarter was well ahead of UBS forecasts and there was significant momentum in the rolling out of new product. The broker expects replacement demand declines by two thirds in the first year after casinos re-open in the US, highlighting that Aristocrat Leisure’s exposure to the outright sales market is around 25% of earnings.
There are seven Buy ratings on FNArena’s database for Aristocrat Leisure. The consensus target is $29.11, suggesting 27.3% upside to the last share price.
