Investment Thesis Retain Overweight. ALL is a slotmachine...

Investment Thesis

Retain Overweight. ALL is a slotmachine manufacturer with operations in ANZ, the Americas, and InternationalClass III segments, as well as a fast-growing Digital division. ALL has strongrecurring revenues, and has been consistently gaining market share in NorthAmerican gaming operations. ALL has significantly increased its digitalexposure (36.9% of FY18 earnings) and continues to develop titles for bothland-based and digital platforms. Further digital growth and capital managementopportunities are available, and coupled with strong execution by managementand the scarcity of earnings growth in the market, despite a challenging andstructural slot expenditure decline, we believe the risk/reward remainsattractive.

Valuation

Our share price target is based on our SOP valuation compounded forwardto Dec-20 at ALL’s cost of equity and adjusted for dividends where appropriate.We calculate our SOP valuation based on the individual cash flow streams ofeach discrete business segment. In ALL’s case, we value capital expenditure,working capital and provisions at the Group level. Our group post-tax WACC is8.6%. The key figures that make up this discount rate are a cost of equity 9.8%and post-tax cost of debt of 4.8%. We apply a beta of 0.97 within thiscalculation.

Risks to Rating and Price Target

Key downside risks include the consistentdecline of EGM expenditure. Australian per-capita gaming expenditure hasdeclined 0.7% on average since 2007/8, which could indicate a shift ofpreference within the gaming sector. This shift, coupled with technologicaladvances, may favor emerging industries such as virtual reality or skills-basedgaming. ALL is also susceptible to FX exposure because it generates revenue inmultiple currencies, particularly USD. There is also the ongoing risk ofchanges to the regulatory environment in which ALL operates, which may have amaterial impact on earnings. The future of EGM remains questionableregarding pre-commitments, EGM expenditure caps, time caps and market sizeregulation.