Aristocrat Earnings: While Tailwinds in Online Gaming Are No Longer Blowing, EGMs Remain Resilient

We maintain our AUD 43 fair value estimate for shares in Aristocrat ALL following the release of interim fiscal 2023 earnings. Underlying net profit of AUD 659 million is up 14% on the prior corresponding period, or pcp. Strong performance in the core electronic gaming machine, or EGM, business offset earnings weakness in Pixel United—Aristocrat’s online gaming division. The net result was buoyed by sharply lower net interest costs (higher interest rates have benefited Aristocrat’s net cash position) and favourable foreign currency translation. We lower fiscal 2023 underlying NPAT forecast by 2% to AUD 1.2 billion, principally due to the softer-than-expected Pixel United result. The board declared a fully franked interim dividend of AUD 30 cents per share, tracking our forecast for total fiscal 2023 dividends of AUD 64 cents per share, fully franked.

The gaming business—about two thirds of earnings—lifted operating earnings 17% to AUD 915 million. It is Aristocrat’s core competency in what remains a lucrative and resilient market. The result was underpinned by growth in both outright sales and leased revenue. We estimate Aristocrat’s highly popular and profitable EGM titles, which underpin its narrow economic moat, allowed the firm to capture share in both segments in the key North American market. Outright sales volumes lifted 11% on the pcp, with higher average selling prices in Americas (up 21%) and Australia and New Zealand (up 2%). The installed base of leased EGMs in North America lifted 9%, with a 2% decrease in average fee per day.

Gambling is roaring back well above pre-COVID-19 levels. U.S. gambling expenditure hit its eighth consecutive record quarter in first-quarter 2023, per the American Gaming Association’s Commercial Gaming Revenue Tracker, released May 16, 2023. While land-based gaming has rebounded above pre-COVID-19 levels since second-quarter 2021, much of the more recent growth is attributable to ongoing deregulation in sports betting and iGaming.