I have decided I need to do more reflecting and writing on my larger positions. i realise that ALL is not everyone's cup of tea but i share it for those interested.

ARISTOCRAT LEISURE

Opinions and observations

Notes on FY 23

Result $1.3b +21% and epsa similarly up 21%, above my estimates.

Broadly, there was a return for casino-based businesses to pre C19 levels and a softening in the online based businesses (Pixal) that thrived during C19. Casino gaming 52% of revenues, Online 42% for the group.

The interesting strategic direction for ALL and the industry as a whole is the move from land based gaming to online gaming driven by the opening up of US regulations and technical developments. ALL approaches this change by focusing on online real-money gaming and finding new verticals to deploy their existing and new content.

Longer term the success then depends to a reasonable extent on the payback on the design and development (D&D) of games.

Looking specifically at the result, although above my numbers, were driven by a lower quality mix, imo. That can be seen by removing favourable FX and IR moves delivering an underlying 6% growth in NPATA. (I don’t specifically model FX).

ALL make money through selling machines to casinos that can be outright sales or a profit share for the more lucrative and popular games, profit share is better for ALL. FY23 saw a large increase in outright sales, which is great, but lower quality. Overall strong growth in North America and International (mainly Asia) delivered, Australia flat. ALL gained share and globally remains dominant in this sector.

The Pixal business was softer as the mobile gaming market was described as mixed. Whenever this happens thoughts shift to whether is it the market or ALL, as this is a more competitive space. Over the last 3 years ALL has spent about $5b on capex (ALL market cap $26b), D&D and User acquisition. The growth has been in D&D, which shows the need to develop games and obviously, the return on this spend over time is critical. UA spend was lower in fy23 which helped reported profits and management described it as dynamic, depending on the game launch sequence, so new games require more spend. There was a lull in the cadence of releases, with 10-15 pending. There is a sneaking suspicion that ALL games are not as potent as they were a while ago. Of course, there is some lumpiness involved here and the success of RAID will be difficult to replicate (fy23 24% of bookings for Pixal). The top 5 games comprise 74% of bookings so some concentration exists. No doubt ALL can outspend most of the competition but getting effective returns is the key. There are rumours of creative personal departures that may impact the quality of games, have to watch this carefully. Pixal has historically surpassed my expectations but remains a moving feast with higher levels of competition. Management has been changed here as well.

ALL launched anaxi which looks to provide content to casinos and others I suspect for casinos take gaming to their clients using a mobile device. That is, ALL games on a mobile device with casino logos, is my read. No doubt this is a large part of the story moving forward and again it is competitive. Early days on this one. ALL has a competitive advantage given relationships and proven in casino games.

ALL gave some info on TAMs for the Pixal subgroups. Social Casino $6.6b of which ALL share is 14%, Casual gaming $19b, ALL share 1%, Role-playing games $13.5b, Strategy games $13.5b and Action games $3.7b of which ALL combined share is 2%. From this we can see that ALL has a reasonable share in its wheelhouse, SC, but a minuscule share in the highly competitive other categories. There lies the opportunity and challenge.

The cash conversion remains strong. The balance sheet is good with the cash raised for the aborted Playtech acquisition being redirected to buybacks and more acquisitions, Roxor and Neo Games, these are part of the anaxi push. Expected to be initially neutral to eps. The b/s moves from net cash but remains below ALL target range of 1-2X ND/Ebitda.

My conclusion on ALL is that it remains a highly profitable and well led growth stock. The valuation is full to fair around these levels. The feature that strikes me is that its markets are changing and more challenging than other growth stocks which probably deserves a lower rating. That is the ability to generate successful games is not as clear cut as other growth paths.

Disclosure Held – I have reduced over $40 and although ALL remains in my top 10 holdings I don’t think the risk-reward is as good as some of my other quality growth stock exposures, therefore holding at a lower weight than other similar quality growth stocks. find any errors pls tell me