Aristocrat: Poised for the next leg of growth

Ben Clark

TMS Capital

Aristocrat Leisure was my choice for 2018 in the Livewire "Predictions and top picks" series filmed in December. Aristocrat hosted an investor session last week, which was attended by over 100 analysts, investors, and fund managers. After a very busy start to 2018, I thought I’d pass my points from the day's presentations.  

Although the company was guarded about providing any new financial info to the market ahead of its upcoming result there was plenty of content to digest.

The CEO, Trevor Croker, started proceedings off by confirming that the two recently announced digital acquisitions (Plarium and Big Fish) were performing as well as anticipated. Through the day I got the impression that the digital side of the business, now 38% of revenue, is performing in line to a bit ahead of projections.

I don’t think management are seeing some of short dated earnings windfall, more so a massive global market offering significant long term growth opportunities. The market is currently estimated at US$116bn, and is projected to grow at 7% CAGR. Aristocrat are now the second largest player in social casinos and the fifth in overall social / mobile gaming.

Croker stated at the end of his presentation that the company is "ideally poised for the next leg of significant growth". His presentation was measured but upbeat. Since 2014 recurring revenue has significantly increased across the group from 24% to 65%. Revenue has become more diversified.

Aristocrat filed more patents than any other Australian company last year, three times the second largest (CSIRO). The company continues to expense all R&D and customer acquisition costs in year one and despite this, it's generating over 35% EBITDA margins.

Digital division performing well

Mobile is where all the growth in digital is coming from. It makes up US$50bn of the US$116bn total pie and will grow much faster than PC / console. Aristocrat now have 8m daily active users, two years ago they had 2m.

A constant theme that was reiterated was that to be successful in digital you must have scale, scale is key and offers a significant barrier to entry.

The founder of Plarium, Avi Shalel and head of digital, Jeff Goldstein, both spent some time discussing the science of meta-gaming. Shalel said this really only came to gaming a year ago but can be applied across most genres and will become one of the key themes of future industry growth; driving loyalty, user engagement and critically, monetisation. Meta is everything that interacts around the game such as clubs and live ops.

Good news for land-based business

Although most investors attended the day with an interest to get a better understanding of the digital division, it was in the land based commentary that it felt like there was more immediate good news on the horizon.

After several false starts, the company is making inroads in the US in a number of adjacencies. In particular, the sales execs called out classic slots and a real potential competitor to Wheel of Fortune. There was a real sense of optimism about the medium term sales outlook for the physical game division and it feels like Aristocrat is continuing to take market share, holding to improving margins while opening up new markets.

In conclusion

Market nervousness about the size and speed of digital acquisitions is the main reason the stock has looked attractively priced vs its growth counterparts for most of the year to date. If the company can deliver on these purchases as they did with Product Madness, I feel we will see some earnings multiple expansion.

We shall hear more in a few weeks time when the Half Yearly Report is released. 

1 stock mentioned

Ben Clark
Portfolio Manager
TMS Capital

Ben Clark commenced his role as Portfolio Manager with TMS in 2005 and has over 20 years’ experience in the industry. Ben runs the TMS High Conviction fund that is open to all sophisticated investors.

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