The fund managers at IOOF won’t be happy with Aristocrat Leisure, the poker machine company which sprung another of its surprise earnings downgrades on Friday and saw the shares hit a six year low.
IOOF told the market on November 16 that it had become a substantial shareholder in Aristocrat with a stake of 5.15%, or more than 27.5 million shares, purchased with a cost per share of around $3.40.
On Friday the shares closed at $2.70, after hitting the six year low of $2.65, giving IOOF an unfortunate loss of around $19 million on its investment, which is a big ouch and won’t endear Aristocrat to the fund managers.
Aristocrat shares ended the day down 18.9%, a substantial decline.
In its update on Friday morning, Aristocrat warned a recovery could be more than a year away after it halved its full-year operating profit amid falling earnings across its key markets.
Aristocrat said its net operating profit for 2010 was likely to be between $50 million and $60 million, compared with $116.4 million last year and $140 million in 2008.
The company has been hit hard by falling demand in the US, where it generates about 65% of its profit.
The weak economic conditions and high unemployment have seen Las Vegas and other casinos struggle with sluggish revenue growth. That in turn has prompted reduced investment in gaming machines.
To cap that, the strong Australian dollar has cut reported revenues and earnings.
Aristocrat said the US market had shrunk by 15% this year and demand was still falling.
Despite this, CEO Jamie Odell, said he was still confident about the three-to-five-year turnaround program, installed 15 months ago.
Mr Odell said he was most disappointed about the ”accelerated decline” in the market share in Australia.
He said domestic market share had been slipping over the past four years and the company’s failure to innovate had left it with a product offering that was ”not as competitive as we would like”.
He would bring forward a new Australian product launch to early next year to arrest the decline in new unit sales.
And the company was troubled by "continued poor earnings in the Japanese market, reflecting a lack of competitive product releases and high levels of competition".
Growth momentum in these key markets was unlikely to build materially before 2012, Aristocrat said.
"As product portfolios improve in Australia and Japan through 2011, Aristocrat expects to increase share in these markets, and make further gains in North America.
"Aristocrat will continue to focus on positioning the business to take full advantage of opportunities as market conditions improve in 2012 and beyond.
"Further, Aristocrat remains within its debt covenants and has significant headroom available within the Company’s current 3 year debt facilities, which were renewed in June 2010.
"Aristocrat continues to address difficult market and legacy business issues to ensure the Company consistently delivers the best possible products in our key markets and segments and drive sustainable growth within its turnaround window," the company told the market in the statement on Friday.
