There’s ample space for growth for gaming company Seven Aces (Seven Aces Stock Quote, Chart, News TSXV:ACES), according to Industrial Alliance Securities analyst Neil Linsdell, who launched coverage of the stock on Monday with a “Buy” rating and C$1.90 target, which represented a projected 12-month return of 74.3 per cent at the time of publication.
Canadian public company Seven Aces operates exclusively in the US state of Georgia where it has a 70-per-cent stake in Lucky Bucks, a route operator that owns and manages Coin Operated Amusement Machines (COAMs). Lucky Bucks has about 2,000 COAMs across the state in what Linsdell calls high-traffic sites, for example, in convenience stores and gas stations.
“Seven Aces is operating in a market that is highly fragmented but also highly regulated. This provides the opportunity for a well organized and well capitalized organization to profitably grow organically, and to become a sought-after and efficient acquirer,” said Linsdell.
The analyst notes that Seven Aces’ growth strategy includes a significant focus on M&A by selectively acquiring the highest-producing COAMs in Georgia, where the market is still relatively fragmented. Lucky Bucks is currently the largest COAM operator in the state but with only about nine per cent of total units (and about 11 per cent of total revenue), there is plenty of opportunity for additional acquisitions, says Linsdell.
“Using the organizational capabilities of ACES’ management team, the company is creating infrastructure and processes that allow it to operate more efficiently and to offer superior terminals, games and customer service to location operators. This puts it in a better position to win contracts as they expire (typically every five to ten years) from less organized or less well-capitalized route operators, and to be seen as a preferred acquirer for sellers looking for an exit or to implement succession plans,” said Linsdell.
“This competitive advantage is further highlighted by increasing regulations that place additional pressure on smaller operators, enticing them to consider selling their COAM assets to LB rather than face escalating compliance and other costs in order to continue operating,” he said.
The analyst thinks that ACES will generate fiscal 2019 gross revenue and adjusted EBITDA of $78.8 million and $27.3 million, respectively, and fiscal 2020 gross revenue and adjusted EBITDA of $82.0 million and $28.2 million, respectively.
Linsdell says he likes the company’s strong free cash flow generation, which he expects will improve as greater economies of scale are achieved, increasing to over 15 per cent of gross revenue over the next five years, excluding acquisitions and with minimal capex.
The analyst is deriving his target price using the average of a discounted cash flow valuation against the FCF attributable to shareholders, which is then discounted at 12.5 per cent, and an EV/adjusted EBITDA multiple of 9x applied against adjusted EBITDA attributable to shareholders and excluding any M&A benefits.
In September, Seven Aces announced that it is continuing its execution of a Normal Course Issuer Bid, which began on February 19, 2019. As of October 18, 2019, the company has repurchased 4,604,150 common shares at an average price of $0.91 per share, with a full re-purchase running to 5,587,431 shares.