Fitch Ratings recently assessed Aristocrat Leisure’s creditworthiness and gave them a Long-Term Issuer Rating of “BBB-“. The outlook for the rating is stable.
A sound balance sheet will allow Aristocrats to pursue M&A deals
Aristocrat’s solid business profile as a global supplier of gaming products and low leverage are the key factors behind this positive assessment. The company intends to remain cautious in managing its finances, as well as investing in its existing portfolio and returning capital to shareholders via dividends and select buybacks. It also plans to consider potential acquisitions.
The company’s strong creditworthiness can be attributed to its track record of maintaining a sound financial balance sheet and meeting financial targets. Aristocrat can fund acquisitions of small to medium size and share repurchases with cash, while still being financially prudent.
Through the equity raise of AUD 1.3 billion ($916M), liquidity and net leverage have improved in the past 18 months. This was originally intended for the large Playtech acquisition. However, it never came through and has consistently produced high levels of operating cashflow.
Fitch Expects M&As In the Real-Money Gaming Sector
Aristocrat is an Australian leader in slot machines and a strong third-party supplier to North America. The North American gaming operations segment has driven Aristocrat’s success in class 3 slot machines. It generates recurring revenue and high margins. However, the machines are still on Aristocrat’s balance sheet.
Aristocrat has a roughly 20% share of total US slot sales and a larger share of premium installation units. As of September 30, 2022 Aristocrat had over 30,000 North American gaming operations, nearly double what it had five years ago.
Fitch expects Aristocrat will pursue M&A deals in the real-money gambling (RMG) sector. This is due to its financial flexibility, solid portfolio of slots content and failed acquisition of Playtech 2022.
Aristocrat’s digital company has seen significant growth through M&A as well as heavy investments in new content. Aristocrat’s prior acquisitions of Plarium, Big Fish and other digital businesses have increased their digital revenue from 16% in 2017 to 46% by 2022.
Fitch believes that Aristocrat has limitations in its land-based segment. However, its digital products provide a good diversification of its core business which was evident during the pandemic.
The digital market is very competitive, especially considering Aristocrat’s social gaming products. This requires significant research and development investment and additional costs to acquire customers. Although these factors can cause volatility in operating cash flow, the company has been able to absorb it historically.
