Pollard Banknote is a buy, Echelon Wealth says

Echelon Wealth Partners analyst Gianluca Tucci is sticking with his investment thesis on Pollard Banknote (Pollard Banknote Stock Quote, Chart, News TSX:PBL) after the company’s latest quarterly results.

The strong showing in its Q3 should be repeatable going into Q4, says Tucci, who in an update to clients on Tuesday reiterated his “Buy” rating and $26.50 target price for PBL.

Winnipeg-based Pollard Banknote has been a leading supplier of instant tickets for over 30 years and serves over 60 lottery and charitable gaming organizations worldwide. The company also provides turnkey support solutions to the industry in the form of market research, validation expertise, algorithm development, lottery management services, retail development and more.

The company on Tuesday released its third quarter financials for the period ended September 30, 2019, boasting record revenue for its Q3 of $103 million, which management says was driven by increased instant ticket sales and supported by ancillary product sales.

“Our third quarter production volumes were higher than the first two quarters of 2019, reflecting a strong increase in orders across our customer portfolio, which resulted in a record level of quarterly ticket production,” wrote co-CEO John Pollard.

“We are very positive in our outlook for the remainder of 2019 and into 2020 as we see strong order levels for our core instant ticket products and increasing traction with our expanding ancillary product portfolio. The lottery and charitable gaming industries are extremely healthy with strong consumer demand generating ongoing opportunities for Pollard to continue to be the market leader and partner of choice,” wrote Pollard.

PBL’s $103-million top line was paired with adjusted EBITDA of $16.0 million, which compared to the consensus estimates of $101 million and $15.9 million, respectively, and Tucci’s forecast of $100 million and $16.1 million, respectively.

The company’s gross margin was 23.9 per cent, a hair lower than Tucci’s 24.0-per-cent estimate, which the analyst says is not a concern. The analyst notes that PBL’s current instant ticket order levels through the remainder of 2019 and into Q1 of next year remain at the high levels seen in the Q3.

Tucci says that over time, the company’s gross margin will continue to be supported from increased instant ticket volumes, ancillary products and iLottery sales.

“In Q219, PBL recommissioned its original Ypsilanti press and has recently added some additional equipment in order to increase its capacity. We believe this is indicative of additional volume commitments from its customers and view the near term as further opportunity to further monetize synergies from recently completed acquisitions (International Gamco, Innova Gaming, Schafer Systems, Fastrak Retail) which should further drive free cash flow, profitability, and complementary acquisitions down the road,” writes Tucci.

Earlier this year in May, Pollard Banknote acquired UK-based Fastrak Retail for £4 million, a purchase that Tucci judges as “positive and strategic in PBL’s efforts in becoming the lottery partner of choice.”

Looking ahead, Tucci has rejigged his estimates, now calling for fiscal 2019 revenue and adjusted EBITDA of $400.0 million and $62.4 million, respectively, which was previously $393 million and $62 million, respectively.

The analyst’s $26.50 target represented a projected 12-month return of 30 per cent at the time of publication.