Aristocrat Leisure (ASX:ALL) develops, manufactures, and distributes gaming machines and systems in Australia, New Zealand, the Americas, Asia Pacific, South Africa and Europe.
ALL is the largest gaming machine company in Australia and the world’s second-largest slot machine maker.
The company has been a basket case over the past few years amid weak consumer spending and adverse FX movements, as well as industry and operational problems.
Although ALL’s 1H11 profit was down sharply on-year, certain elements of the earnings release indicate the company is better placed to leverage off a cyclical rebound in its core markets – Australia and the US.
Gambling on weak 1H11
Aristocrat Leisure reported a 1H11 net profit of $24.9 million, which was down 49.5% from 1H10. On a normalised basis, earnings were down 32% (1H10’s profit was inflated by a one-off gain on an asset sale). An interim dividend of 2.5 cents was declared.
The profit was impacted mostly by higher net interest costs, adverse FX movements and an 8.8% fall in revenue to $310.6 million.
Sales weakened amid tough trading conditions in North America – ALL’s biggest segment. The division’s EBIT margin also contracted 5.6 basis points due to a higher proportion of second hand sales.
However the Australian operations performed solidly, with revenue there rising 5.5% on-year to $73.4 million.
The launch of the Viridian WS cabinets was well received by customers, driving average selling prices higher and improving margins despite competitive market conditions.
Despite a tough half, ALL confirmed FY11 net profit guidance of 10% – 20% growth on FY10’s $77.2 million.
Although the North American division struggled, there was positive momentum towards the end of the half, with average daily fees increasing due to the rollout of new game titles.
Assuming a continuation of this trend, higher selling prices could be an important driver of earnings in the second half. Also, as legacy products are cycled out, ALL’s margins could see a turnaround due to a more favourable selling mix.
The operating environment is at least showing signs of improvement, with US consumer sentiment having shot higher in recent weeks.
Although market conditions were expected to remain challenging in Australia, Aristocrat Leisure nevertheless forecast a continuation of top line momentum, along with improved selling prices and margins.
Importantly, Aristocrat Leisure’s new product rollout makes it well placed to leverage off a cyclical rebound in both countries.
Market sentiment towards the stock has improved in recent months, and we believe there is further near-term upside to come.
ALL is a defiantly a stock to watch.
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