Aristocrat Leisure: Worth a gamble?

This pokies manufacturer is half way through a five-year transformation. We assess its progress so far

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Aristocrat Leisure Limited (ASX: ALL) shares have gained over 12% in the last month, compared to a flat S&P/ASX 200 index.

The company has a December financial year end and reported its full year results for 2011 on 28th February 2012. Adjusted net profit rose 21% over the previous corresponding period to $66.1m, on the back of a 3.6% rise in revenues to $709m.

The high Australian dollar impacted net profit after tax to the tune of $7.1m. The company declared an unfranked final dividend of 4 cents.

The company

Aristocrat is engaged in the design, development and distribution of gaming content, platforms and systems. The Company is licensed by over 200 regulators and its products and services are available in over 90 countries around the world. Aristocrat offers a diverse range of products and services including electronic gaming machines, interactive video terminal systems and casino management systems.

Australia & Rest of World operations performed well, US & Japan fell

Australia and New Zealand operations increased revenue by 28%, and earnings before interest and tax, abnormal items, charges for design & development (D&D) and corporate costs almost doubled to $69.6m. Margin also increased from 16.9% in 2010, to 36.6%.

It appears that Aristocrat has recovered some market share from Ainsworth Game Technology (ASX: AGI), but the company stated that market conditions in Australia remain competitive, with a large number of suppliers.

North America saw revenue growth, but operating profits were down slightly by 4% and Aristocrat stated that they grew market share.

Bally Technologies Inc. (NYSE: BYI), one of Aristocrat's main competitors in the US, has reported falling revenues, profit margins and earnings per share for the last three years. International Game Technology (NYSE: IGT), based in the US, also reported in their most recent annual report that their company was meeting increasingly aggressive competition.

The Japan segment profit was down 95%, mainly due to the natural disasters that occurred in 2011, but the Rest of World segment increased revenues by 15%.

Aristocrat reported revenue growth in South Africa, New Zealand and Latin America, and record share of new Macau casino openings.


The company is half way through a five year transformation program, and believes progress is being made through market share gains in the US, market share regained in Australia and New Zealand, expansion into Italy and online.

Aristocrat reported competitive trading and currency headwinds, but believes its 2012 financial year net profit after tax will be well up on 2011's result. The company continues to expand into new channels, through downloadable games, applications for mobile devices and online gaming.

Debt has been reduced by $53.8m, to $232m, representing a net debt to equity ratio of 92%, which compares favourably with its two main competitors Bally (over 200%) and IGT (over 100%). Interest cover is reasonable at 5.6 times, although Debt / EBITDA looks fairly low at 1.7 times.

The Foolish bottom line

Aristocrat may be progressing, but still has too much debt for my liking, as well as facing some strong headwinds. The company has a history of letting shareholders down, with $372m of abnormal losses in 2009 and a 53% decline in normalised profit after tax for 2010.

Currently trading on a trailing P/E of over 22 and paying a dividend yield of 2.4%, it looks overpriced, and I'll be avoiding Aristocrat for now.

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The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy. 

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