Seven Aces Limited - Ordinary Shares ACEXF

Forecasting FY’19 – $85M USD Revenue & $34M USD EBITDA..

[TallerCraig]

What a mess that stub Q4 was today. In the face of all that the core business is on fire just continuing to grow both organically and through acquisition.
 

Two Key Takeaways from Todays Numbers
 
1. Return to Revenue Growth – The business is seasonally strongest in Q1 around tax return season but people were starting to get spooked about QoQ revenue declines in Q2 and Q3. Especially in Q3 with having terminals temporarily offline.  That was put to rest with a big $6,604,302 USD Revenue figure in the month of December for $19.2M at a quarterly pace. At that pace it puts revenue growth on a pace QoQ up 18%. This is all before you even include 13 more contracts acquired in Q1 ’19 already.
 
2. No Further Goodwill Impairment – The ability of management to identify cashflow producing assets and acquire them at reasonable prices is critical to the story. That was put in question when they took a small goodwill impairment in Q3. Immaterial in size but the signalling of it was the greater issue. Great we saw no impairment charge in Q4 as management continues to prove its ability to acquire viable assets.
 
 
Forecasting Fiscal 2019
 
This is where it gets good let’s dig into 2019 estimates and why this is my largest holding.
 
Revenue – $85M USD ($51M USD Attributable to ACES shareholders)
 
This equates to 20%+ Revenue growth on a YoY basis which I think I could be conservative on this figure. Continued core organic growth in the mid to high single digits that will be bolstered by a big seasonally strong Q1 which is supported by the Superbowl being in their major Atlanta Hub.  
 
Lets just take the latest month of data we have from December. Given that it is a highly recurring revenue business it is relatively safe to annualize the current run rate of business. So, $6,604,302 USD multiplied by 12 months equates to $79,251,624 USD on an annualized business before we consider any of the three major growth drivers. (Seasonally Strong Q1, Organic Growth & Acquisition Program). 
So how do we find that extra $5.75M USD in revenue. Truthfully, I think its already in the bag, here’s the math.
 
Q1 FY18 was stronger then Q4 FY17 by 3M and 2.2M stronger then Q2 FY18. Which equates to 10 -15% seasonal boost in Q1 especially in 2019 with the Superbowl in town. This will add an incremental $2M+ to the current run rate revenue of $79.25M getting us to $81.5M.
 
Add:
 
Already closed 13 Gaming Contracts in March if we assume the acquire contracts at 1.5 – 2.0x Sales this adds another $2.5M in revenue bringing our number to $84M.
 
Add:
 
Core US GDP growth running hot at 3.2% add that as the core organic growth adds another $2.5M giving us $86.5M.
 
There you have it, with $1.5M USD to spare. That gives us a figure of $114M CAD in revenues and $68.4M attributable to ACES shareholders.  
 
 
Profitability - $34M EBITDA USD ($20.4M USD Attributable to ACES Shareholders)
 
40%+ EBITDA margins where else are you going to find that. Manu and his pay package is the only thing wrong with this company. That aside, lets look at the last 3Qs EBITDA margin. (Q1 42.51%, Q2 41.45%, Q3 41.32%).
 
Outside of Manu’s bogus bonus package in Q4 they are able to put up consistent EBITDA margins North of 40%.
 
Keep it simple, 40% EBITDA margins gives us a figure of $45.5M CAD in EBITDA and $27.3M CAD attributable to ACES shareholders.
 

Valuation
 
With a net debt figure of $40M USD attributable to ACES shareholders and $20.4M USD EBITDA estimate attributable to ACES shareholders I get to a price of 4.5x EV/EBITDA when a peer group trading closer to 8 -9x EV/EBITDA.
 
If I put a peer group multiple on ACES of 8x EV/EBITDA I get to a target of 2.00/share or close to 150% upside.
 
This is why I love them buying back stock down at this valuation.
 
 
Pollard Bank Note – PBL should be knocking on their door to buy the company or the 40% NCI stake from Anil especially after the success of their Innova Gaming acquisition in the past, but I digress I will save that for another post.
 
 
Q1 is going to be huge and we don’t have to wait long as we will get a look this month.
 
Largest Position, was even adding today because of the revenue growth was ahead of my expectation.
 
 
LONG