Poker machine maker Aristocrat Leisure shares hit a three year low yesterday when the company’s AGM was told that it was expecting a relatively flat full year trading result, given "challenging" market conditions and the impact of the stronger Australian dollar.
The shares closed at $7.81, down 23c, after hitting a day’s low of $7.40, the lowest price for more than three years.
Aristocrat said that while profit for the first quarter was in line with that of the prior year, results for the second quarter were expected to be impacted by more challenging market conditions and the particularly strong prior corresponding period.
"Given current trading conditions and prevailing exchange rates (with the Australian dollar forecast to have appreciated by an average 11 per cent versus the US dollar), the full year trading result is expected to be broadly in line with that reported in 2007, with the phasing of earnings weighted more towards the second half than the traditional 40/60 split," Aristocrat said.
"At like-for-like exchange rates this would represent underlying operating earnings growth of five per cent, well below the company’s target, but reflective of the prevailing economic market conditions at this time."
"The Company’s operating cash flow remains strong, with year-to-date results significantly ahead of the prior year and the full year outlook remaining favourable."
The company earned a net after tax profit of $247.2 million in 2007, up 3.4% over 2006.
On the basis of yesterday’s forecast, the company will not have experienced significant profit growth for three years, so it’s no wonder the shares weakened to a new three year low.
The chairman, David Simpson told the AGM in Sydney yesterday the 2007 result "reflects both the difficult market and regulatory across the company’s three largest regions- Australia, North America and Japan and the adverse impact of the stronger Australian dollar which reduced reported earnings by $18.4 million or 7%. On like for like exchange rates, earnings per share would have increased by 11.4%."
So not much of an improvement on a year Mr Simpson described as having some of "the most adverse operating conditions many in the gaming industry can recall".
So it was no wonder the shares tipped downwards at the news.
ALL shares have already been under pressure over the slumping export returns because of the rise in the Aussie currency; the US recession and lower gaming revenues in Nevada and Las Vegas, and worries about its Japanese strategy.
As well the Victorian Government’s decision not to renew the gaming licences held by Tabcorp and Tattersall’s from 2012 could mean less spending by those companies on new machines in the next four years as they run their businesses for cash.
The shares have fallen around $3 since the Victorian decision was announced earlier this month, hitting a 2008 low yesterday of $7.40, before bouncing a touch to close at $7.63, down 41c on news of the flat year forecast.
CEO Paul Oneile told the AGM that while market conditions across much the company’s business are challenging and will impact short term results, the key fundamentals of the business model of pricing, cost leverage and cash flow remain very much intact.
"The growth potential of the Company remains high and we have significantly progressed a number of key initiatives and innovation projects which positions well to capture a substantial share of the global expansion of gaming as short term market uncertainties lift,” he said.
The company said in a statement announcing the trading update that the current economic environment in North America "has resulted in a reduction in the level of replacement demand although for the full year this decline is expected to be offset by increased volumes due to expansions and new markets. The Company’s share of video sales remains in line with 2007 levels.
"In Australia, demand remains soft with uncertainty regarding potential government and regulatory change together with lower operator gaming turnover resulting from the introduction of smoking regulations impacting capital expenditure programs.
"The timing of gaming expansion in Asia will impact results compared with the prior corresponding period which benefited from a number of large venue openings. While the Company’s share across the region remains very strong and the regional outlook positive, new venue openings will be lower in 2008 before picking up again in subsequent years.
"Japanese players and operators are gradually embracing the new industry regulations (Regulation 5) which came into full effect in October 2007. The Company expects to increase sales by 200% in the first half to approximately 33,000 units and, subject to regulatory approval of games, is on track to record a 6 – 7% share of the 1.0 – 1.2 million units forecast to be sold in the market in 2008.
"The Company continues its rollout of the new Viridian™ hardware and Gen7™ platform. Approvals are being progressively received and feedback on initial placements has been positive with sales momentum expected to increase as the year progresses.
"The Company has progressed a number of initiatives to support its future growth and to position itself for an upturn in market conditions. Over the balance of the year the Company expects to:
• Launch its new product range designed for the Spanish market;
• Commence rollout of the ACE Video Lottery System in Norway where it has a contract with the Norwegian State Lottery;
• Finalise Gaming Laboratories International (GLI) approval and commen
