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BASIC INFORMATION AND INVESTMENT SUMMARY Aristocrat Leisure Limited (ASX:ALL) is a business, established in 1953, that manufactures and generates revenue from gaming machines, gaming systems along with furniture, signage and accessories. Aristocrat has two types of businesses, land-based and digital-based. Their land-based business consists of Aristocrat Class III and VGT II while the digital-based are Plarium, Big Fish Games and Product Madness. Aristocrat is headquartered in Sydney, Australia and was listed on the Australian stock exchange in 1996 ("Aristocrat Leisure", 2020). The company operates within the casino and gaming sector and the gambling industry as they produce gambling machines and gaming items for public purposes. Aristocrat has been provided with an investment action recommendation stating that they should try to use a blended approach that incorporates a PE-Based Valuation along with a Discounted Cash Flow Valuation (Limited, 2018) . Aristocrat currently trades at $22.06/share (27-Apr-2020) and has a market capitalisation of $14.734B with a target stock price of $32.05 (Yahoo Finance, 2020) . Given these values, our current recommendation is to HOLD. The liquidity of the stock can be determined by finding the share turnover ratio by calculating the volume of shares divided by share outstanding, resulting in 0.004856%. This demonstrates that the Aristocrat’s stock is somewhat illiquid due to its low degree of share turnover. The stock’s float of Aristocrat is found to be AUD565.97m which is small compared to its market capitalization (Yahoo Finance, 2020). The top 18 shareholders collectively own less than 50% of the company’s shares, implying that the company’s shares are widely disseminated and there is no dominant shareholder. The largest shareholder being BlackRock Inc, with 7.05% ownership followed by The Vanguard Group, Inc, Writeman Pty Ltd and ThunderBirds Are Go Pty Ltd, controlling 5.13%, 4.25% and 2.56% respectively (St, 2019) . Aristocrat Leisure Limited is the world’s second-largest manufacturer of casino gaming systems and a leading gaming provider and games publisher based in Australia with 60% of the market. It offers a wide range of electronic gaming products and services that are approved for use in more than 300 licensed jurisdictions with 6400 employees found in over 80 countries ("Aristocrat Leisure Ltd.", 2019) . Using the Discounted Cash Flow method to determine the value of the business and the Price to Earnings ratio to determine the value of the stocks which have a Trailing P/E of 21.90, it can be found that Aristocrat’s enterprise value to be AUD16.99B. Aristocrat's enterprise value to revenue ratio can be determined at 3.86 while its enterprise value to EBITDA ratio is 11.77. Furthermore, the company has a Price/Sales (ttm) ratio of 3.48 and a Price/Book (mrq) ratio of 7.12 (Yahoo Finance, 2020) .

BUSINESS DESCRIPTION Aristocrat was created in 1953 by Leonard Ainsworth when he developed and distributed gambling systems to numerous casinos worldwide. During its early stages, these gambling slot machines were the company's main products as they released the ‘Microstar’ range of slot machines within Australia which is still being used today. Moreover, game setups with large progressive jackpots over a collection of machines have been Aristocrat’s most renowned products such as its Lightning Link series ("OUR HISTORY – Aristocrat", 2020). In the years that followed, the company introduced revolutionary innovative changes such as the World’s first poker machine with fully lit reels and scorecard, the World’s first five-reel slot machine and the hyperlink gaming system. Aristocrat became a global presence during the 1960s as they expanded out of Australia and into Europe and the USA. In 1996 the company became public and for the first time was listed on the ASX. However, in the previous decade, Aristocrat has moved towards online gaming products and services, starting its transition in 2012 when Aristocrat acquired the online gaming company Product 2

Madness, which established a footing in the digital games market. In 2017, Aristocrat acquired both Plarium Global for AUD$677 million ("Aristocrat buys Vikings: War of Clans maker Plarium for $US500 million", 2017) and Big Fish for AUD$1.3 billion (Toscano, 2017) as the recently purchased companies were leading publishers in web-based and free-to-play games. From this, Aristocrat was able to create online games such as “Vikings” and “Big Fish Casino” to further diversify their product range, enabling them to better increase sales and adapt to the changing trends of the market. Aristocrat now has over 6400 employees spread throughout 80 different countries ("OUR HISTORY – Aristocrat", 2020) To add on, Aristocrat’s revenue is equally made up of 2 categories: Social Casino and Social Casual (Fairmont Equities). At the end of the US fiscal year (30 September) 2019, the revenue from ordinary activities was AUD$4,397m, which is up 25.3% from the previous year. 85% of this total revenue was made up of the digital and land-based division in the North America operations which is one of its key drivers. Profit from ordinary activities after tax was AUD$698.8m, which was up by 28.8%. Interim dividend was 22c and final dividend was 34c, which is up by 3c and 7c respectively. The contingent retention and other acquisition-related transactions and costs were AUD$65m. Aristocrat continues to invest heavily in talent and technology to deliver competitive products across land-based and digital segments. The company's total reported spending increased AUD$87m. Corporate costs increased by AUD$1.4m compared to the previous period. Net interest expense increased from AUD$18.6m to AUD$124m, this increase was due to the increased debt levels the company now has to support their prior acquisitions. Meanwhile, the key drivers of expenses are the recent acquisition of companies such as Big Fish Games and Plarium. Furthermore, their financial expenses, especially interest, mounted up to AUD$135.1 million in 2019, with their R&D cost adding up to AUD$500.4 million in the same year. (Aristocrat Profit Announcement - 2019) There were several different key operational highlights for the end of September 2019. The business increased share while maintaining yield in the land-based North America gaming operations business, grew share in land-based outright sales, profitable growth in the digital business, investment in talent and technology, and strong financial metrics for the period.

INDUSTRY OVERVIEW AND COMPETITIVE POSITION Land-Based Activities Aristocrat Leisure specialises in both land-based and digital businesses. Aristocrat has two subsidiaries that operate in the land-based market. These two subsidiaries are Aristocrat Class III and VGT Class II. These two companies manufacture and distribute a range of licenced casino games. In 2019 Aristocrat was the winner at the Global Gaming Awards for Land Based Supplier of the Year’ and ‘Slot of the Year’(Aristocrat Profit Announcement - 2019) . Aristocrats’ top competitors in the land-based market are Konami Corporation, Multimedia Games Inc and International Game Technology PLC. Konami Corporation is a Japanese entertainment and gaming company that specialises in product distribution and video game development. Konami’s net revenue in 2019 was AUD$3.8 billion. ( Financial Highlights KONAMI HOLDINGS CORPORATION) . Multimedia Games produce physical gaming systems and electronic gaming units for commercial casinos. In 2014, Multimedia Games was acquired by Everi Holdings for AUD$1.9 billion. In 2019, Everi’s games revenue was AUD$440m (Everi Holdings Annual Report - 2019). International Game Technology (IGT) is the world’s leading designer, manufacturer and supplier of pokie machines, services and gaming machines. IGT’s net revenue in 2019 was AUD$7.4 billion (International Game Technology Annual Report - 2019). 3

Digital Business Other than land-based activities, Aristocrat Leisure specialises in digital-based gaming and has three different subsidiaries that operate within the digital gaming environment; Big Fish, Plarium and Product Madness. As a whole, digital revenue for 2019 was up 245% to US$1,252 (iGaming Business, 2019), driven by the acquisition and strong performance of two games, Jackpot Magic Slots and Cooking Craze. Big Fish Games is the world’s largest producer and distributor of casual games with more than 2.5 billion distributed since 2002. Their catalogue has over 450 mobile games and 3,500 PC games. They have seen consistent growth in revenue since 2013 up from $13.9 to $494.6 million in 2018 ("Big Fish Games revenue 2018 | Statista", 2018). To determine their competitive position, the unique framework of Porter’s Five Forces was applied to determine the profitability and the current competitiveness in an industry, which can be used for the analysis of the gambling industry category that Aristocrat falls under: 1. Potential Threat of New Entrants The legalisation of gambling activities has lowered the barriers to entry, therefore allowing many new companies to enter the casino and gaming sector, increasing the level of competition and rivalry. However, larger capital requirements and rapid technological obsolescence would cause several problems for new entrants, therefore the threats of new entrants would not be too serious ("Aristocrat Leisure Limited Porter Five (5) Forces & Industry Analysis [Strategy]", n.d.) . 2. Bargaining Power of Buyers With a large percentage of Aristocrat’s revenue deriving from the US, the casino and gaming industry there has buyers with a medium level of bargaining power, in the presence of rising gambling alternatives such as land-based, riverboat and Native American casinos. However, each of these casinos has a different target market, serving different kinds of customers. Moreover, pricing of the casinos prevents customers from switching around and thus the bargaining power of the buyers is considered to be medium as discretionary income of the customers has reduced ("Aristocrat Leisure Limited Porter Five (5) Forces & Industry Analysis [Strategy]", n.d.). 3. Bargaining Power of Suppliers in the Industry According to analysis, the power of suppliers is relatively low in the casinos and gaming industry as casinos need furnishing and food supply. Therefore, bigger casinos assert a lot of pressure over a large array of small suppliers to take advantage of pricing. Nevertheless, as internet-based gambling is on the rise, developers of innovative technology solutions can increase this power in the long run ("Aristocrat Leisure Limited Porter Five (5) Forces & Industry Analysis [Strategy]", n.d.) . 4. Competitive Rivalry Among the Existing Companies With the rapid changes in the business landscape of the US, the casino and gaming sector of the economy has gained competitiveness, where the larger companies are attempting to acquire the smaller rivals to reduce this competitiveness. Some of these changes include the deregulation of gambling activities such as the emergence of internet-based gambling, waterborne casinos and entertainment options, etc ("Aristocrat Leisure Limited Porter Five (5) Forces & Industry Analysis [Strategy]", n.d.) . 4

5. Potential Threat of Substitutes in the Industry In comparison to the other forces, the threats of substitutes in the industry are increasing exponentially with the presence of low law restrictions. This allows the operation of various forms of gambling activities to enter the market. To add on, the thriving range of other forms of gambling such as internet based casinos, tribal lands and waterborne casinos, has attracted many new consumers ("Aristocrat Leisure Limited Porter Five (5) Forces & Industry Analysis [Strategy]", n.d.) . Therefore, with the understanding and analysis of Porter’s Five Forces, a developed understanding of the entity can be gained. This also reflects how Aristocrat is handling the threats and maximising the services for clients and profits.

FINANCIAL ANALYSIS Aristocrat’s EPS in the current financial year of 2019 is found to be at 1.10, which is above the average benchmark of 0.16 ("ICLUBcentral - Industry Averages Stock Watch List", 2020) . Moreover, the company’s EPS is expected to grow at 21.76% over the next 5 years. However, they had a negative EPS of 0.13 in the second quarter of 2014, this combined with the one-off licensing revenues and purchase of Video Gaming Technologies, contributed to their negative net profit of AUD16.4 million that year ("Stockopedia. Stock Screens, Stock Ranks, Stock Tips & Tricks", 2020) . After this period, Aristocrat recovered significantly demonstrating an upward trend for the EPS ratio over the next few years. Liquidity: The current ratio (Current Assets/Current Liabilities) determines the ability of a firm to reduce its debt. Aristocrat’s current ratio is 1.66 ("ALL.AU | Aristocrat Leisure Ltd. Financial Statements - WSJ", 2020), which is common within the gambling industry, this is greater than 1, therefore indicating that they are in a good position to meet its debt obligations. Aristocrat has seen a decreasing current ratio from 2015 at 2.03 to 1.33 in 2018 ("Stockopedia. Stock Screens, Stock Ranks, Stock Tips & Tricks", 2020) . However, within the 2018/19 FY, Aristocrat has managed to increase the current ratio to 1.66. The quick ratio (Cash + Marketable Securities + Accounts Receivables)/(Current Liabilities) of Aristocrat is 1.51 ("ARLUF Quick Ratio | Aristocrat Leisure - GuruFocus.com", 2020). This ratio determines the company’s ability to quickly pay off its current liabilities and having a higher ratio would increase the quickness in the conversion of liquid assets into cash. Aristocrat’s quick ratio performance has been cyclical in nature as it has been unstable since 2015 at 1.80 to 2019 at 1.51 ("Stockopedia. Stock Screens, Stock Ranks, Stock Tips & Tricks", 2020). However, this figure is slightly above Aristocrat’s median quick ratio of 1.19 with its lowest being 0.47 and highest being 1.84.

Growth in sales: Aristocrat had observed a 39.5% average growth of sales in the last 5 years ("Stockopedia. Stock Screens, Stock Ranks, Stock Tips & Tricks", 2020) , which was superior to the industry 5 year average of 7.3% ("ICLUBcentral - Industry Averages Stock Watch List", 2020) . This impressive performance was due to strong results from the US division under the digital gaming sector, which reported a 17% increase in revenue of USD$543.3million at the start of 2019 ("US and social gaming drive Aristocrat to record FY revenue", 2019). Furthermore, the acquisition of Big Fish Game and Plarium, led to their strong performance with the launch of several of its role-playing games. The revenue is expected to continue growing in 2020 and 2021 at AUD$4338million and AUD$4970million, respectively. Profitability: Aristocrat has an operating margin of 22.1% in 2019, surpassing its 5 year average of 21.7%. Its Dividends per share was 0.56 in 2019, after facing growth of 21.7% but it is still lower than its 5 year average of 28.5%. However, it is expected that the dividends per share will fall in 2020 to 0.505, but will increase again in 2021 to 0.637. Moreover, Aristocrat had a Net Profit of AUD$699million in 2019, increasing significantly from 2014, which saw a negative net profit of AUD$16.4million. This upward trend is still expected to continue in 2020 and 2021, as net profit is expected to be AUD$769million and AUD$997million, respectively ("Stockopedia. Stock Screens, Stock Ranks, Stock Tips & Tricks", 2020) .

Capital Structure: For the fiscal year ending 30 September 2019, Aristocrat had cash and short term investments of AUD$575million and working capital of AUD$692million, thereby reflecting its strong current and quick ratio. It had Net Debt of AUD$2,446million in 2018 after seeing an increasing trend over the past 4 years which finally saw a decrease in 2019 to AUD$2,218million. This high debt is represented through its Net Gearing ratio of 103.46% ("Stockopedia. Stock Screens, Stock Ranks, Stock Tips & Tricks", 2020). From these values, it can be determined that Aristocrat are able to meet its short term debt effectively, but can be challenged in meeting its long term debt.

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VALUATION Residual Earnings Model Date

Jan-20

Sept-20

Sept-21

Sept-22

Sept-23

Sept-24

EPS ($AUD)

1.10

1.52

1.85

2.25

2.74

3.34

DPS

0.560

0.505

0.637

1.007

1.226

1.495

BPS

3.370

4.385

5.598

6.841

8.355

10.200

ROCE %

0.451

0.422

0.402

0.401

0.400

RE

1.127

1.338

1.597

1.942

2.365

Discount Rate

1.086

1.213

1.355

1.513

1.689

PV of RE

1.038

1.103

1.179

1.284

1.400

Total PV to 2024

6.004

Continuing Value (CV) ($AUD)

29.961

PV of CV

17.739

Value per Share

27.113

Summary and Assumptions of the Valuation: When using the residual income model, it can be observed that the stock is overpriced as the calculated value per share is lower than the actual value per share (33.500>27.032), therefore it would be recommended to sell the share. The assumption of using this valuation method is that the dividend payout ratio remains constant (44.74%) from September 22 while the DPS for September 20 (0.505) and 21 (0.637) was found from Stockopedia ("Stockopedia. Stock Screens, Stock Ranks, Stock Tips & Tricks", 2020) and that the EPS forecast is accurate. Furthermore, this method of forecasting EPS involves the use of a constant growth rate of 21.76% over the 5 years excluding the EPS of Sept 20 (1.52) and Sept 21 (1.85) w which was found from Stockopedia ("Stockopedia. Stock Screens, Stock Ranks, Stock Tips & Tricks", 2020).

Dividend Discount Model Forecast Year

Jan-20

Sept-20

Sept-21

Sept-22

Sept-23

Sept-24

Sept-25

EPS

1.10

1.52

1.85

2.25

2.74

3.34

4.068

DPS

0.560

0.505

0.637

1.007

1.226

1.495

1.820

Discount Rate

1.086

1.213

1.355

1.513

1.689

1.886

Present Value of Dividend

0.465

0.525

0.743

0.810

0.885

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Total PV at 2020

3.428

TV at 2024

22.282

PV of TV

13.192

PV Per Share

16.620

Summary and Assumptions of the Valuation: This model was also used to determine the stock price, providing further evidence. In this case, it can be found that the actual stock is again overpriced as the calculated value per share is lower (33.500>16.581). The accuracy of this value could have been improved if additional methods of valuations were applied. This method adopts the assumption that there is a constant dividend payout ratio indefinitely from September 22 (44.74%) while the DPS for September 20 (0.505) and 21 (0.637) was found from Stockopedia ("Stockopedia. Stock Screens, Stock Ranks, Stock Tips & Tricks", 2020) . This valuation also relies on the accuracy of the forecasted values of EPS and that the assumptions of the EPS values are accurate and fair to have an accurate forecasted growth rate too. Furthermore, this method of forec...