Global markets rallied overnight as stocks on Wall Street turned higher in afternoon trade.
Investors in New York continue to be whiplashed as stocks recovered from a steep drop at the start of the session on fears of a deepening trade conflict between the United States and China and are looking at closing at over a 1% gain. Volatility remains high, and once again we remind medium term investors to remain calm during periods of heightened volatility.
Stock in Focus: Aristocrat (ALL:AX)
We have initiated research coverage on Aristocrat (ALL). Aristocrat is the largest gambling machine manufacturer in Australia, with numerous sources of revenue (particularly from casino operators) both locally and overseas. ALL have been disciplined in in their focus on growth which is now underpinned by expanding their digital content, technology and distribution channels. This includes developing and investing into adjacent and new market segments such as Social Casino, Social Gaming and Premium Paid games.
ALL has transformed its business which previously relied on volatile and lumpy outright sales, into an offering with higher quality recurring revenue. We would argue they now operate in a similar manner to a “Software as a service provider”, as opposed to historically being a manufacturer. ALL has also made two significant acquisitions of Plarium and Big Fish, which expands their addressable digital market from solely the social casino market of US$3.2Bn to a larger digital gaming market of US$43.6Bn.
ALL’s share price has been on a strong run over the last few years that has reflected its growth in earnings, although lately the share price has consolidated. We anticipate upside over the medium term for two reasons: 1) ALL’s valuation (price to earnings) multiple should re-rate to a higher multiple to reflect the transformation of its business as more of its revenue becomes recurring, 2) and as ALL continues to deliver strong growth in its digital segment and from its recent acquisitions, in our view.
We initiate coverage on Aristocrat with a BUY.
Australia & New Zealand Market Movers
The Australian share market was in positive territory yesterday (ASX 200 index +0.17%) avoiding a fourth straight day of losses. Predictions of a strong start to the day after a strong close on Wall Street were proven wrong but the market was able to recover throughout the day. Announcements by Nestle may have spooked Bellamy's Australia and The A2 Milk Company last week but both were among the strongest performers on the market yesterday. Bellamy's was the biggest mover on the day gaining 7.1% while on the flipside ANZ recorded its eighth day of losses in a row and was the only major bank to finish in the red.
The New Zealand market rallied on Wednesday (NZX 50 index +0.82%) on the back of A2 Milk's recovery from last week's selling, while Air New Zealand gained on news it will ditch an alliance with Virgin Australia. Air New Zealand said it will end its strategic alliance with Virgin Australia Holdings in October when regulatory approval for their shared services end.
3 Things Markets Will be Watching this Week
1. Global politics remain in focus with tensions rising between the US and China as they impose trade tariffs on each other.
2. The Reserve Bank of Australia makes an interest rate decision on Tuesday.
3. Monthly US employment figures are released at the end of the week
Have a Great Day,
Team