Analysis of Aristocrat Leisure Limited

This report analyses the company, its future prospects, interest of the shareholders, present financial performance, competition in the industry, risk return profile etc. of Aristocrat Leisure Limited. It includes shareholder analysis, position of the company, types of returns, risk return analysis, cost of capital, and financial statement analysis.

ANALYSIS OF
ARISTOCRAT
LEISURE
LIMITED

TABLE OF CONTENT
Introduction of the company.....................................................................2
Purpose of Report....................................................................................2
Shareholder Analysis...............................................................................2
Position of the company...........................................................................5
Types of Returns Capital Growth Vs Dividends.......................................6
Risk Return Analysis.............................................................................7
(a)Shareholders return for FY 2017.......................................................7
(b)Business Risks..................................................................................9
(c)Review of Capital projects and Market Reaction.............................11
Cost of Capital........................................................................................12
Cost of Equity using Capital Asset Pricing Model (CAPM)..................12
Cost of Equity using Dividend Growth Model......................................13
CAPM Vs DGM....................................................................................14
Cost of Debt...........................................................................................14
Weighted Average Cost of Capital.........................................................15
Comments on WACC..........................................................................16
Financial Statement Analysis.................................................................16
(a)Market Value Based Measures.......................................................16
(b)Market Value of Equity to Book Value of Equity..............................17
(c)Economic Value Added...................................................................17
Profitability Ratios................................................................................18
Return On Equity.............................................................................18
Return on Assets of the Company....................................................18
Return on Capital Employedof the Company....................................19
DU Pont Analysis...................................................................................19

ASSIGNMENT
ANALYSIS OF ARISTOCRAT LEISUREE LIMITED
Introduction of the company
Aristocrat Leisure Limited (ALL) is a company listed on Australian Stock
Exchange. The company has its headquarters in Sydney, Australia. The
company is a leading global manufacturer of gambling machines and
gaming solutions. ALL has its marketing offices in Australia, United
States of America, South Africa and Russia1.
The company has obtained license for operation in more than 200
countries and marks its presence globally in more than 90 countries.
ALL offers a wide array of product encompassing electronic machines
for gaming, casino management systems etc. The Group has further
diversified itself in Social gaming and real money wager markets. The
company has an official website2
Purpose of Report
The report has been prepared with the intention to analyse the
company, its future prospects, interest of the shareholders, present
financial performance, competition in the industry, risk return profile
etc.
Shareholder Analysis
Every investor has its own intention behind investing in stock market.
The same may encompass long term vision to short term vision. There
are various types of philosophies that guide investment in securities of
a company. These philosophies in turn are influence by age, risk
appetite, long term, short term, size of the company and prospects.
Generally investors are categorised under three categories:
1https://en.wikipedia.org/wiki/Aristocrat_Leisure
2www.aristocrat.com.

(a) Long term Investors: These investors are generally promoters of
the company and they believe in the vision and future prospects.
They take keen part in the affairs of the company and are stable
investors;
(b)Medium Term Investors: These investors are generally mutual
funds, trust, Foreign Institutional Investors who invest in the
company looking at medium term prospects of the company. They
don’t find themselves under the vision and generally take little to no
participation in the affairs or management of the company;
(c) Short term investors: These investors reap benefits of sudden
upsurge or movement in the industry or sector and generally invest
with an intention to quickly gain some quick cash without relying
much on the vision and future prospects of the company.
A brief snapshot of top 20 investors of the company in past 2 years has
been presented here-in-below:
3
3 Refer page No 109 of Annual Report of 2016

4
On perusal of the above, it may be seen that majority shareholder of
the company are institutional investor that comprise of nominees and
bank that hold a large number of share who buy and sell their stake
under short term to medium term to reap the benefits of escalation in
prices of the shares of the company. 70% and more of the shares of the
company are held by banks and nominees which are opportunistic and
liquidate their holdings for a bargain. Thus, they can be categorised as
marginal investors.
Further, there are certain companies who hold less than 10% of the
companies but have place reliance on the financial and strength of the
company. These include:
(a) ECA 1 Pty Ltd;
(b)Amp Life Limited;
(c) Maaku Pty Limited.
These aforesaid companies have been trying to increase their
shareholding in the company by relying on the vision prospects of the
company and may be classified as long term investors of the company.
4 Refer Page no 111 of Annual Report 2017

Further Len Ainsworth who holds a substantial holding in the company
through custodian and other means is the promoter of the company and
is associated with the long term vision of the company.
Position of the company
Further, the current position of the company has been tabulated here-
in-below:
Sl No Particulars Amount
1 Market Capitalisation 19.297 Billion
2 Beta 1.06
3 PE Ratio 38.45
4 EPS 0.79
5 Future Target Estimated 34.63
6 Current Price 30.22
Screener with Industry and sector Analysis
Growth Screener

On perusal of the above 2 tables it may be understood that company is
growing at a pace which is faster than the industry and can provide a
stable return to its investor over a long term as the prospects have
changed over an year with sales and EPS growing at a faster rate
compared to industry over an year ago. Further, the price earnings
growth ratio of the company is 0.8 which is less than 16.
Types of Returns Capital Growth Vs Dividends
The returns and investment intention of the investors are generally
reflected in the vision and mission of the company. Further, the
objectives of the company shall be in alignment with the interest of its
shareholders and stake holders at large. ALL is focussing on the
following objectives as delivered from the message of chairman and
CEO:
5https://www.reuters.com/finance/stocks/financial-highlights/ALL.AX
6https://www.google.co.in/search?
q=pef+ratio+for+aristocrat+limioted&oq=pef+ratio+for+aristocrat+limioted&aqs=chrome
..69i57.6526j0j7&sourceid=chrome&ie=UTF-8

(a) Digital strategy and growth which shall be in alignment with the
increase in revenue and growth of the company to further the
interest of shareholders;
(b)Foundations of recurring revenue growth;
(c) Acquisition of Social Games Plarium Global Limited for expansion,
proposed acquisition of Big Fish;
(d)Consistent increase in cash flow and cash earnings per share;
Thus, the above clearly highlights that shareholders of the company are
primarily more focussed on growth rather than dividend as many
acquisition are taking place and the company is exploring opportunities
to be number 1.
Risk Return Analysis
For the purpose of analysing the risk return of ALL, one needs to look at
the return earned by shareholders on their investment, business profile
and risk associated with the company and review of capital projects and
market reaction.
(a)Shareholders return for FY 2017
The return to shareholders can be computed as a summation of return
in the form of dividend to shareholders and return in the form of capital
appreciation. The same has been computed herein below:
(i) For computation of return in the form of dividend to shareholders,
one needs to look at the dividend paid by the company during the
Financial Year including both interim and final dividend. The total
dividend received by the shareholder in FY 2017-18 is 34 cents.
Further, the price of the share at the beginning of the financial year
stood at 22.5 dollar.
Thus, the return earned by shareholders as dividend equals to
(Dividend received during the year/ beginning share price) which is
(34/2250)*100= 1.51%
Further, the return earned by the shareholders in the form of capital
appreciation has been computed by using the value of the shares of the
company on 30-06-2018 i.e. 31.21 dollar and the value of the company

at the beginning of the Financial Year i.e. 22.5 dollar. Thus the capital
increment during the year is (31.21/22.5-1)*100= 38.71%.
Thus, the overall return earned by investors during the financial year
stood at 40.22% which is substantially good. Thus, the stock is more of
a growth stock than a dividend paying stock. Further, accounting rate of
return to shareholder equity for past 5 years have been presented here-
in-below:
On perusal of the above, it can be seen that return has been increasing
constantly over the years of the company.
Further, the return of the company exceeded the return of its peers
during the captioned period. The data of the same has been presented
here-in-below:
Further, a summary of movement in shareholders wealth during past 5
years have been presented here-in-below:

(b)Business Risks
The major risks associated with the business of the company include
the following:
(i) Risk of assessment, litigation and contingent liabilities: Since
the gaming industry is highly controlled and regulated, there are
various issues of litigation and disputes involving bigger cause of
concern for the company. Further, crystallisation of any material
dispute can cause huge outflow of resources for the company. The
same has been presented in an excerpt from newspaper;

(ii) Change in economic conditions and other allied factors
affecting the gaming industry:
The demand for products and services in a gaming industry are
highly dependent on market conditions, personal disposable income
of gamers, their gaming preferences and social upbringing etc.
Since the expenditure on gaming is discretionary the same can fall
without any control of the group. Thus, the economic outlook has a
huge impact on the business of ALL.
(iii) Gaming Competition: The ever increasing competition in
the gaming industry both land based and online has a huge impact
of profitability of the company. Further, the competition has
increased with entry of new customers. The critical factors to
survival include innovation, pricing and reliability. Further, the group
shall explore other segments mostly digital for continuous growth
otherwise the business shall stabilise and revenue will fall. The same
is evident by various acquisitions of the companies in the recent
years.
(iv) Government Gaming Regulation: The entire gaming
industry has been subject to huge regulations imposed by
government of respective countries. Significant expenditure is
incurred towards complying these regulations which include
obtaining license, permits, finding suitability of location,
documentations, major shareholders, key employees etc. Any

change in these regulations can impact the profitability of the
company as a whole.
(v) Cyber risk and Privacy regulation: Integrity and privacy of data
is crucial under gaming market on account of various laws and
regulation relating to privacy. Further, any breach of data can
impact significantly as the business of company is evolving digitally
over time.
(vi) Tax: It is one of major concern for the company as huge tax is
imposed on gaming businesses. Any change in tax requirements of
the company can impact its profitability and return to its
shareholder. Further, a different interpretation to law can have a
suit or law crystallised against the company and can result in
material outflow.
In short, company is surrounded with risk most associated with
technology and regulation. Thus, the company is trying to establish a
robust mechanism to manage the same.
(c)Review of Capital projects and Market Reaction
The company made a major announcement during the fiscal year in
October regarding acquisition of Social games business Plarium Global
Limited. The impact of the same has been shown in the graph in the
form of price movement:
7Yahoo.finance.com

Cost of Capital
The cost of capital of the company measures the amount of return the
shareholder an debt holders must receive or serve as an opportunity
cost. In short it is an expected return. Under this section, the cost of
debt, equity and overall cost of the company shall be ascertained:
Cost of Equity using Capital Asset Pricing Model (CAPM)
CAPM is an additive model and one of the simplest model to compute
expected return of shareholders. The formula of CAPM has been defined
here-in-below:
RE=Rf +Beta(RM-Rf)
Where RE symbolise cost of equity;
Rf symbolise risk free return;
(RM-Rf): Market risk premium.
Rfis taken at 2.56%8 i.e. yield on 10 year government bonds in Australia
and it is the best indicator of risk free return as the government bond
will not default given its strong credit rating provided by various credit
rating agencies like Moody , S&P , Fitch etc.
Beta has been taken 1.069. The same has been taken yahoo
finance.com
RMhas been computed by taking simple average of return of Australian
stock exchange for past 510 years:
Year Return
2017 12.5%
2016 11.6%
2015 3.8%
2014 5%
2013 19.7%
Average 10.52%
8https://www.google.co.in/search?
q=yield+on+10+year+government+bonds+in+australia&oq=yield+on+10+year+government+bonds+in
+australia&aqs=chrome..69i57j0.17015j1j7&sourceid=chrome&ie=UTF-8
9https://au.finance.yahoo.com/quote/ALL.AX?p=ALL.AX
10https://www.marketindex.com.au/statistics

Accordingly, the cost of equity = 2.56%+1.06(10.52%-2.56%)
=10.9976%.
Cost of Equity using Dividend Growth Model
ALL has been paying out dividends constantly; hence cost of equity can
be estimated using dividend growth model. The same is dependent on
the fact that dividend grows constantly annually forever. If the said
assumption holds REcan be computed as follows:
RE= (Expected Dividend/Price at present) + Growth where growth has
been derived from the equation= retention ratio* return on equity or
g= 1 - Dividend * Net Income
Earning Per Share Shareholders Equity
By using the balance sheet of the company for FY 2017-18, the growth of
the company is
G=(1-34/79.7)*(559.1/1345.6)=23.82%
RE=0.34/22.5+23.82=25.33%

Dividend: Page number 19 and dividend are fully franked
CAPM Vs DGM
In ALL as majority of investors greater than 70% of the investors (Refer
Page 111 of Annual report) are marginal investors, they shall demand a
better risk return trade off and thus Capital Asset Pricing Model shall be
a better measure compared to Dividend Growth Model.
Further, the growth rate of 23.82% being very high and unlikely to
sustain in the long run. The high growth rate is mainly on account of
acquisition and diversification and shall not persist continuously. Hence
DGM should not be used for estimating cost of equity of the company.
Though CAPM may seem best under the present circumstance it has it
own draw back. The draw back includes:
(i) It is an additive model;
(ii) Governmnet bonds are not 100% default free as seen in case of
Greece;
(iii) Other factors like long term, short term has not been taken into
consideration.
Cost of Debt
Generally debt has three characteristics:
(i) A commitment that fixed payments in the form of coupon shall be
repaid in future;
(ii) Payments shall be tax deductible;
(iii) There shall be risk of default.
The analysis is based on long term borrowings and ignores current
liabilities. The total non –current liability of the company has been
extracted from annual report and has been presented here-in-below11:
11 Refer page no 78 of Annual Report

Further, trade and other payables under non-current liabilities have been
ignored assuming they interest free and does not bear the characteristic
of debt.
Further, for the computation of RDcost of borrowing needs to be
ascertained. However, a detailed list of borrowing is not provided in the
annual report along with the rate of borrowing. Hence, the same has been
computed on the basis of net interest paid during the year compared with
the opening and closing borrowings average.
RD= (Net interest paid during the year/ total Average borrowing during the
year)
=4412/ (1198.6+1287.3)
=3.54%
Assumption: The entire interest paid during the year is associated with
borrowings.
Weighted Average Cost of Capital
Weighted average cost of capital has been computed by the
formula=WE*RE+ WD*RD (1-tax rate)
For determination of equity, we need to first compute the, market value of
shares outstanding. The closing value of shares is recorded at AUD 31.21
and the number of share outstanding includes 637.565Million13. Thus, the
market capitalisation equals to =31.21*637.565=19.89 Billion
12 Refer page No 18 of Annual Report
13 Refer Page No 68 of Annual Report

Further, the market value of borrowing is equal to 1.1986 Billion and
represents 5.68% of total capital.
Accordingly, WACC of capital equals to =5.68*3.54 %( 1-0.3)
+94.32%*10.9976%=10.51%
Comments on WACC
The WACC represents appropriate average return the project of the
company should earn in order for capital to stay invested in those
projects. Further, project that are accept or implemented by the company
should have return exceeding the same for NPV to be positive.
The WACC computed is based on assumptions and same may fluctuate as
assumptions undertaken for the purpose of computation changes. Further,
any other method for deriving the cost of equity shall have been used the
WAAC would have increased substantially. Similarly, for debt if external
comparable would have been used then the WACC would have been
impacted.
Further, the weights used are susceptible to change as the value of share
price change continuously. Thus, in short there is no full proof method for
determining the cost of capital of the company.
Financial Statement Analysis
Financial statement analysis based on ratios is important in determining
the financial strength of the company. For the purpose of analysing the
financial statements, following financial ratios have been taken into
consideration:
(a)Market Value Based Measures
The total market capitalisation of the company is the first measure to
analyse the performance of the company. The market capitalisation of
the company equals closing share price* Number of shares
outstanding=31.2114*637.56515=19.89 Billion
To measure the performance of the company, the analysis shall
compare the market value added by comparing the market
14https://au.finance.yahoo.com/quote/ALL.AX/history?
period1=1498847400&period2=1499020200&interval=1d&filter=history&frequency=1d
15 Refer Page No 68 of Annual Report

capitalisation with book value of ALL equity. The market value has been
computed here-in-below:
Market Value added=Market capitalisation-book value of
equity=19.89-.83616=19.06 Billion.
Thus, in short it can be seen that shareholders have invested .836
billion AUD and has accumulates 10.06 Billion AUD.
(b)Market Value of Equity to Book Value of Equity
The second most reliable method for analysis is Market to book value of
equity. The ratio has been computed here-in-below
Market-to-Book Ratio= Market Value Of Equity
Book Value Of Equity
Thus, (19.89/.836)=23.79 times (As per annual report figures)
The market to book value ratios show that shareholder wealth has been
multiplied 23.79 times which means a substantial return to investors.
However, the aforesaid measures have the following weakness:
(a) They are susceptible to change as they are driven by market
sentiments;
(b)They many change on account of external events beyond control of
management;
(c) Further, the figures of present might not be true representative of
the future.
(c)Economic Value Added
The analysis further focussed on computation on EVA for analysing the
financial statement. The same is computed by deducting profits after
deducting profits and interest of the company from WACC of the
company.
The formula has been described here-in-below:
Total Capitalisation=Book Value of Equity + Book Value of Debt
=1.3456+1.1986+=2.5442
EVA= (After tax interest+ Net Income)-(Cost of Capital * Total
Capitalisation)
16Refer Page 97 of Annual Report

= (.4417*0.7+.323818)-(10.51%*2.5442) =.7638-.267=0.50 Billion AUD.
The above figures being positive represent positively about the
economic value added. However, the same may not be true
representative of the actual position of the company as it is driven by
book value while market capitalisation is driven by market sentiments.
Further, it quantifies asset which are visible in Balancesheet while there
are certain asset which are not visible like brand image, customer
loyalty etc.
Profitability Ratios
The three key ratios for determining the profitability of the company
includes:
(a) Return on Equity;
(b)Return on Capital;
(c) Return on Assets of the company
This part of the report contains analysis of these three ratios:
Return on Equity
Return on Equity measures the return received by the shareholders in
the form of net profits. The same has been computed by using the
formula:
ROE= Net Income
Equity
= (495.119/1345.520) = 36.79%
The aforesaid figure represents a handsome return to investors of the
company and the same is 26% higher than the cost of capital of the
company.
Return on Assets of the Company
17Refer page No 18 of Annual Report
18 Refer page 97 of Annual Report
19Refer page 57 of Annual Report
20Refer page 97 of Annual Report

Return on Asset measures the return per dollar of asset employed in the
company. The method of computation has been detailed here-in-below:
ROA= (Interest (1-Tax) + Net Profit)/ Total Assets
= (44*.7+ 495.121)/3292.922= 15.90%
Return on Capital Employed of the Company
The analysis has been carried out here-in-below:
ROC=After - Tax Interest + Net Income
Total Capitalisation
ROC= (44*.7+495.1)/2.5442=20.67%
DU Pont Analysis
ROA=Asset Turnover*Operating Profit Margin
= Sales * After-Tax Interest+ Net Income
Assets Sales
For computation of the above, balance sheet of past 2 years have been
referred:
Asset Turnover (2017) = (2453.8/ (3292.9+2987.7)/2)=78.13%
Asset Turnover (2016) = (2128.7/ (2987.7+3218.7)/2)-68.59%
Operating profit Margin (2017)=525.9/2453.8=21.43%
Operating profit Margin (2016) = (270.923+76.8024*.7)/2128.7=15.25%
ROA (2016)=324.66/2987.7=10.87%
According to DU Pont analysis, there has been increase in operating profit
margin, asset turnover ratio on account of which there has been increase
in the return of asset of the company.
21Refer page 57 of Annual Report
22 Refer Page 97 of Annual Report
23 Refer page 59 of Annual Report of 2016.
24 Refer Page 62 of Annual Report of 2016

ALL has been increasing at a growth faster compared to its peers. Further,
in terms of Simply Wall Street Pty Limited, the company shall grow at a
pace faster compared to its peers @15.66% compared to peer average of
15.05%. The net income expected to reach AUD 620.77 Mio in 5 years25.
Further, w.r.t. increase in performance over the peers. The peers have
presented a result of 5.52% over last month while ALL has shown an
increase in price of 19.61% over the past month.26
Movement in price of peers
25https://simplywall.st/stocks/au/consumer-services/asx-all/aristocrat-leisure-shares/news/why-i-
bought-aristocrat-leisure-limited-asxall/
26http://www.capitalcube.com/blog/index.php/aristocrat-leisure-ltd-leads-amongst-peers-with-strong-
fundamentals/
27https://online.capitalcube.com/#!/stock/au/ASX/all

Further, comparison of fundamentals of peer companies has been
presented here-in-below:
(Amount in AUD Mio)
Sl
No Name of the Company PE
Ratio
Sale
s
Share Price Change in 1
year
1 Tabcorp Holdings
Limited 251.05 3.8 2%
2 Donaco International
Limited N/A 0.0
92 -75%
3 Crown Resorts Limited 16.92 3.4
9 10%
4 Jumbo Interactive
Limited 28.94 0.0
4 88%28
On the basis of above, it may be seen that ALL has been performing
better compared to its peers.
28https://finance.yahoo.com/quote/JIN.AX/history?
period1=1498761000&period2=1530383400&interval=1d&filter=history&frequency=1d