Seven Aces has a 174 per cent upside, says Paradigm Capital

Paradigm Capital analyst Kevin Krishnaratne likes the new deal from Seven Aces (Seven Aces News, Stock Quote, Chart TSXV:ACES) which sees the gaming company picking up another ten per cent stake in Georgia-based amusement platform Lucky Bucks.

In a research note to clients on Wednesday, Krishnaratne reiterated his “Buy” rating and C$2.25 target, which represented a projected 12-month return of 174.4 per cent at the time of publication.

On Tuesday, Seven Aces announced that it had increased its ownership of Lucky Bucks from 60 per cent to 70 per cent in a deal worth $6.72 million (all figures in US dollars unless noted otherwise). Krishnaratne, who takes the new deal as a positive for the stock, noteed that the purchase comes in line with last year’s nine-per-cent increase in its Lucky Bucks stake which was completed for $6 million. The analyst says that with about nine per cent market share, he sees multiple opportunities for Lucky Bucks to further consolidate the coin-operated amusement machines (COAM) market in the state of Georgia.

“Lucky Bucks is building a free cash flow machine based on a favourable business model that delivers strong EBITDA margins of plus-40 per cent on gross revenue (plus-80 per cent on net revenue), with minimal levels of capex required. With the company’s market share based on the number of machines still below ten per cent and the top ten operators estimated to represent about 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 ACE’s share price,” writes Krishnaratne.

The analyst argues that ACES is “well undervalued,” estimating that while its gaming peers are trading at about 8.0x 2020 EBITDA, ACES is trading at about 4.0x his 2020 EBITDA estimate.

Krishnaratne is calling for fiscal 2019 gross revenue and adjusted EBITDA of $78.4 million and $30.8 million, respectively, and fiscal 2020 gross revenue and adjusted EBITDA of $83.5 million and $33.5 million, respectively.

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