Aristocrat Leisure (ALL) Update

Aristocrat Leisure (ALL) has a target price of $8.80 from stockmarket analyst Macquarie Research Equities.

Aristocrat Leisure Ltd (ALL): Cutting Back in Australia

Lowering Australian replacement sales — On the back of ongoing weak trends in the very large NSW club and hotel market, driven by impact of smoke-free gaming on venues, we have lowered unit sales to roughly equal to those achieved in FY07, and have taken a more conservative view in forward years.

Revising earnings down — Core eps lowered, FY08e core eps now 46.3cps (down 10.8%), FY09e core eps is now 57.6cps (down 9.7%), and FY10e core eps is 62.5cps (down 9.9%). Target Price $8.80.

Competitors catching up — Slots are being warehoused in Macau and casinos are hesitant to commit to significant capex in the US when spending is trending down so sharply in major casino markets. But, we believe some of ALL's competitors have taken new directions in game development, and these risks are paying off with improved sales. We also note that in the US, performance of some of ALL's competitors indicate that good games continue to drive sales growth, leading to the conclusion that current weakness cannot be entirely explained away by "market conditions".

New platform rolling out, but it's the games that are the key — And until the library builds and customers can see the benefit, sales will likely stay slow. The ongoing strength of demand in the stepper segment also underscores a key product weakness for ALL in the North American market. Gen 7 games library will build through FY08e, but won't likely deliver an uplift in sales now until FY09. Stock looks like compelling value, but we believe near-term momentum is missing.