Aristocrat Leisure - Macquarie · 2015-04-07 · Aristocrat has been a big beneficiary during this period of consolidation – perfectly timing the release of industry leading gaming

Please refer to page 23 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

AUSTRALIA

ALL AU Underperform

Price (at 04:00, 02 Apr 2015 GMT) A$8.41

Valuation A$ 6.22 - DCF (WACC 9.0%, beta 1.3, ERP 5.0%, RFR 3.8%, TGR 3.0%)

12-month target A$ 7.20

12-month TSR % -10.4

Volatility Index Low

GICS sector Consumer Services

Market cap A$m 5,330

30-day avg turnover A$m 16.8

Number shares on issue m 633.8

Investment fundamentals Year end 30 Sep 2014A 2015E 2016E 2017E

Revenue m 870.3 1,515.3 1,763.8 1,724.2 EBIT m 161.3 391.6 478.8 460.4 Reported profit m 118.1 224.4 300.8 285.7

Adjusted profit m 118.1 245.4 300.8 285.7 Gross cashflow m 162.1 357.0 429.7 408.0 CFPS ¢ 28.6 56.7 68.2 64.8 CFPS growth % 5.0 98.4 20.3 -5.1 PGCFPS x 29.4 14.8 12.3 13.0 PGCFPS rel x 3.19 1.56 1.53 1.68 EPS adj ¢ 20.8 38.9 47.7 45.3 EPS adj growth % 6.9 87.3 22.6 -5.0

PER adj x 40.5 21.6 17.6 18.5 PER rel x 2.39 1.26 1.16 1.30 Total DPS ¢ 16.0 29.2 35.8 34.0 Total div yield % 1.9 3.5 4.3 4.0 Franking % 0 0 0 0

ROA % 16.2 20.7 17.5 16.3 ROE % 21.8 33.0 36.3 31.5 EV/EBITDA x 25.0 10.2 8.4 8.8 Net debt/equity % -24.3 168.9 156.3 150.1 P/BV x 7.5 6.8 6.0 5.6

ALL AU vs ASX 100, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, April 2015

(all figures in AUD unless noted)

7 April 2015 Macquarie Securities (Australia) Limited

Aristocrat Leisure The jackpot’s been won Event

We lower our rating to Underperform and maintain our $7.20/sh target price.

While there is plenty to like about Aristocrat, primarily their market leading

product offering, increased recurring revenue profile, and a highly favourable

currency exposure, we view the recent outperformance of the stock as more

than factoring this in and see a number of issues on the horizon which remain

notably underappreciated. All in, we see the enthusiasm as overdone.

Impact

Plenty to like... We hold little doubt that Aristocrat is well positioned to

continue the recent positive earnings trajectory, with new products highly

competitive in the US and domestic markets, a well timed VGT acquisition

which has boosted the recurring revenue profile, continued gains in the social

gaming platform, and favourable exposure to a strengthening USD. However,

we view these factors as well appreciated by the market, and have combined

to offer a notable tailwind to the stock price. Since announcing the acquisition

of VGT in July 2014, ALL has outperformed the wider ASX index by ~52%.

... but headwinds underappreciated. Despite these positive aspects, we see

a number of issues which suggest the enthusiasm surrounding Aristocrat’s

outlook may be overdone. These focus on a US market best characterised as

tepid, increasing competition as the recent consolidators begin to fight back

and a greater than anticipated capex requirement for VGT. We expect a

highly cash-flow generative setting for Scientific Games and IGT/GTECH,

based on the sustainability of their respective lotteries businesses, to boost

the R&D efficiency of both platforms and further the development of new

game titles and technology, and thereby beginning to close the gap towards

Aristocrat’s market leading content. As such, we see the return profile for

Aristocrat’s Class III segment as likely to taper off post FY16 as the capex

requirement and the competitive dynamic in the US industry begins to bite.

A declining ROIC profile frames our view. Market enthusiasm centres on

VGT’s high cash-flow generation, however we remain concerned that VGT’s

ageing installed base due to a historically low unit replacement rate will likely

require a notable uptick in capex by Aristocrat as the replacement rate

inevitably ticks higher. In addition, we view the capex required in continuing to

build out the Class III installed base as significant. Combining these issues

together, we model a declining firm-wide ROIC profile post FY16. While the

near-term operational setting no doubt looks favourable, we see the

enthusiasm underpinning the recent share-price momentum as overdone.

Earnings and target price revision

EPS changes: FY15e +3.3%, FY16e +8.5%, FY17e +3.9%. TP unchanged.

Price catalyst

12-month price target: A$7.20 based on a Blended methodology.

Catalyst: New product releases, 1H15 earnings release May 26

Action and recommendation

We lower our rating to Underperform and maintain our $7.20/sh target price.

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management Aristocrat Leisure

7 April 2015 2

The jackpot’s been won... enthusiasm looks overdone

While there is plenty to like about Aristocrat, primarily their market leading product offering, increased

recurring revenue profile, and a highly favourable currency exposure, we see this as fully factored

into the current stock price and see a number of issues on the horizon which remain notably

underappreciated. All in, we see the enthusiasm as overdone.

US share gains likely, but industry outright unit sales slowing

We expect aristocrat to gain share in the North American market as the firm deliver high-end games

which have been viewed favourably by casino buyers. We expect Aristocrat’s current and pending

popular titles as likely to translate into an increase in the firm’s installed base and outright unit sales,

with casinos demanding new games which appeal to a younger demographic. We model Aristocrat’s

Class III installed base (ex-VGT) increasing from 9,071 units in FY14 to 11,271 units in FY17, a 24%

hike, and model ship-share rising from 13.9% in FY14 to 17.3% in FY17 - a 27% uptick in unit sales.

Despite this, we are concerned that a weak North American outright sales market and tepid regional

GGR growth is likely to deliver absolute unit sales and installed base metrics short of expectations.

Industry consolidation a near-term kick, but playing field set to level

Aristocrat has been a big beneficiary during this period of consolidation – perfectly timing the release

of industry leading gaming content during a period when competitors are seemingly more focused on

realising the above mentioned synergies, allowing Aristocrat to pick up notable share in the US.

However, we expect a highly cash-flow generative setting for Scientific Games and IGT/GTECH,

based on the sustainability of their respective lotteries businesses, to boost the R&D efficiency of

both platforms and furthering the development of new game titles and technology, and thereby

beginning to close the gap towards Aristocrat’s market leading content.

VGT a cash cow, but capex requirement makes it no bull

All in, we view the VGT acquisition by Aristocrat as generally positive, albeit with a number of

concerns and far from the transformational acquisition which has typified the M&A activity of

Aristocrat’s major competitors. With market enthusiasm focused on VGT’s high cash-flow generation,

we remain concerned that VGT’s ageing installed base due to a historically low churn rate will likely

require a notable uptick in capex by Aristocrat as the churn rate inevitably ticks higher.

Return on capital profile to decline post FY16

While VGT’s installed base generates notable free cash flow, it does so due to an ageing installed

unit base displaying a slow replacement rate. As such, we view a quickening replacement cycle as

likely to require a notable increase in capex, dragging the firm’s ROIC profile lower post FY16. Also,

while visually impressive, the capex required to build out the Class III installed base is significant,

with licensing fees, design commissions, and boosted technology profile implying a drag on returns.

All in, with the market focused on a ramp up in firm-wide earnings, combined with a jump in ship-

share across the US and Australia, we view the falling return profile post FY16 as underappreciated.

Valuation & Recommendation

We have maintained our $7.20/sh target price. This aligns with our $7.14/sh valuation derived from

our blended approach, which combines a DCF value of $6.22/sh, SOTP value of $7.29/sh, and our

“through-the-cycle” valuation of $7.92 which values Aristocrat on a peak/maintainable earnings level.

The average of these is $7.14 per share, and forms the basis for our $7.20/share target price.

Aristocrat Leisure - Sales, EBITDA, & EPS (A$m, except EPS)

Macquarie Estimates

Company Name Identifier Rating Metric FY14a FY15e FY16e FY17e FY18e FY19e

Aristocrat Leisure Ltd ALL-AU Underperform Sales 864.9 1,514.9 1,763.9 1,724.5 1,711.7 1,785.1

EBITDA 209.0 503.1 607.7 582.8 569.5 585.2

EBITDA Margin 24.2% 33.2% 34.5% 33.8% 33.3% 32.8%

EPS 0.207 0.389 0.477 0.453 0.444 0.461



7 April 2015 3

US share gains likely, but a shrinking pie We expect aristocrat to gain share in the North American market as the firm delivers high-end

games which have been viewed favourably by casino buyers. Aristocrat’s The Walking Dead was

named casino product of the year in 2014 at the Global Gaming Awards. In addition, Aristocrat’s

backlog of games remains impressive, driven by notably popular entertainment titles such as

Game of Thrones, Sons of Anarchy, Ted, and the Big Bang Theory, which per our industry

feedback post the G2E conference in 2014 were industry leading. We expect these popular titles

as likely to translate into an increase in Aristocrat’s installed base and outright unit sales, with

casinos demanding new games which appeal to a younger demographic. We model the firm’s

installed base across Class III increasing from 9,071 units in FY14 to 11,271 units in FY17, a

24.3% increase. We model Aristocrat’s ship-share increasing from 13.9% in FY14 to 17.3% in

FY17 - representing a 27% uptick in unit sales.

Despite this, we remain concerned that a weak North American outright sales market and tepid

regional GGR is likely to deliver absolute unit sales and installed base metrics short of notably

bullish expectations. While improving their product breadth and depth, Aristocrat is not a new

entrant into the US market, launching its first machine in the US in 1964 and peaking out at ~17%

ship share in 2005/06. Since that period, Aristocrat has maintained ship-share between 10-14%.

Fig 1 Aristocrat’s ship-share history in North America

Source: Company data, Macquarie Research, April 2015

Slowing total unit sales in North America. While we model Aristocrat to pick up ~300bps of

ship-share over the next two years, we remain concerned that a continued slow-down in the North

American total unit sales market is likely to leave earnings short of bullish expectations which

highlight a near-term run to ~20% ship-share as achievable, further hampered by tepid gross

gaming revenue across regional casinos. For North America, we model a +5% increase in

replacement units in 2015, pushing replacement units to ~58k units, combining with new units

sales at ~9k to give total unit sales of ~67k in 2015, down from an estimated ~74k in 2014, and

well below the 114k units (including Canadian churn) posted during 2013.

Fig 2 We hold a tepid outlook for the North American outright unit sales


7% 9% 17% 17% 14% 11% 12% 12% 13% 10% 11% 14%

66% 62% 47% 46%38% 37% 32% 29% 33% 36% 41% 26%

15%10%

11% 15%21% 21%

19%15% 16% 18%

16%18%

7%13% 19% 15% 17% 19% 24%

26% 20% 17% 14%12%

0%

20%

40%

60%

80%

100%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Other

Multimedia Games

Konami

SGMS

Bally

IGT

Aristocrat

95.2 109.676.1 71.2 62.9 51.2 41.9 49.7 54.3 52.6 64.0 55.5 58.0 59.8

36.027.0

30.0 35.0 37.0 48.3

25.5 12.0 11.7 22.324.1

18.1 9.0 6.68.9

26.1

0.0

50.0

100.0

150.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E

Replacement Units New Units Canada Units

('000 units)


7 April 2015 4

Fig 3 Future casino openings have slowed

Casino Operator Timing Slots

Baha Mar Baha Mar 2Q15 1,500 Plainridge Park Casino Penn National 2Q15 1,250 Yreka Casino Karuk Indians Mid-2015 1,500 Cherokee Valley River Casino Caesars Mid-2015 1,200 Ramona Band of Cahuilla Indians Ramona Band 2H15 750 Jamul Penn National 2H15 1,700 Four Winds North Pokagon Band 3Q15 500 Dania Jai-Alai 4Q15 1,257 Scarlet Pearl Biloxi Land Holdings One 4Q15 1,350 Thistledown Racino 2Q16 250 West Valley Casino Tohono O'odham 2H16 1,100 Grey Rock Entertainment Centre Sonco Gaming 2H16 200 National Harbor Casino MGM 3Q16 3,600 Legends Casino Yakama Nation 3Q16 200 Wynn Everett Wynn 4Q16 3,000 MGM Grand Springfield MGM 4Q16 2,000 Vancouver Casino Paragon Gaming 4Q16 600 Montreign Casino Sullivan County 2017 2,150 Lago Casino Tyre 2017 2,000 Rivers Casino Schnectady 2017 1,150 Central Valley Casino North Fork Rancheria 2017 2,000 Massachusetts Casinos (SE Mass) TBD 2017 2,000 Resorts World Las Vegas Genting 2017 3,200 Barstow Casino Los Coyotes 2017 1,325 Philly Live! Cordish 2017 5,000

Source: Casino company data, Macquarie Capital (USA), April 2015

Fig 4 Slot replacement rate including and excluding contracted/premium machines remain soft relative to prior peaks.

Source: Company data, Macquarie Research, April 2015. True replacement rate backing out Premium, Class II, Video Poker and VLT markets

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E

% of installed base replaced (less leased/Canada) True replacement rate


7 April 2015 5

Industry consolidation a near-term free kick Adapting to a slow growth environment

Consolidation across the slot supplier space has been in motion for a number of years, as a

combination of international slot makers moving into North America and former Class II suppliers

and amusement companies targeting the Class III casino market translated into a slot supplier

sector that has become more crowded than ever, magnified by a drop in gross gaming revenue

due to weak consumer fundamentals which hampered capex spend by casino’s and led to a

slowdown in the replacement cycle.

This led to a number of major merger & acquisitions within the supplier space:

January 2013: Scientific Games acquired WMS for US$1.5bn.

July 2013: Bally acquired Shuffle Entertainment for US$1.3bn.

July 2014: GTECH acquired IGT for US$6.4bn.

July 2014: Aristocrat acquired VGT for US$1.3bn.

August 2014: Scientific Games acquired Bally for US$5.1bn.

September 2014: Global Cash Access acquired Multimedia Games for US$1.2bn.

This M&A activity has reshaped the slot supplier landscape, with only two of the prior ‘big 5’ slot

suppliers, Aristocrat and Konami, remaining as standalone entities.

Casino closings in North America have also contributed to the slow growth environment. Per

industry statistics, approximately 10,000 slot machines have been taken out of commission during

2014 based on casino closures, combined with delays in new casino opening. While many of

these units will find their way to international markets, many will also be redeployed into the other

North American casinos, further weighing on the soft growth setting.

In addition, changing demographics suggest the fundamentals for the slot segment could remain

soft longer term. The core demographic for slot machines is players aged 50 and over, with

younger players’ generally preferring table games and skill-based games. As a result, more of the

casino floor is being allocated towards table games, highlighting the overriding theme of the recent

wave of M&A for greater breadth of content and game platforms. In 2013, slots accounted for 73%

of positions across Caesars Entertainment Corp’s portfolio of 30 casinos, down from 78% in 2007.

Fig 5 Recent major supplier historical M&A

Date Announced Acquirer Target EV / LTM EBITDA

Mar-15 AGS LLC Cadillac Jack 8.8x

Sep-14 Global Cash Access Multimedia Games 9.1x

Aug-14 Scientific Games Bally 10.4x

Jul-14 Amaya Rational Group (PokerStars) NA

Jul-14 GTECH IGT 8.6x

Jul-14 Aristocrat Leisure VGT 8.2x

Sep-13 Apollo Management AGS LLC NA

Jul-13 Bally Technologies Shuffle Master 14.3x

Jan-13 Scientific Games WMS Industries 6.2x

Sep-12 Amaya Cadillac Jack NA

May-10 Vitruvian Partners Inspired Gaming Group 3.7x

Jan-06 Scientific Games Global Draw 5.4x

Jan-06 Lottomatica Group GTECH 9.6x

Nov-05 Shuffle Master Stargames Party 12.4x

Dec-04 GTECH Atronic Americas 8.0x

Nov-03 GTECH Spielo Manufacturing 5.4x

Jun-03 IGT Acres Gaming Incorporated 5.5x

Jul-01 IGT Anchor Gaming 7.3x

Jan-01 Aristocrat Leisure Casino Data Systems 8.9x



7 April 2015 6

Synergy targets highlight a cut in R&D and SG&A

To justify the near US$16bn worth of acquisitions in the space over the past two years, the

realisation of synergies has become critical. By our mark, approximately US$800m in synergies

have been flagged across the major acquisitions, targeting duplicative costs across research &

development, licensing, manufacturing, marketing, and headcount, amongst others, while also

leveraging game content across multiple distribution outlets on a global scale.

Aristocrat near-term share gains likely

Aristocrat has been a big beneficiary during this period of consolidation – perfectly timing the

release of industry leading gaming content during a period when competitors are seemingly more

focused on realising the above mentioned synergies, allowing Aristocrat to pick up notable share

within the US market.

As such, we anticipate Aristocrat to boost their outright unit sales +27% by FY16, taking their

North American ship-share from 13.9% in FY14 to 17.2% in FY16. In addition, we anticipate

Aristocrat to add an additional 1,700 units to their Class III recurring revenue installed base

through FY16, taking their installed base from 9,071 in FY14 to 10,771 units in FY16, largely

driven by the popularity of the firm’s current and soon-to-be-released suite of products.

Fig 6 Our installed base forecast for Aristocrat


Fig 7 Outright unit sales and ship-share forecast for Aristocrat


6,757 7,562

9,071 10,071

10,771 11,271 11,471 11,671

$40.00

$42.00

$44.00

$46.00

$48.00

$50.00

$52.00

$54.00

$56.00

$58.00

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY12a FY13a FY14a FY15e FY16e FY17e FY18e FY19e

Closing installed base Total average fee per day (US$)

Installed unit base Avg. fee per day

9,206 10,146

9,419

10,714

11,931 12,272 12,625 12,991

11.6%

13.3%13.9%

16.3%

17.2% 17.3% 17.4% 17.4%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000


Total machines sold Total market share

Total units sold Ship-share


7 April 2015 7

However, consolidators will find their footing...

We view these anticipated share gains by Aristocrat as well understood in the market, and instead

turn our focus to FY16 and beyond when the aforementioned acquisitions by Aristocrat’s major

competitors begin to be bedded down. In our opinion, the expanded R&D budget to be achieved

by turning very big slot companies into bigger companies is likely to go a long way toward

addressing the product side of the equation.

More precisely, we expect a highly cash-flow generative setting for Scientific Games and

IGT/GTECH, based on the sustainability of their respective lotteries businesses, to boost the R&D

efficiency of both platforms and furthering the development of new game titles and technology,

and thereby beginning to close the gap towards Aristocrat’s market leading content.

With this in mind, we model Aristocrat’s North American ship-share to trend sideways beyond

FY16 at ~17-18% as the competitive market setting intensifies. In addition, we model Aristocrat’s

installed base increasing by 200 units annually post FY16. While we anticipate growth, our outlook

sits below a notably bullish investor base.


7 April 2015 8

VGT a cash cow, but no bull VGT is a good strategic expansion for Aristocrat

VGT is a leading provider of Class II gaming content, platforms, systems and technology, founded

in 1991 and headquartered in Tennessee, US, with primary operations in Oklahoma. VGT is the

number one provider in Class II mechanical reels in North America, having established a number

of well-recognised brands including Hot Red Ruby, and My Moneybags.

VGT is driven entirely by recurring revenue, with an installed base of ~20,200 units, representing

~40% share of Class II installed units nationally and a ~90% share of mechanical reel units in

Oklahoma.

This looks a good strategic expansion for Aristocrat. It gives it increased scale and further

diversifies its customer base and offering. Of note, the VGT acquisition will bring a number of

positives:

An increased scale in its Gaming Operations segment, where post-acquisition

Aristocrat's installed base will increase from 9,071 units to ~30,200 units in FY15, and the pro-

forma revenue contribution from Gaming Ops will increase from ~15% to ~35%, per our

estimates;

Fig 8 Aristocrat’s Gaming Operations installed base growth


Fig 9 Combined Aristocrat group revenue – recurring revenue profile


A strong presence in Class II mechanical reels and Class II gaming more broadly. Class II is a

well-supported segment of the gaming market for Tribal Casinos, as there is no requirement to

share revenues with the State, as is the case for Class III;

5670 6229 6757 7562 9071 10071 10771

20200 20200

0

5000

10000

15000

20000

25000

30000

35000

FY10a FY11a FY12a FY13a FY14a FY15e FY16e

VGT

Aristocrat

Installed base

30,271 30,971


7 April 2015 9

Strong cash flow, with VGT generating $110m of annualised FCF for the year to December

2013. We expect modest growth in CY14 and CY15, plus around $5m of operational

synergies in the FY16 period, which may prove conservative.

Fig 10 VGT revenue and EBITDA forecast (US$m)

FY13a FY14a FY15e FY16e FY17e FY18e

Closing installed base 20,200 20,200 20,200 20,200 20,300 20,400

Average fee per day (US$) 32.01 32.33 32.33 33.30 34.30 35.33

Average fee growth rate 1.0% 0.0% 3.0% 3.0% 3.0%

Participation revenue (US$m) 236.0 238 238 246 254 262

% change vs pcp 1.0% 0.0% 3.3% 3.0% 3.5%

EBITDA (US$m) 157.0 159 159 160 169 175

% ch vs pcp 1.0% 0.0% 1.0% 5.3% 3.5%


All in, we view the VGT acquisition by Aristocrat as generally positive, albeit with a number of

concerns and far from the transformational acquisition which has typified the M&A activity of

Aristocrat’s major competitors.


7 April 2015 10

However we also see a number of risks associated with the acquisition:

VGT’s strong presence with tribal casinos will push Aristocrat’s share of the North American tribal

leased game share from 5% to 31% of the market, per company data, making Aristocrat the

largest provider to the tribal casino sector. Of note, the earnings for VGT are geographically

concentrated, with Oklahoma currently generating over 90% of VGT’s earnings.

Fig 11 Native American gaming – Oklahoma has the largest installed base of machines

Source: Company data, National Indian Gaming Commission, Macquarie Research, April 2015

As such, Aristocrat is also exposed to any future shifts to the structures that currently support

Class II gaming in North America, notably the associated tax benefits for tribal casino operators.

While political appetite currently is limited for a change in structure, the debate remains present.

Within Oklahoma, Aristocrat also inherits a greater concentration of customers, with a small

portion of tribal clients accounting for a notable percentage of earnings.

The nature of Class II contracts also raises the potential of lumpy product churn.

While the cash conversion profile of the VGT business is highly attractive, this is achieved, in our

opinion, by the limited capital expenditure spent. With an ageing installed base due to a historically

low churn rate, we see a notable uptick in capex likely required by Aristocrat as the churn rate

inevitably ticks higher.

In addition, the rapid growth which typified the ramp-up in Indian gaming revenue has stagnated

since 2007, with GGR over the past 7 years averaging just +1.8% annually based on a sluggish

economy, while wider effects in the gaming industry of market maturation and increased

competition have also weighed.

Fig 12 Native American GGR growth has slowed since 2007

Source: National Indian Gaming Commission, Macquarie Research, April 2015

Oklahoma

20%

California 19%

Washington 8%

Michigan 7%Minnesota 6%

Other 40%

Indian Casino Installed Base - All UnitsTotal # of units ~355k

Oklahoma units ~69.7k

Oklahoma

50%

Alabama

9%Louisiana 8%

Montana 6%

Other 27%

Indian Casino Installed Base - Class II UnitsTotal # of units ~50.5kOklahoma units ~25k

11.0 12.8

14.7 16.8

19.5 22.6

25.1 26.0 26.7 26.5 26.5 27.2 27.9 28.3

11.1%

16.4%14.8% 14.3%

16.1% 15.9%

10.9%

3.9%2.7%

-1.0%0.1%

2.5% 2.8%1.4%

-5%

0%

5%

10%

15%

20%

0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Native American GGR yoy chg

(US$bn)


7 April 2015 11

Installed base stable, lower CF expected as capex ramps up

For the VGT division through FY16, we model:

Installed base remaining flat at 20,200 units.

Revenue of US$246m in FY16, with revenue growth of +3% annually driven by average fee

per day annual growth of +3%, rising from ~US$32 to ~US$34 per day, by our estimates.

EBITDA of US$160m in FY16, which includes $5m in synergies

With market enthusiasm focused on VGT’s high cash-flow generation, we remain concerned that

VGT’s ageing installed base due to a historically low churn rate will likely require a notable uptick

in capex by Aristocrat as the churn rate inevitably ticks higher.

As highlighted within our ROIC analysis, we assume a slower churn rate for VGT’s installed base

compared to Aristocrat’s Class III recurring revenue business, while also assuming a 50%

discount in the cost per replacement unit, as VGT refreshes approximately 1/3rd

of their installed

base per year, effectively prolonging the floor-life of the cabinet. As such, we model capex as a %

of recurring revenue for VGT at ~16-17% through FY20, relative to a higher ~20-24% for

Aristocrat’s Class III business.

With this in mind, we model the capex requirement for VGT’s installed base at A$57m in FY16,

combining with an increased capex requirement across the Class III segment to lift Aristocrat’s

group-wide capex from A$63.5m in FY14 to A$174m in FY16 – resulting in a near tripling in firm

wide capex requirements.

Fig 13 Combined Aristocrat group capex requirement forecast


4.8 9.0 22.5

48.1 53.7 54.2 25.6 24.0

41.0

49.4 62.7 63.9

53.2

57.4 57.9

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

FY12a FY13a FY14a FY15e FY16e FY17e

- VGT Gaming Ops

- US Gaming Ops

- General

(A$m)


7 April 2015 12

Declining ROIC profile VGT capex to shift higher, as US margins could drag

With the market focused on a ramp up in firm-wide earnings on the back of Aristocrat’s VGT

acquisition during 2014, combined with an increase in ship-share across the US and Australia, we

view the declining return profile post FY16 as underappreciated.

While VGT’s installed base generates notable free cash flow, it does so due to a notably ageing

installed unit base which has displayed a slow churn rate. As such, we view a quickening churn

cycle as likely to require a step increase in capex, dragging the firm’s ROIC profile lower as we

move past FY16.

In addition, while visually impressive, the capex required in continuing to build out the Class III

(pre-VGT) installed base remains significant, with licensing fees, design commissions, and the

boosted technology profile implying a drag on returns. Aristocrat’s relationship with the various

content owners for the licensing of the latest products, including Game of Thrones, Sons of

Anarchy, Ted, and the Big Bang Theory, imply a notable licensing fee. With our installed base

growth assumption centred on the firm’s highly anticipated licensed content, we see some

downside risk to the margin profile as likely.

Fig 14 Aristocrat has been experiencing climbing ROIC’s since FY10. We expect this to peak in FY15 before gradually declining through FY20.


Aristocrats Class III slot business operating at enviable levels. Aristocrat’s Class III slot

business continues to fire on all cylinders, delivering high-end games which have been viewed

favourably by casino buyers. Aristocrat’s The Walking Dead was named casino product of the year

in 2014 at the Global Gaming Awards. In addition, Aristocrat’s backlog of games remains

impressive, driven by notably popular entertainment titles such as Game of Thrones, Sons of

Anarchy, Ted, and the Big Bang Theory. We expect these popular titles as likely to translate into

an increase in Aristocrat’s installed base and outright unit sales, with casinos demanding new

games which appeal to a younger demographic. We model the firm’s installed base (ex-VGT)

increasing from 9,071 units in FY14 to 11,271 units in FY17, a 24.3% increase. We model

Aristocrat’s ship-share increasing from 13.9% in FY14 to 17.3% in FY17.

85.3 110.8 139.7 145.3 161.3

387.9 453.8 450.5 449.4 464.9 458.2

9.3%

11.4%

13.9% 14.2% 14.8%

17.7%

13.5%12.5%

11.7% 11.4%10.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

FY10 FY11 FY12 FY13 FY14 FY15e FY16e FY17e FY18e FY19e FY20e

EBIT (Group) RoIC (Group)

(A$m) ROIC


7 April 2015 13

Fig 15 Aristocrat’s installed base forecast: We model continued gains in Aristocrat’s Class III installed base, with leading content driving an increase in average fee per day.


Fig 16 Aristocrat’s outright unit sales and ship-share forecast: we model Aristocrat achieving ~17% ship-share in FY16, up from 13.9% in FY14.


Margin forecasts overstated? While there is little doubt that Aristocrat should be able to build out

their recurring revenue installed base and gain near-term ship-share, we remain concerned that

the capital requirement and lower return profile of doing so is underappreciated. Aristocrat is likely

to benefit somewhat from improved scale as the firm expands its installed base and greater ship-

share, however we see a number of factors which suggest that Aristocrat’s margin outlook may be

overstated:

Content licensing. Management remain tight-lipped on the cost of content licensing paid for

the leading entertainment titles outlined previously, however we model this at approx. $10m

for FY14. If we assume half of Aristocrat’s Class III gaming operations installed base is

derived from games with licence agreements, this implies a cost per unit of approximately

$2,400 per unit, which, if assuming an average fee per day received of approx. $50 per unit,

would represent a payoff period of ~50 days. With our installed base growth assumption

centred on the firm’s highly anticipated licensed content, we see some downside risk to the

overall margin profile as likely.

6,757 7,562

9,071 10,071

10,771 11,271 11,471 11,671

$40.00

$42.00

$44.00

$46.00

$48.00

$50.00

$52.00

$54.00

$56.00

$58.00

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000


Closing installed base Total average fee per day (US$)

Installed unit base Avg. fee per day

9,206 10,146

9,419

10,714

11,931 12,272 12,625 12,991

11.6%

13.3%13.9%

16.3%

17.2% 17.3% 17.4% 17.4%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000


Total machines sold Total market share

Total units sold Ship-share


7 April 2015 14

Design talent costs money. The acquisition of game developers and design talent remains

in focus as global slot suppliers continue to build out in-house development studios. Aristocrat

has aggressively built out their Design & Development team, recruiting leading design talent

from competitors to underpin their new product development. The addition of Joe Kaminkow,

formerly of IGT and widely regarded as one of the leading game designers, to the Aristocrat

team has started to pay off, with the team central to the development of the firm’s latest

popular titles. With details surrounding the commission structure of leading talent limited, we

anticipate this being a further margin headwind looking ahead.

Technology enhancements imply greater costs. The latest Britney Spears game highlight’s

Aristocrat renewed focus on cutting edge slot technology, with the new Double Arc cabinet

standing at 10 ½ feet tall and offering dual 42 inch curved screens. Aristocrat’s Behemoth

cabinet contains an 84 inch LCD display screen (the largest cabinet ever designed in the

casino industry) featuring the latest 4K resolution, combined with touch screen technology.

The slot industry across the board is being revolutionised by new technologies designed to

increase the excitement of game-play while extending time on device, and therefore

participation revenue. While difficult to gauge, the increased technology also no doubt boosts

production costs of the latest cabinets, implying a potential negative drag on margins, in our

opinion.

All in, we view Aristocrat as likely to benefit from improved economies of scale, combined with the

potential for greater than expected synergies stemming from the VGT acquisition, supporting a

notably favourable near-term profit environment in FY15 and FY16 as the firm builds share.

However, we see the return profile for Aristocrat’s Class III segment as likely to taper off post

FY16 as the capex requirement and the competitive dynamic in the US industry explained above

begins to bite.

Fig 17 We estimate Aristocrat’s US slot business operates at a notably strong ROIC level, with near-term momentum likely to support a higher return profile


VGT capex requirement also understated. While the cash conversion profile of the VGT

business is highly attractive, this is achieved, in our opinion, by the limited capital expenditure

spent. With an ageing installed base due to a historically low churn rate, we see a notable uptick in

capex likely required by Aristocrat as the churn rate inevitably ticks higher.

Our analysis assumes a slower churn rate for VGT’s installed base compared to Aristocrat’s Class

III recurring revenue business, while also assuming a 50% discount in the cost per replacement

unit, as VGT refreshes approximately 1/3rd

of their installed base per year, effectively prolonging

the floor-life of the cabinet. As such, we model capex as a % of recurring revenue for VGT at ~16-

17% through FY20, relative to a higher ~20-24% for Aristocrat’s Class III business.

126.7 107.3 120.3

140.5 163.7

234.3 271.0 276.9 273.5 281.0 268.8

32.8%

24.8% 25.6%28.8%

31.6%

41.0% 42.0%

38.0%

33.9%32.1%

28.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

-

50.0

100.0

150.0

200.0

250.0

300.0


EBIT (Class III slot business) RoIC (Class III slot business)

(A$m) ROIC


7 April 2015 15

Fig 18 We model VGT’s capex increasing as installed base requirements increase


Declining combined ROIC profile. With this in mind, combining our return profile for the VGT

business with our USA segment, along with our higher capex expectations, we see a notable

downtick in Aristocrat’s ROIC profile for its combined class II and III slot business through FY20.

Fig 19 ROIC outlook when including the VGT business shows a notable decline in return on capital for the combined North America platform


13 18 19 22 23 24 25 27

10

15 17

18 19 20 21

22 10.0%

14.0%15.1%

16.6% 16.9% 17.2% 17.6% 17.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

-

10

20

30

40

50

60


Capex on installed base (USD) Other capex (USD) Capex % of Class II revenue

Capex (US$m) % of revenue

126.7 107.3 120.3 140.5 163.7

395.7 437.7 447.9 440.7 452.1 440.5

32.8%

24.8% 25.6%

28.8%31.6%

25.6%

16.7% 16.1% 15.1% 14.7% 13.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0


EBIT (Class II & III slot business) RoIC (Class II & III slot business)

(A$m) ROIC


7 April 2015 16

Australian outlook solid, but market capped We hold little doubt that Aristocrat’s re-focus on the domestic market will pay dividends, with

feedback from industry buyers suggesting that Aristocrat will continue to claw back ship-share,

benefiting from improved product and content following a period of notable declines leading into

FY10.

Fig 20 Aristocrat’s domestic ship-share outlook


However, we view the likelihood of Aristocrat achieving more than 50% ship-share as limited, with

most buyers hesitant to over-commit to any one buyer, while the rise of AGI in the domestic

market heightens the competitive dynamic relative to pre-FY07.

The performance of international competitors in the Australian market, namely IGT, WMS, Bally

and Konami, remains weak, with our industry channel checks suggesting that the earnings

percentage share of each on the casino/club floor notably lags the floor share. In addition, the

consolidation seen in North America has also likely had an effect domestically, as staff turnover on

the marketing front among the foreign suppliers makes it difficult for domestic buyers to remain

faithful. Under this setting, we see the likelihood of Aristocrat continuing to pick up share as strong,

as the firm benefits from strong game performance on gaming floors, with the added advantage of

remaining focused on domestic relationships.

Growth within the Australian market, however, is limited due to the regulatory cap on slot

machines, with the overall number of machines more likely to decline than increase. As such, the

focus remains on share gains and price hikes as the avenues to drive earnings growth.

Fig 21 Australian ship-share history


53.6%50.1%

46.1%

26.3%

33.2%

37.7%

31.5%

39.7%

48.0% 47.0% 46.0%

20%

25%

30%

35%

40%

45%

50%

55%

60%

FY07a FY08a FY09a FY10a FY11a FY12a FY13a FY14a FY15e FY16e FY17e

Australia ship-share (%)

54% 50% 46%

26% 33% 38% 31%40%

48%

2% 7% 15%

18%

23%27% 33%

32%28%18% 17%

17%

18%

16%16% 15%

13% 11%26% 26% 22%

38%27%

19% 21% 15% 13%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 2012 2013 2014 2015e

Other

IGT

Ainsworth

Aristocrat


7 April 2015 17

Valuation & recommendation Historically we have used a DCF based approach to value Aristocrat, assuming a WACC of 9.0%

and TGR of 3.0%. On this basis, our DCF valuation is $6.22/share including 35cps of option value

for online gaming liberalisation in North America.

While a DCF methodology is consistent with our treatment for other stocks in our coverage

universe, we believe the market tends to place more emphasis on market relative PER when

valuing Aristocrat. Given this, we have also calculated a blended valuation methodology in setting

our 12-month target price for Aristocrat that incorporates our DCF, SOTP and “through-the-cycle”

valuation approaches. This also serves to factor in the full effect of the recent VGT acquisition and

the increased earnings profile that we expect post FY15.

The outcomes of these approaches are summarised below and result in a valuation range of

$6.22-7.92/sh, which includes 35cps of option value for Aristocrat’s online gaming business

potential in North America. The average of these methodologies is $7.14 per share, and forms the

basis for our $7.20/share 12-month target price.

Fig 22 Summary of Aristocrat valuation approaches

Methodology Core valuation Online gaming option value

Total valuation

DCF 5.87 0.35 6.22 SOTP - FY16 6.94 0.35 7.29 "Through-the-cycle"* 7.58 0.35 7.92 Average 6.80 0.35 7.14


SOTP FY16 valuation of $7.29 per share

On a SOTP valuation approach using our FY16 estimates, we value Aristocrat at $7.29/sh,

including 35cps of option value relating to the potential for online gaming liberalisation in North

America.

For Aristocrat’s major divisions (Australia, North America and RoW), we have applied an EV/EBIT

multiple of 12.5x for FY16, consistent with the broader ASX Industrials market average.

For Product Madness/social gaming, we adopt a DCF-based valuation to reflect the long-term

growth opportunity from this segment.

.

Fig 23 Aristocrat SOTP valuation summary

Segment Val method EV FY15 EBIT

Multiple EV FY16 EBIT

Multiple

Australia EV/EBIT 1,334 106.8 12.5 1,315 105.2 12.5

North America EV/EBIT 2,963 237.1 12.5 3,625 290.0 12.5 Japan EV/EBIT 109 10.4 10.4 95 11.3 8.3 Rest of World EV/EBIT 925 74.0 12.5 942 75.4 12.5 VGT EV/EBIT 1,698 154.3 11.0 1,784 178.4 10.0 Product Madness DCF 695 24.8 28.0 762 41.1 18.6 Unallocated EV/EBIT -2,699 -215.9 12.5 -2,783 -222.6 12.5 Total enterprise value 5,025 391.5 12.8 5,742 478.9 12.0 Net debt 1,322 1,369 Total equity value 3,703 4,373 Equity value per share $5.88 $6.94 Real money online gaming option $0.35 $0.35 Equity value per share $6.22 $7.29



7 April 2015 18

“Through-the-cycle” valuation of $7.50-8.35 per share

The key assumptions in this approach are:

Through-the-cycle or maintainable earnings of $288.3m (45.8cps);

A long-term market (Industrials) PER of 12.5-14.0x; and

Aristocrat’s long-term average PER relative to the market at 1.25x.

Fig 24 Aristocrat "through-the-cycle" / maintainable earnings seen at $288.3m

A$m Maintainable earnings

FY10a FY15e FY18e

Revenue Australia 246.1 137.6 248.9 247.0 North America 665.8 323.1 602.2 675.5 Japan 40.6 48.5 48.3 48.4 VGT 331.7 - 307.2 326.0 Rest of World / Online 515.0 175.4 308.3 414.7 Total group revenue 1,799.1 684.6 1,514.9 1,711.7 EBIT Australia 101.6 23.3 106.8 103.7 North America 270.4 126.7 237.1 273.5 Japan 5.1 6.0 10.4 9.3 VGT 172.6 - 154.3 167.2 Rest of World / Online 154.9 55.8 98.8 126.3 Unallocated / R&D - 239.0 - 126.5 - 215.9 - 226.8 Total group EBIT 465.7 85.3 391.5 453.2 NPAT 288.3 54.5 245.2 279.8


Using this approach, we see Aristocrat’s “through-the-cycle” core valuation being $7.15-8.01/sh.

After including the 35cps of online gaming option value, the “through-the-cycle” valuation range

would be $7.50-8.35/sh. At this level, Aristocrat would be trading at an FY16 PER of 15.7-17.5x.

Fig 25 A maintainable earnings valuation approach implies a valuation range of $7.50-8.35 per share

A$ Low High Mid-point

Estimate of maintainable earnings (cps) 45.8 45.8 45.8 Market PER - Industrials 12.5x 14.0x Aristocrat long-term PE rel 1.25x 1.25x Aristocrat "Through-the-cycle" PER 15.6x 17.5x 16.6x "Through-the-cycle" core valuation ($/sh) 7.15 8.01 7.58 US online gaming option value ($/sh) 0.35 0.35 0.35 "Through-the-cycle" valuation ($/sh) 7.50 8.35 7.92 FY16 EPS - Macq estimate 47.7 47.7 47.7 FY16 implied PER at "Through-the-cycle" valuation 15.7x 17.5x 16.6x



7 April 2015 19

Fig 26 Aristocrat has traded at an average 15.5x PE since 2008


Fig 27 Aristocrat has traded at an average 1.25x PE relative to the ASX since 2008


Fig 28 Aristocrat’s current relative valuation sits in excess of prior averages


19.6x

5x7x9x

11x13x15x17x19x21x23x25x27x

2009 2010 2011 2012 2013 2014 2015

ALL AU - PE FY2

7-year avg. = 15.5x

1.3x

0.8x

1.0x

1.2x

1.4x

1.6x

1.8x

2.0x

2009 2010 2011 2012 2013 2014 2015

ALL AU relative to ASX - PE FY2

7-year avg. = 1.25x

18.3x

15.5x

19.6x

10x

12x

14x

16x

18x

20x

22x

ALL

15-year avg

2008-2014

Current

PE - FY2


7 April 2015 20

Fig 29 FY15 segment outlook

A$ 1H15e % ch vs pcp

2H15e % ch vs pcp

FY15e % ch vs pcp

Segment revenue Australia A$m 122.6 45.6% 126.3 -0.1% 248.9 18.2% North America A$m 276.9 32.1% 325.3 51.4% 602.2 41.9% Japan A$m 22.4 62.8% 25.9 1299.7% 48.3 209.3% VGT A$m 135.0 nmf 172.2 nmf 307.2 nmf RoW A$m 112.7 7.5% 195.5 70.4% 308.3 40.4% Total revenue A$m 669.7 62.3% 845.2 84.6% 1514.9 74.1% Revenue profit (ex-Japan) 647.3 62.3% 819.3 79.7% 1466.6 71.6% Segment profit Australia A$m 52.4 62.9% 54.3 -1.1% 106.8 22.6% North America A$m 108.9 36.6% 128.1 52.7% 237.1 44.8% Japan A$m 4.8 394.6% 5.6 -203.2% 10.4 -332.1% VGT A$m 67.9 nmf 86.4 nmf 154.3 nmf RoW A$m 36.6 -1.8% 62.2 79.5% 98.8 37.4% Total segment profit A$m 270.7 80.2% 336.7 100.4% 607.4 90.9% Segment profit (ex-Japan) 265.9 78.2% 331.0 90.8% 597.0 85.0% Unallocated costs Design & development A$m 87.1 39.1% 109.9 58.8% 196.9 49.4% D&D as % of revenue 13.0% 13.0% 13.0% Corporate A$m 7.0 5.0% 12.0 5.0% 19.0 5.0% Other A$m 0.0 nmf 0.0 nmf 0.0 nmf Total unallocated costs A$m 94.1 27.0% 121.8 47.2% 215.9 37.6% Consolidated EBIT A$m 176.6 132.1% 214.8 152.2% 391.5 142.7% Share of associates A$m 0.0 nmf 0.0 nmf 0.0 nmf EBIT A$m 176.6 132.1% 85.2 0.0% 391.5 142.7% Net Interest A$m 14.1 224.8% 32.6 819.4% 46.8 492.0% Tax A$m 32.5 126.6% 67.0 219.7% 99.5 181.9% Minority interests A$m 0.0 nmf 0.0 nmf 0.0 nmf Adjusted NPAT A$m 130.0 126.5% 115.2 89.8% 245.2 107.6% Adjusted EPS cps 20.6 98.3% 18.3 76.4% 38.9 87.3% Dividends cps 15.5 93.4% 13.7 71.7% 29.2 82.6%


Fig 30 FY15 profit bridge


245.2

118.119.7

73.414.9

154.3

26.9

65.1

6.1

103.1

0

50

100

150

200

250

300

350

400

450

FY14a Aust Nth Am - ops Japan VGT RoW D&D Corporate Int/Tax FY15e

A$m


7 April 2015 21



7 April 2015 22

Macquarie Quant View

The quant model currently holds a reasonably positive view on Aristocrat

Leisure. The strongest style exposure is Growth, indicating this stock has

good historic and/or forecast growth. Growth metrics focus on both top and

bottom line items. The weakest style exposure is Valuations, indicating this

stock is over-priced in the market relative to its peers.

Displays where the

company’s ranked based on

the fundamental consensus

Price Target and

Macquarie’s Quantitative

Alpha model.

Two rankings: Local market

(Australia & NZ) and Global

sector (Consumer Services)

44/382 Global rank in

Consumer Services

% of BUY recommendations 69% (9/13)

Number of Price Target downgrades 0

Number of Price Target upgrades 8

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score

(higher is better).

For the comparable firms this chart shows the key underlying styles and their

contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions

signal that favours analysts who have more timely and higher conviction

revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes

in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model

Which factor score has had the greatest correlation with the company’s

returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is

better) and the percentile rank relative to the sector and market.

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Local market rank Global sector rank

Attractive

-0.6

0.2

0.6

0.7

0.8

1.0

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Konami

International Game Techno…

TABCorp Holdings

Ainsworth Game Technology…

Tatts Group

Aristocrat Leisure

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

Konami


TABCorp Holdings


Tatts Group

Aristocrat Leisure

Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

-0.2

-0.2

0.2

-0.3

0.3

0.6

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Konami


TABCorp Holdings


Tatts Group

Aristocrat Leisure

-60… -50… -40… -30… -20… -10… 0% 10% 20% 30% 40% 50% 60%

Konami


TABCorp Holdings


Tatts Group

Aristocrat Leisure

Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-25%

-24%

-17%

-16%

30%

36%

36%

40%

-40% -20% 0% 20% 40%

⇐ Negatives Positives ⇒

Return on Equity FY1

Return on Equity NTM

Turnover (USD) 250 Day

DPS Growth FY1

Price to Book FY1

Price to Book NTM

Price to Book LTM

Dividend Yield LTM

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

-1.37 0.02

-1.21-0.16

-0.02 0.52

0.38 0.24 1.07

-0.16 1.00

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/382)

0 50 100

Percentile relative

to market(/418)


7 April 2015 23

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or

down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 March 2015

AU/NZ Asia RSA USA CA EUR Outperform 48.99% 59.51% 49.30% 43.79% 59.59% 52.20% (for US coverage by MCUSA, 7.42% of stocks followed are investment banking clients)

Neutral 34.12% 26.62% 35.21% 50.29% 34.93% 31.32% (for US coverage by MCUSA, 5.68% of stocks followed are investment banking clients)

Underperform 16.89% 13.87% 15.49% 5.93% 5.48% 16.48% (for US coverage by MCUSA, 0.87% of stocks followed are investment banking clients)

ALL AU vs ASX 100, & rec history

(all figures in AUD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.


12-month target price methodology

ALL AU: A$7.20 based on a Blended methodology

Company-specific disclosures: ALL AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Aristocrat Leisure Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

Date Stock Code (BBG code) Recommendation Target Price 17-Mar-2015 ALL AU Neutral A$7.20 25-Nov-2014 ALL AU Neutral A$6.50 15-Oct-2014 ALL AU Neutral A$6.15 08-Jul-2014 ALL AU Neutral A$5.60 28-May-2014 ALL AU Neutral A$5.30 16-May-2014 ALL AU Neutral A$5.25 26-Nov-2013 ALL AU Neutral A$4.50 29-May-2013 ALL AU Neutral A$4.05 24-May-2013 ALL AU Neutral A$3.90 04-Feb-2013 ALL AU Underperform A$3.00 28-Nov-2012 ALL AU Neutral A$2.75 02-Jul-2012 ALL AU Neutral A$2.60

Target price risk disclosures: ALL AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) (“MGL”) and its related entities (the “Macquarie Group”) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.


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General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

Documents

Aristocrat Leisure - Macquarie · 2015-04-07 · Aristocrat has been a big beneficiary during this period of consolidation – perfectly timing the release of industry leading gaming