29/07/20 A very rough analysis

Positives:

• Global player in gaming machines, online gaming operating in over 90 countries. Second largest gambling manufacturer globally.
• Proven company; with sales, cash flow and EPS compounding above 20% for last 10 years.
• Digital segment growing, currently accounting for ~46% of total revenue from last 1H20 report.
• Net margin above 15% past 5 years
• ROIC > 10% past 5 years
• CEO Trevor Croker owns about $AUD9.5m worth of shares. Considering his annual salary is $1.6m (excl ST/LTI), this is respectable
• $871m in cash
• Pays a small fully franked dividend ~ 2% though 1H20 dividend was suspended.
• No recent director selling

Negatives:

• High debt levels - $2.7b+, acquired Plarium and Big Fish in 17/18. Net debt/equity currently at 1.3x, interest cover ~ 8.
• COVID19 - impact on 2H20 earnings. Interesting to note most casinos have reopened in the US. https://www.americangaming.org/research/covid-19-casino-tracker/ 
• Washington lawsuit from 2019 - approx $30m settlement cost if approved.
• Withdrawal of government handouts could impact on discretionary spending
• Regulatory changes as expected in this space

Comment:

All in all, I like ALL (pardon the pun). Historically ALL has had big pullbacks in its share price, but over the long term it has very much outperformed the market. COVID19 may be a blessing in disguise, bringing forward plans to expand the digital segment of the business. Short term pain, long term gain. I back the management to ride out the COVID19 impact. However the active risks need to be monitored closely as per outlined above. 

At the current price, it is looking a little too expensive. Happy to add below ~$22.

Disc: [I hold ALL shares]