Why the Aristocrat Leisure (ASX:ALL) share price can go higher from here

The Aristocrat Leisure Limited (ASX: ALL) share price could be going higher from here according to one leading broker.

In afternoon trade the gaming technology company’s shares are down slightly to $34.51, but analysts at Goldman Sachs believe there’s decent upside to come for its shares.

What has been happening?

On Wednesday Aristocrat released its full year results for FY 2020 and, as expected, revealed a sizeable drop in profits because of the COVID-19 pandemic.

In case you missed it, for the 12 months ended 30 September, Aristocrat reported a 5.9% decline in operating revenue to $4,139.1 million and a 31.8% reduction in earnings before interest, tax, depreciation and amortisation (EBITDA) to $1,089.4 million.

This was driven by a 32% decrease in Aristocrat Gaming (Land-based) revenue due to the impact of COVID-19 customer venue closures and social distancing restrictions. This revenue decline was almost offset by an impressive performance by Aristocrat Digital segment.

The latter segment delivered double-digit growth in bookings, revenue, and profit during FY 2020. Management noted that its RAID: Shadow Legends game continued its impressive growth trajectory, generating US$368 million in bookings.

Was this a good result?

According to a note out of Goldman Sachs, Aristocrat Leisure beat its forecasts for both revenue and earnings in FY 2020. It was also impressed with its cash conversion and notes that its net leverage remained steady.

In light of this, the broker has held firm with its buy rating and lifted its price target on the company’s shares to $37.00.

This price target implies potential upside of approximately 8.5% over the next 12 months including dividends.

Goldman commented: “Despite the challenging backdrop, ALL delivered a high quality result in our view given i) demonstrated scalability of digital, with margin expansion, and significant ABPDAU growth despite lower DAU (focus on quality), ii) better-than-expected US land based performance, both in terms of outright sales and growing its install base while maintaining marketing leading avg fee per day, and iii) strong cashflow generation in the half while balance sheet strength clearly remains a highlight.”

“Looking ahead, management remain focused on positioning ALL for further growth, targeting to maintain/enhance land based share, bookings growth across digital, and continued D&D investment (above historical levels) to drive sustained long term growth. Therefore we continue to view ALL as well-placed to leverage off its strong balance sheet and above peer D&D spend to capture further share gains or M&A opportunities,” it concluded.

More reading

• ASX 200 rises again on Wednesday
• Why Aristocrat Leisure, Chalice Gold, Westpac, & Whitehaven Coal shares are charging higher
• ASX 200 up 0.35%: Aristocrat FY 2020 results, big four banks higher, a2 Milk update
• Aristocrat Leisure (ASX:ALL) share price in focus after FY 2020 results
• 5 things to watch on the ASX 200 on Wednesday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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