Aristocrat starts to pay out

Since last year’s Aristocrat Leisure annual general meeting—see 3 May 11 (Buy – $2.73)—much has changed, and largely for the better. The turnaround gathered pace during 2011, becoming more visible with the announcement of the company’s full year results (see 28 Feb 12 (Hold – $2.88)).

Wednesday’s annual meeting was thus a little more relaxed, with chairman Ian Blackburne and other directors explaining welcome changes to board governance and remuneration policies. Less well received was the decision to change the balance date from 31 December to 30 September.

You can see the company’s point. The change better aligns the business with its global sales cycle, although it also raises a few questions.

At the 2011 results in February, managing director Jamie Odell carefully stated that results would be weighted to the fourth quarter of the 2012 calendar year (October to December). The same quarter was also strong in 2011, reflecting orders taken after the Australasian Gaming Expo and Global Gaming Expo, both of which occur late in the calendar year.

Bumper year

The change means the next and potentially bumper October to December period will fall into Aristocrat’s 2013 financial year. Management is understandably keen to ensure it delivers on guidance, and the change gives it breathing space in case orders following the Expos are delayed by a few months.

This calendar year, Aristocrat will report half-year results to 30 June, then full year results to 30 September. Odell promised to provide pro forma accounts to help with the reconciliation, so we’ll examine them closely. The switch is a small red flag but nothing over which to unduly fret.

As was the case last year, Odell did not provide a first quarter trading update at the meeting. But he did reiterate anticipated ‘strong’ net profit growth for the year to 30 September (as well as the year to 31 December). Investors are already expecting strong growth, however, and much less than a $90m profit this calendar year would be considered disappointing (profit for the year to 30 September will be lower than this figure).

Pre-commitment

Mandatory pre-commitment may also back on the agenda. With the government’s majority once again razor-thin, it may need to deal with anti-pokies campaigner Andrew Wilkie MP, just a few months after the government double-crossed him—see 23 Jan 12 (Speculative Buy – $2.64). Aristocrat may be a short-term beneficiary of the reforms but mandatory commitment remains a longer-term threat.

The company’s revenues and earnings can fluctuate significantly—see The Aristocrat time machine from 2 Apr 12 (Hold – $3.02)—so there remains a chance we’ll get another opportunity to buy the stock should earnings disappoint. Despite the regulatory and technological threats to the model, Aristocrat remains a high quality business with significant profit upside.

The stock has risen 4% since 2 Apr 12 and closer to $2.75 we’d consider upgrading to Long Term Buy. For now, HOLD.

Note: The model Growth portfolio owns shares in Aristocrat Leisure.