Aristocrat foray into digital paying off: JP Morgan
Return on invested capital at Australia-listed slot machine maker Aristocrat Leisure Ltd is likely to moderate in financial year 2018 after peaking in 2016 and 2017, but work being done now is likely to see improvement in that regard in 2019 and 2020, according to a report from JP Morgan Securities LLC.
“In a market where short-termism is increasingly pervasive and noise often holds sway, there is considerable merit in stepping back and looking more deeply at how a company is being run,” wrote analysts Donald Carducci, Abhinay Jeggannagari and Jason Steed in a Tuesday note.
“A critical tool in examining business performance is return on invested capital. At the most fundamental level, value is the combination of a company’s rate of return and its growth rate,” they added.
The brokerage noted that since a restructuring of the Aristocrat Leisure business following the appointment in 2009 of Jamie Odell as chief executive, there had been greater focus on business segments offering recurring revenue – including online platforms such as social casino games – rather than outright one-off sale of cabinets to bricks and mortar casinos.
Mr Odell departed in early 2017 and was succeeded by Trevor Croker, who has continued the foray into digital business.
The JP Morgan analysts noted that in the traditional cabinet sales segment, commerce can be volatile. Factors affecting sales performance have been said to include the number of new casino properties opening in a reporting year.
Fiscal year 2015’s dip in capital returns had been due to the US$1.28-billion acquisition by Aristocrat Leisure – clinched in October 2014 – of U.S.-based gaming machine manufacturer Video Gaming Technologies Inc (VGT), stated JP Morgan, adding that piece of business had “since provided significant returns”.
“Investing in digital (Plarium and Big Fish) should yield a positive result into fiscal 2019 and fiscal 2020,” added the brokerage, referring respectively to a US$500-million deal for social gaming company Plarium Global Ltd, completed in October 2017, and the agreement to acquire social casino firm Big Fish Games Inc in January this year following a near-US$1 billion cash offer.
“Aristocrat Leisure has generated over 30 percent return on invested capital through acquiring early-stage and mid-tier business such as Product Madness, VGT, Plarium, and Big Fish,” noted the JP Morgan team.
Aristocrat Leisure had been “successful in transforming acquisitions via game designers and increased design investment,” stated JP Morgan.
Technology news website GeekWire reported on Tuesday that Big Fish Games plans to cut about 15 percent of its workforce, including several key executives. The media outlet quoted an internal memo to employees, signed by Jeff Karp, who joined Big Fish Games in July as president and managing director. According to the memo, the company will now focus solely on the development of casino and casual games.
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