Seven Aces Limited - Ordinary Shares ACEXF

Q2 Preview: 40% Revenue Growth w Clean EPS 0.025/share…

[TallerCraig]

On a rainy Saturday I thought now was as good time as any to do a quick preview for QIC.V as I still believe it is one of the best cash generation inorganic small cap growth stories right now in the Canadian market.
 
With all these global growth concerns it should make businesses like this that can growth no matter the macro environment more valuable.
 
Two big factors to the story that I think the street still isn’t giving them credit for.  Refinancing of Debt & increase in Ownership Stake in Lucky Bucks.  Both developments have yet to be seen in Quarterly numbers.
 
Debt Refinancing
 
With refinancing done in April we still haven’t seen a clean Q with the restructured debt which will be closer to 2-2.5M/Quarter in finance costs. Big difference then 12M they expensed that last 2 Qs in finance costs.
 
The Cashflow they generate is massive 4M in operating cashflow in Q1 ex net changes working capital, with minimal cap ex all this can be plowed back into the business for debt reduction and further acquisitions.
 
Hurdle rate on further acquisitions comes way down with a borrowing costs of 8% then the 18% they were paying before.
 
 
Ownership Equity Bump to 60% from 0.51%
 
The best acquisition you can make is in you own business. This is essentially what management is doing.
 
Think about how accretive this is to QIC.V shareholders. They are taking $6M USD cash and are buying a further 9% equity interest in a business that generates 70M+ in revenue & 30M in annual EBITDA.
 
Adding 2.7M in EBITDA for a business with zero incremental execution risk and still having a Lucky Bucks CEO who is aligned with QIC.V shareholders, can’t be beat.
 


Digging into the Numbers for Q2
 

Revenue
 
Target 17.0-17.5M: Don’t expect anything close to that Q1 anomaly with a seasonally strong Q1 but something closer to Q4 figure. Look to management on any commentary on revenue growth per unit would be huge as it would give an organic growth driver to the story. 
 
Still believe there is an organic growth story here in 2018 if you look to US tax reform, Job growth and consumer confidence especially in a red state like Georgia has to help a discretionary spend business like QIC.V.
 

Profitability
 
Target 0.020- 0.025/share: Finally get a clean look at the business and I think it could surprise some people. With General Admin under control in a 10% of Sales range but the Financing costs is going to make the biggest difference.
 
Will look even better because you are going to get a reversal of some of the FV Derivative Liability to which could add up to $500,000 but at the end of the day the mark to market of the warrants is meaningless since they are already way in the money.
 
Works out to a consolidate EBITDA bogey in the 6.5 – 7.0M Range.
 

Valuation
 
This is where it gets interesting… especially once you adjust for the increased stake to 60% from 51%.  With a consolidated business that will generate 30M USD in EBITDA this year with only 60M in debt the leverage is not even that bad. The cashflow this business throws off that number will come down real fast.
 
If you put a 6-8x EBITDA on multiple on that business with a 60% equity interest you get a price range of 1.65 - 2.20/share or 1.93/share at the midpoint or 105% upside!!!
 
 
I believe this business is largely unknown in the Canadian market, with a large runway for growth within the state of Georgia as they are only really concentrated around the Atlanta metropolitan which creates a path for growth and consolidation.
 
With Earnings out early next week you got a day or 2 days max to get in. Telling that when management presented their story in Toronto in October at the Stableview conference the name popped up to 1.12/share. People just need to hear their story.
 
With a solid Q next week, I believe we could be back pushing all time highs close to 1.20/share as the calendar turns to November.
 
 

LONG