Quantum International Income Corp has 112% upside, says Paradigm Capital

Quantum International Income Corp (TSXV:QIC) is building itself a veritable free cash flow machine in Lucky Bucks, says Kevin Krishnaratne of Paradigm Capital.

In a coverage launch on Thursday, the analyst gives Quantum International Income a “Buy” rating with a 12-month target price of C$2.25, representing a projected return of 112.3 per cent at the time of publication.

Acquired by QIC in October 2016 for $13.5 million (all figures in US dollars unless otherwise noted), Lucky Bucks is a Georgia-based coin-operated amusement machine company in which QIC holds a 51 per cent controlling interest. Lucky Bucks represents QIC’s one and only investment, in a market that Krishnaratne describes as fragmented and ripe for consolidation. (All figures in US dollars unless otherwise noted.)

“Georgia’s coin operated amusement machine (COAM) market is sized at $675 million and is represented by ~22,000 machines, with Lucky Bucks serving as the state’s largest operator with +1,800 COAMs and run-rate revenue of $70 million that has been bolstered over the past 12 months on a growth by acquisition strategy,” says the analyst.

“We view Georgia’s regulatory environment as low risk and favourable for leading operators such as Lucky Bucks, supported by the formation of well-defined and enforced policies that help the state fund important scholarship and childcare programs,” he says.

Lucky Bucks has been busy on the M&A front, acquiring nine COAM operators since May of last year. And with the recent closing of a $75-million credit facility with Goldman Sachs, the company is likely to have more acquisitions on the way, says Krishnaratne.

“Beyond gaining scale through M&A, we see three areas where Lucky Bucks enjoys a unique competitive advantage versus competitors, including the leveraging of technology to create innovative services for players and at locations, the building and strengthening of relationships with location owners, and its lead in transparency related to the reporting of operations to the government,” says the analyst.

Krishnaratne sees QIC producing an Adj. EBITDA in fiscal 2018 of $17.7 million on a topline of $51.6 million. For fiscal 2019, he estimates Adj. EBITDA at $31.4 million and gross revenues of $70.7 million.