Macquarie is betting on these two ASX gambling stocks

This article was first published for Livewire Markets on Monday 6 February 2023

As the Kenny Rogers song knows, you have to know when to hold 'em and you got to know then to fold 'em. There is also a lyric in that song which suggests the best gamblers also know what to throw away and what to keep. In this case, Macquarie has two ASX gambling stocks on its buy radar and is choosing to throw away neither. 

In this article, I'll take you through the reasons why both Ainsworth Game Technology (ASX: AGI) and Aristocrat Leisure (ASX: ALL) were recently kept at OUTPERFORM ratings by the broker. We'll also get some perspective from someone who knows the sector well in Ben Clark at TMS Capital. 

The big reason: Gaming revenues are resilient

The story about gambling and casinos in Australia over the last few years is very well-known. Even if you haven't seen Crown and Star Entertainment Group's governance crises splashed across the front pages, chances are you've seen how ubiquitous gambling dens are across the country. In fact, 40% of the world's pokies are in New South Wales.

Yes, you read that right. 40%. 

In America, 2022 saw a record year for gambling revenues accelerated by the legalisation of sports betting in some states. Last year, nearly US$55 billion was gambled away by consumers in just the first 11 months of the year. The first-11 months figure already surpassed the previous record .... set in 2021. 

In December 2022 itself, US casino revenues grew by 5% year-on-year. That took the overall year-on-year growth to 6% - which remember, was 6% higher than the previous record set only 12 months earlier.

And bar the pandemic, it's only gone up.  

No wonder Macquarie had this to say about the two major gaming plays in its note, dated February 2nd:

"US casino revenue trends continue to support the thesis that the industry is resilient and less susceptible to economic volatility. As such, we remain positive on the outlook for the slot manufacturers, in particular Aristocrat with ongoing market share momentum within outright sales and gaming ops underpinned by product performance."

High rolling price targets

All data as of Feb 1st, close of trade

Ben's view: Take a chance on Aristocrat

Ben agrees with Macquarie's view, arguing Aristocrat has what it takes to survive an economic downturn. 

"Gaming will still hold up and we've seen in past economic downturns, it's been very defensive. It's one of the reasons we like Aristocrat," Clark said. 

Aristocrat's position, he said, was boosted when its two major competitors went into the COVID-19 pandemic with a lot of debt on its balance sheet. This is where Clark argues that Aristocrat stands out.

"Aristocrat followed their same approach which is keep investing," he said. "They've continued to grow their margins and grow their market share."

It's these 'land based' margins, as Clark calls it, that prospective investors should be watching if it wants to invest in the company.

"It's the physical machines in pubs, clubs, and casinos," Clark said. "What we saw is the land based result boomed and the digital result took a step back at the last result - largely driven by COVID. Maybe we go into a new year where we hopefully start to see both those engines firing."

... But don't roll the dice on Star Entertainment Group

When Crown Resorts went private in June last year, it left only one major casino operator on the local bourse in Star Entertainment Group (ASX: SGR). But Star, like Crown, was subject to a plethora of governance headlines through 2021 and 2022. Clark believes it may be another two or three earnings cycles before we know if Star remains an investable idea.

"I think it's going to be a mess for a while," Clark said. "They have significant costs which they're looking to have regulators and other parties come back on board."

In Clark's response, he also referenced Tyro Payments (ASX: TYR) and specifically, ex-CEO Robbie Cooke who has since joined Star Entertainment Group as its latest chief. And while the change in leadership is good news, he also believes the downside is still to come.

"It's going to be a difficult journey for them," Clark reiterated in spite of Star's property holdings which have put its balance sheet in some good stead. "If you wanted to try to monetise that property, how much would it cost? I'd probably sit on the sidelines if it was me for now."