The growth strategy is proceeding according to plan for gaming company Seven Aces (Seven Aces Stock Quote, Chart, News TSXV:ACES), who just got a target raise from Industrial Alliance Securities analyst Neil Linsdell. In an update to clients on Thursday, Linsdell reiterated his “Buy” rating with the new price target of C$2.10, up from C$1.90.
Toronto-headquartered Seven Aces operates in the state of Georgia through a 70-per-cent stake in Lucky Bucks, the largest route operator in the state which owns and manages coin operated amusement machines (COAMs).
The company announced on Wednesday that Lucky Bucks has entered into a new credit facility for $165 million and closed one acquisition for 160 gaming contracts. The five-year facility, led by KeyBank National Association, will be used to replace the existing $100-million facility, thereby lowering Lucky Bucks’ cost of borrowing from 9-10 per cent to approximately 4.5 per cent. The closed acquisition, initially announced on December 20, 2019, involves the purchase of 160 gaming contracts and associated skill-based digital gaming terminals from Game Vendor for $32.5 million with potential additional payments bringing the aggregate to $36 to $38 million. (All figures in US dollars unless where noted otherwise.)
“This announcement reflects the recognition of the maturity of the Georgia coin-operated amusement machine market, and the risk profile of our business. This credit facility provides interest expense savings and an unmatched flexibility to execute on our acquisition pipeline”, said Manu K. Sekhri, CEO of Seven Aces, in a press release.
In his update, Linsdell notes that recent acquisitions bring Lucky Bucks’ total location contracts to about 437 sites across Georgia, including about 2,500 terminals or 11 per cent of the market by units, making it the dominant player in the state.
“The market is relatively fragmented, with LB as the largest COAM operator in Georgia, with ~11 per cent of units, providing ample opportunities for additional acquisitions,” wrote Linsdell. “The top ten operators combined (including LB) are estimated to control ~40 per cent of the market. As such, we are optimistic about LB’s potential opportunity to continue consolidating this market for many years to come.”
Linsdell describes ACES’ growth strategy as centred around M&A, by selectively acquiring the highest-producing COAMs in the state while leveraging its growing infrastructure and network and advancing structure and what Linsdell calls the company’s best-in-class reporting systems to create a protective moat.
“ACES’ growth is proceeding as expected. Increased marketing efforts and costs should contribute to a long and solid growth trajectory, complemented by numerous acquisition opportunities. With these adjustments to our forecasts, we maintain our Buy recommendation, but increase our target to C$2.10, from C$1.90,” he wrote.
Linsdell thinks ACES will generate fiscal 2020 gross revenue and adjusted EBITDA of $92.4 million and $31.5 million, respectively, and gross revenue and adjusted EBITDA in fiscal 2021 of $94.5 million and $32.8 million, respectively. At press time, his C$2.10 target represented a projected 12-month return of 68 per cent. ACES finished 2019 up 33 per cent.