Quantum International has really big upside, says Paradigm Capital

Another acquisition by its 60 per cent owned subsidiary, Lucky Bucks, has Kevin Krishnaratne feeling bullish about Quantum International Income Corp (Quantum International Income Stock Quote, Chart TSXV:QIC), which has plenty of more opportunities to consolidate the fragmented gaming market in the US state of Georgia, the analyst says.

Yesterday, QIC announced that Lucky Bucks had acquired eleven gaming contracts from Feeling Lucky Amusement, a coin-operated gaming company, for $4.9 million, marking the second purchase in November, following the acquisition of nine contracts from Goldstar Amusement two weeks ago. (All figures in US dollars unless noted otherwise.)

Manu K. Sekhri, CEO of Quantum, said, “We are delighted to add these twenty high-quality locations to our growing footprint in the Georgia gaming market. Having successfully completed the acquisitions of Feeling Lucky Amusement and Goldstar Amusement this month to date, we are continuing to explore opportunities to consolidate additional assets in the Georgia gaming market.”

Krishnaratne says there’s still room for QIC to grow with Lucky Bucks.

“Lucky Bucks is building a FCF machine based on a favourable business model that delivers strong EBITDA margins of +40 per cent on gross revenue (+80 per cent on net revenue), with minimal levels of capex required,” said Krishnaratne, analyst for Paradigm Capital, in a client update on Friday.

“With the company’s market share based on the number of machines still below 10 per cent and the top 10 operators estimated to represent ~40 per cent of the market, what we are most excited about is Lucky Bucks’ potential to consolidate this very fragmented market for many years to come, driving ongoing upside to QIC’s share price,” he says.

The analyst has upped his forecast for QIC, calling for fiscal 2019 revenue and EBITDA of $73.2 million (was $72.2 million) and $29.7 million (was $29.3 million), respectively, and fiscal 2020 revenue and EBITDA of $87.1 million (was $83.3 million) and $36.1 million (was $34.5 million).

Krishnaratne is maintaining his “Buy” recommendation and C$2.25 target for QIC, saying that the company trades at about 4.0x fiscal 2019 EV/EBITDA estimates, which is lower than its comparable gaming peers in the 8.0x to 9.0x range. His target represents a projected return of 122.8 per cent at the time of publication.