Seven Aces has double-digit upside, Industrial Alliance says

It’s business as usual for gaming sector company Seven Aces (Seven Aces Stock Quote, Chart, News TSXV:ACES), says Industrial Alliance Securities analyst Neil Linsdell, who delivered an update to clients last Friday on the company’s new quarterly results.

Linsdell maintained his “Buy” recommendation and C$2.10 target price, which as of publication date represented a projected 12-month return of 27.3 per cent.

Seven Aces operates exclusively in the state of Georgia through its 70-per-cent stake in Lucky Bucks, which has a coin operated amusement machine (COAM) business.

The company reported its fourth quarter and year ended December 31, 2019, results last Thursday, posting gaming revenue of $79.3 million. That compared to the ten-month period ended December 31, 2018, of $59.7 million. Adjusted EBITDA for 2019 was $26.9 million. (All figures in US dollars except where noted otherwise.)

In 2019, Seven Aces closed on nine acquisitions for a total of $13.2 million, while also buying back over 4.6 million shares at an average price of $0.91 per share.

“2019 was a year of growth through acquisition,” said Manu K. Sekhri, CEO, in a press release. “We continued with our acquisition strategy in Georgia and we purchased over 4.6 million shares as part of our NCIB at attractive prices, which is accretive to all shareholders.”

In the Q4, Seven Aces hit $20.0 million, slightly better than Linsdell’s $19.7-million estimate, while adjusted EBITDA of $4.6 million came in under Linsdell’s $5.1-million forecast. EPS was negative $0.01 per share versus the analyst’s $0.00 per share.

Linsdell noted that since the end of 2019, Lucky Bucks has added an extra 180 locations to its footprint, bringing the total to about 450 sites across Georgia and now representing about 11 per cent of the state’s market by units. The build-up has made Lucky Bucks the dominant player in a state still ripe for more consolidation, Linsdell said.

“The market is relatively fragmented, with LB as the largest COAM operator in Georgia, providing ample opportunities for additional acquisitions. The top ten operators combined (including Lucky Bucks) are estimated to control ~40 per cent of the market. As such, we are optimistic about Lucky Bucks’ potential opportunity to continue consolidating this market for many years to come,” Linsdell wrote.

As far as the COVID-19 crisis and its impact on Seven Aces goes, Linsdell reported minimal disruption, since its COAMs are found in the still-essential businesses of gas stations and convenience stores. As well, Georgia has been earlier than others in reopening some businesses, starting on April 24.

Looking ahead, Linsdell said, “ACES’ top line growth is proceeding as expected, but we have slightly trimmed our profitability as the Company is taking on extra costs. With these adjustments to our forecasts, offset by the weakening Canadian dollar, we maintain our C$2.10 target price.

The analyst has updated his estimates and is now calling for fiscal 2020 gross revenue of $92.4 million (no change) and adjusted EBITDA of $30.3 million (was $31.5 million).

So far in 2020, ACES is up 19 per cent.