Aristocrat Leisure (ALL) develops, manufactures, and distributes gaming machines and systems in Australia, New Zealand, the Americas, Asia Pacific, South Africa and Europe.

The group has two divisions Gaming Machines Manufacturing and Gaming Machine Services.

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 a surging Australian dollar, as well as industry and operational problems.

However ALL’s FY11 results showed a return to growth and the company’s earnings finally look to have bottomed out.

Super results

ALL FY11 were extremely impressive when compared to FY10.

ALL reported an FY11 EBIT of $110.8 million, which was up 30.8% on a normalised basis. EPS was up 19.4% to 10.3 cents per share at.

More impressive were the results that were reported on constant currency terms. EBIT was $119.7 million, up 41.3%, whilst EPS was up 32% to 13.6 cents per share.

Operating cash flow increased from $73.6 million in FY10 to $108.2 million in FY11, a 47% increase.

In reflection of a healthier balance sheet, the company was able to decrease its debt by 18.8% to $232 million.

Outlook

ALL did not provide any specific guidance for the coming year, but did state it expects strong growth in normalised full year net profit after tax in FY12.

Since 2008 ALL’s EBIT has contracted significantly on an annual basis, but last year was the first year since then that group has shown growth.

The business grew on a normalised basis, but more importantly, on a constant currency basis. As such, any weakness in the Australia dollar will have a positive effect on ALL’s earnings.

The RBA appears to have moved to an easing bias, and with the probability of further monetary easing in the US diminishing, a weaker Aussie dollar compared to US dollar is becoming a likely outcome, thus benefiting ALL.

The company also looks well placed to take part in any cyclical rebound, which we think is already evident in the latest results.

We believe that market sentiment towards the stock has improved drastically in recent times, especially given the spectacular FY11 results.

If ALL continues its growth trend we believe there is plenty of near-term upside on the horizon.

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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.

Encouraging outlook

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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Aristocrat Leisure Ltd (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.

ALL has been one of the shares to sell over the past two years given the macroeconomic challenges it has faced.

Today ALL reported a 1H11 net profit of $24.9 million, down 50% on-year due to the strong AUD and weak global market conditions.

ALL maintained its FY11 guidance of 10% – 20% net profit growth, saying new game releases in North America and Japan, and recent releases in Australia, would partially offset the impact of the strong AUD.

An interim dividend of 2.5 cents was declared.

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