Pollard Banknote has significant upside, Echelon Wealth says

Lottery ticket company Pollard Banknote Limited (Pollard Banknote Stock Quote, Chart, News: TSX:PBL) is benefiting from co-opetition with its two top rivals, says analyst Ralph Garcea of Echelon Wealth Partners, who maintains both his “Buy” recommendation for PBL and one-year price target of $24.00.

Winnipeg-based Pollard Banknote’s cooperative competition with competitors IGT and Scientific Games is significant, says Garcea in a note to clients on Tuesday.

“IGT, a key PBL competitor, announced it has been awarded a 10-year contract, effective May 13, 2018, with the South Carolina Education Lottery (SCEL) to provide an array of lottery technology and ongoing services,” said the analyst. “This is a great illustration of the co-opetition between the industry’s top three players within a given customer, each with a different value proposition.”

Garcea notes that Pollard completed in 2017 the $25 million installation of a new in-line printing press in Ypsilanti, Michigan, which will expand the company’s printing capacity by 35 per cent and give it operating leverage through favourable overhead absorption.

The analyst says that Pollard’s diversified revenue and growing customer base give the company a good buffer — a “revenue moat.” “Pollard’s revenue is derived from long-term contracts (typically 3 to 5 years) with renewal extensions of several years,” says the analyst. “Pollard has built a sound reputation with over 50 customers across the globe including the Americas, Europe, and Asia.”

Garcea maintains his estimates for PBL, projecting a total revenue of $337.2 million in 2018 with an adjusted EBITDA of $55.8 million.

Garcea says PBL is currently trading at a 2018E EV/Sales, EV/EBITDA, and P/E of 1.7x, 10.4x, and 23.6x, respectively, versus its global gaming comparables average of 3.1x, 10.4x, and 17.8x, respectively.

The analyst maintains his “Buy” rating and one-year target price of $24.00, representing a 17 per cent projected return at the time of publication.