Integration With NeoGames And New Gaming Content Will Expand Market Reach In iLottery And iGaming

Key Takeaways

• Strategic divestitures and integration of new business units could enhance market reach and focus on core strengths, potentially increasing growth and profits.
  
• Market share gains, optimized operations, and strategic R&D investments are expected to sustain profitability, boost content deployment, and support expansion into new markets.
  
• The company's reliance on North America and strategic investments may risk revenue stability and increase debt, while earnings face pressure from asset sales and impairments.

Catalysts

Operates as a gaming content and technology company in Australia and internationally.

• The integration of NeoGames and the establishment of Aristocrat Interactive are expected to drive significant growth, with opportunities in iLottery and iGaming expanding market reach and potentially increasing revenue.
  
• The successful sale of Plarium and the strategic review of Big Fish Games may allow Aristocrat to focus more on its core gaming strengths, potentially enhancing future revenue growth and profit margins.
  
• Market share gains in North America and a strong lineup of new gaming content (such as Phoenix Link and the Baron Upright cabinet) are expected to sustain and possibly increase revenue and profitability.
  
• Ongoing cost management efforts and supply chain optimizations have already led to margin expansions, which are expected to continue supporting net margin improvements.
  
• Continued focus on strategic R&D investments and technology enhancements is anticipated to accelerate content deployment and facilitate expansion into new markets, potentially boosting long-term revenue and earnings growth.

Aristocrat Leisure Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aristocrat Leisure's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 19.7% today to 25.8% in 3 years time.
• Analysts expect earnings to reach A$1.9 billion (and earnings per share of A$3.24) by about February 2028, up from A$1.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.6x on those 2028 earnings, down from 35.4x today. This future PE is greater than the current PE for the AU Hospitality industry at 24.3x.
• Analysts expect the number of shares outstanding to decline by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Aristocrat Leisure Future Earnings Per Share Growth

Risks

• The sale of Plarium is expected to be dilutive to NPATA by mid
• to high single-digit percentage points in FY '25, which may impact overall earnings negatively.
  
• The impairment charge of approximately USD 110 million related to Big Fish Games indicates challenges in that segment, potentially affecting revenue and net margins.
  
• The high reliance on North American gaming operations for profit growth signifies a dependency on this market, which could pose risks to revenue stability if market conditions shift unfavorably.
  
• Ongoing strategic M&A and investments, while aimed at growth, may require significant capital, impacting cash flows and potentially leading to increased debt levels if not managed efficiently.
  
• The integration of NeoGames and the associated investments could lead to higher operating costs in the near term, possibly impacting net margins until the integration and scaling are fully realized.

Valuation

• The analysts have a consensus price target of A$72.966 for Aristocrat Leisure based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$85.0, and the most bearish reporting a price target of just A$50.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$7.5 billion, earnings will come to A$1.9 billion, and it would be trading on a PE ratio of 28.6x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of A$73.72, the analyst price target of A$72.97 is 1.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.