Q2 Preview: 25% Revenue & EBITDA Growth – BUYBACK ON POINT… The best cashflow story in the stock market today, don’t crucify me for comparing YoY figures to a Q2 FY19 as I recognize they had a fiscal year end change but this is what I am going with. News flow has been so positive the last three months yet the stock hasn’t moved while the company has hit it hard with the buyback so they must be seeing something good under the hood. Lets see if we cant back into what they see.
Let’s Dig In;
Revenue
TARGET: $21,150,000 USD – reminder this is a 100% USD business so looks even better for Canadian investors.
Organically - There is a natural seasonality to the business tied to consumer cashflow which is elevated around tax refund season call it Mar – May so you have Q2 including two of the strongest months of the year for the business. Add to the fact the red hot retail sales number we got yesterday, interest rate on mortgages and consumer debt have come way down, job growth continues to grow in a Red State with no tax headwinds from SALT deduction that reduced a lot of the expected tax refunds in the northeast you have a solid backdrop for continued organic growth. - US conumer has never been in a better spot
Add the fact that terminals were still coming back online in Q1 there is still embedded revenue in the model given the current footprint that has resulted in revenue being understated the last couple of Qs given the stub year end.
Inorganically - You have three acquisitions that were closed late in Q1 that will really just starting to hit the income statement in full in this Q. Given their acquisition program has looked at acquiring assets for 1.5 – 2.0x Sales they paid a total of $4.527M USD for acquisitions in Q1 which should add $2.587M USD in annual revenue or add $0.645M in Q2 alone.
Profitability
TARGET: $8,760,000M USD EBITDA & $2,000,000M USD EPS – all about that EBITDA and cashflow growth.
It’s all about managing Cash General & Admin costs as a percentage of Sales as gross margin is fixed. The bogey is always 10% of Sales and was even better in Q1 running at 9.26% of Sales and if you net out one time acquisition costs its was even below 9%. Given there was no further acquisitions of financing transactions we should get a real clear look at the true profitability of the business this Q.
With a 50% Gross Margin and a Cash opex in the 8 – 10% range (ex. Manu’s unacceptable comp package) you get an EBITDA margin north 40%. Where else are you going to find that.
Would just add on the finance cost side that I still think they could refi to bring down their rate a further 100 – 300 basis points especially since I think they are under levered given the stablility and large amount of cashflow they generate. Given their debt is tied to the US LIBOR rate and as rates have come down and you are going to get further relief from a rate cut from my boy Jay Powell, their borrowing costs will continue to come down.
Each 1% reduction in the headline rate saves them $750,000 USD/year in borrowing costs!!!
Just will hit quickly on the FV adjustment that always results in a big non cash number on income statement but is irrelevant but just for a heads up you should get a small gain in Q2 as the stock price was essentially flat and the time decay should result in a small gain.
Valuation
We got news in June that I honestly thought was going to cause the stock to pop 20% the next day yet the stock didn’t even blink…of course – Accel Entertainment went public in the US the market share leader in Illinois’ slot business (Similar regulatory environment to Georgia) at a valuation of 10.6x EV/EBITDA with a EBITDA margin of 20%. – THIS IS A DIRECT COMP TO ACES.V!!!!
On 2019 numbers I have ACES.V at $80M USD Revenue & $23M USD in EBITDA attributable to ACES.V shareholders at increased 70% stake. (Ex the Manu garbage).
That is a little over 4.0x EV/EBITDA w a 40% EBITDA margin.
TRADES AT LESS THAN HALF THE VALUATION BUT HAS TWICE THE PROFITABILITY – THIS IS SO BACKWARDS!!!!
Buyback – Capital Allocation
I am a big fan of the buyback and the 10% reduction in NCI. This lets ACES.V grow Cashflow on a per share basis 20% YoY. The business doesn’t have to grow if you continue to shrink the share count so aggressively.
I have not seen a better four month period when it comes to use of capital, lets recap;
April – 410,500 Shares for $309,504.55 @ 0.751/share average or 0.48% of share count
May – 616,500 Shares for $501,252.60 @ 0.813/share average or 0.73% of share count
June – 910,400 Shares for $730,340.80 @ 0.802/share average or 1.07% of share count
July – 387,500 Shares as of July 12 & 10% NCI for $6,720,000
So in the last 100 days they have spent $8,000,000 USD and increased your stake in the business by over 12% at a valuation of under half of the direct peer!!!!
Could care less about the short-term movement in stock price if they keep that up.
LONG – CASHFLOW MONSTER