What: While shares in gambling business Aristocrat Leisure Limited (ASX: ALL) dipped in the lead up to the annual report, they have since recovered most of their ground with investors apparently liking what they saw despite the company reporting a statutory loss.
Here are the key metrics:
- Revenue increased 6.9%, or 1.7% on a constant-currency basis
- Earnings per share rose 6.7% or -2.1% on a constant-currency basis
- Underlying NPAT rose 10.2% to $118.1m, or up 1.3% on a constant-currency basis
- Statutory NPAT saw a total loss of $16.4m on impairments and divestments
- Dividends per share increased 10% to 16cps (up from 14.5cps previously)
- Strong performance in USA and Aus/NZ regions offset by weakness in Latin America and Japan
So What?
Overall it was a bit of a mixed bag for Aristocrat, with currency fluctuations driving most of the improvement.
A strong performance in the US and ANZ region is a great positive and bodes well for Aristocrat's competitive offering against Ainsworth Game Technology Limited (ASX: AGI) in those markets.
However regulatory changes in Japan resulted in fewer and slower game releases, and management – believing that this slower pace may persist for the foreseeable future – booked a $72.6 million impairment against its Japan Pachislot business.
This was joined by a $43.4 million loss in the company's divestment of its Lotteries business, and $17.1 million in one-off costs associated with the acquisition and restructure of VGT back in July.
Together the charges are responsible for Aristocrat's statutory loss on paper; although in this case it is not appropriate to simply look at underlying profit and rule out the statutory loss.
Shareholders need to take note of both since the loss on the Lotteries sale represents a poor initial investing decision and is very material to the company's ongoing performance. A company's ability to invest its funds into new businesses also determines its status as an appealing investment (or not).
The acquisition charges are nothing to worry about – this thing happens all the time.
The Pachislot impairments could reasonably be placed into either the 'worry' or 'don't worry' categories.
On one hand, a changed regulatory environment in Japan is very relevant to the company's profitability in future periods. On the other, the impairment charge relates mostly to inventory and intangible assets, and doesn't impinge on cash flow, debt or returns to shareholders.
Now What?
As I hope I've made clear, Aristocrat's report is one case where investors need to pay close attention to both the statutory, constant-currency, and underlying figures.
It's difficult to evaluate the company's future since so much of these results were driven by currency effects – strong performances in some regions notwithstanding.
Aristocrat doesn't appear to be a bad investment at all, but there are other companies I find considerably more appealing at the moment. One of them is The Motley Fool's Top Stock for 2015, a tech business with outstanding competitive advantages, low costs and very appealing plans for expansion into a booming south-east Asia.
