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AGM update: Is the Aristocrat Leisure (ASX:ALL) share price a buy?

Shares in gaming machine manufacturer Aristocrat Leisure Limited (ASX: ALL) are trading more than 3% lower today despite the company releasing an encouraging trading update at its AGM.

The broader S&P/ASX 200 (ASX: XJO) is down nearly 2% at the time of writing, as rising bond yields continue to weigh on the valuations of some of the bigger ASX tech names.

A few of the big fallers today include Afterpay Ltd (ASX: APT), down 11% (here’s why), Xero Limited (ASX: XRO), down 4.5% and Kogan.com Ltd (ASX: KGN), down 11%.

With a significant amount of debt on Aristocrat’s balance sheet, this puts it into the firing line as an ASX growth share, with higher interest rates increasing its cost of borrowing, hurting its valuation today.

How did Aristocrat perform in FY20?

Complications arising from COVID-19 and social distancing measures had a material impact on the company’s land-based segment revenue in FY20.

Overall, Aristocrat reported a 47% drop in normalised net profit after tax (NPAT) in FY20, which fell to $476.6 million. Revenue declined by 6%, which was mainly the result of the company’s land-based segment. Luckily, a large portion was offset by rapid growth in the company’s digital arm.

The company demonstrated its ability to generate robust underlying cash flows despite the restriction of movement, with operating cash flow of over $1 billion in FY20. Aristocrat seems well capitalised to endure the storm, with an increased revolving credit facility.

Digital growth

Over FY20, Aristocrat generated over $1.6 billion in bookings, representing a 31% increase on the prior corresponding period (pcp). The digital arm alone contributed roughly half a billion in segment profit, up 34% on the pcp.

Average bookings per daily user jumped by 44% to 59 cents as a result of a significant investment in game development as well as marketing spend, which was boosted by the stay-at-home thematic.

What did the CEO say?

In his address, chief executive Trevor Croker said: While our financial results for fiscal 20 were clearly impacted by the pandemic, they also highlighted our strengths, and the effectiveness of our business’ response. As always, we focused on what we could control, to extend our strategic advantages and position the business for future growth.”

Importantly, Croker reiterated the outlook guidance provided in November 2020. Assuming no material change in economic and industry conditions, Aristocrat plans for growth throughout FY21, reflecting:

  • Maintained or enhanced market-leading positions in Gaming Operations;
  • Sustainable growth in floor share across key Gaming Outright Sales markets globally;
  • Further growth in Digital bookings, with user acquisition spend expected to remain between 25% and 28% of overall Digital revenues;
  • Continued design and development investment to drive sustained, long term growth; and
  • An increase in selling, general and admin expenses across the business, as it continues to scale and deliver its growth strategy.

Why I like Aristocrat

I think despite the challenges, Aristocrat has proved that it’s able to stay afloat during times of decreased cash flows.

While the short-term outlook might not be fantastic as COVID-19 continues to take its toll, especially in the US, I think it’s likely that land-based gambling will return to pre-COVID levels in the long run. And in the meantime, Aristocrat has its digital arm which will ideally offset some of the short-term issues.

I would note that the current valuation is a little bit steep given the overall uncertainty, with Aristocrat shares trading at roughly 33x trailing earnings on a normalised basis. However, given the longer-term growth potential and the stable overall thematic of gambling, I think an allocation of shares in Aristocrat would make a nice addition to a growth portfolio.

Given the situation with rising bond yields, it might be worth waiting to see if you can pick up Aristocrat shares even cheaper than what they’re currently trading at today.

For more reading on Aristocrat, click here to read: The bull case for Aristocrat Leisure shares.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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