Pollard Banknote Limited (TSX: PBL) is principally engaged in the manufacturing, development, and sale of lottery and charitable gaming products throughout the world. Its operating segments are lottery, charitable gaming, and eGaming systems.

Key Highlights:

• Increased revenue: During Q1FY22 the company reported a marginal increase in the total revenue to CAD 113.87 million against the total revenue of CAD 112.21 million in Q1FY21. The charitable segment saw an uptick of CAD 16.18 million in sales for the reported period (Q1FY22) vs the sales of CAD 14.20 million in Q1FY21. The eGaming systems also saw a rise in the revenue to CAD 10.96 million in Q1FY22 against the sales of CAD 8.06 million in the pcp. Only the lottery segment saw a slight dip in the sales which slightly impacted the overall sales in Q1FY22.

Source: Company filings

• Recognized as Lottery supplies of the year: Recently the company was recognized as the Lottery supplier of the year, also the company’s Ignite Player Marketing-in-house digital marketing agency was awarded as the Acquisition & Retention Partner of the year at the 2022 EGR North America awards. The group was given this honor for the third time, which is a key positive for its branding.

• Strong liquidity profile: The group’s quick ratio for Q1FY22 was reported at an elevated level of 1.19x, as compared to the industry median of 0.89x. Further, the company’s current ratio was stated at 1.71x for Q1FY22, against the industry median of 1.03x. The higher quick ratio and current ratio represent the company’s ability to meet its short-term obligations falling within one year time, without any hindrance, ensuring the smooth running of the business operations.

Source: Refinitiv, Analysis by Kalkine Group

• Sequential improvement in the margins: In Q1FY22, the company witnessed an increase in the revenues, which were partially negated by the rise in the cost of sales, leading to the overall improved profitability sequentially, which is represented below.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The group is majorly exposed to the restrictions related to COIVD-19 and lockdowns, foreign exchange volatility, credit risks, etc. To add more, the rising interest rates can also curtail the consumer spending on leisure and discretionary activities, which could severy impact the company’s financial health. 

Financial overview of Q1FY22 (Expressed in thousands of CAD)

Source: Company Filing

• During Q1FY22, the group reported the total revenue of CAD 113.87 million, which is slightly higher than the total revenue of CAD 112.21 million in Q1FY21. The charitable and eGaming systems segment reported an increase in the sales which were partially offset by the decline in the sales from the lottery segment in Q1FY22.

• The cost of sales increased to CAD 91.91 million during Q1FY22, as compared to CAD 87.42 million in Q1FY21. The increases in the expenses were on account of the rising cost of the raw materials and higher manufacturing overheads. The higher cost of sales leads to the lower gross profits in Q1FY22 to CAD 21.95 million against the gross profit of CAD 24.78 million in the pcp.

• The income from operations decreased to CAD 9.34 million in Q1FY22 vs the income from operations of CAD 12.33 million in Q1FY21.

• The group reported net income of CAD 6.42 million in Q1FY22 as which is lower than the net income of CAD 7.46 million in Q1FY21.

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The company reported an increase in the total revenue to CAD 113.87 million during Q1FY22 against CAD 112.21 million in Q1FY21, which was majorly driven by the increased sales from charitable and eGaming systems with a decline in the lottery segment. The group is optimistic or the coming quarters and expects the production volume to remain at elevated levels in the coming next two-quarters of FY22 and the management expects higher revenues because of the holiday season falling in the next two quarters. The expansion of the production capacity at its psilanti facility is estimated to be at higher levels, which were evident in the recent results in terms of higher capacity. On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple and the stock is currently trading at 1.3x as compared to the industry (consumer cyclical) mean of 1.8x, suggesting the stock is still undervalued. We have considered SGHC Limited., Inspired Entertainment Inc., etc. as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock of PBL at the last closing price of CAD 20.70 on June 01, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of June 01, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

Technical Analysis Summary

Disclaimer

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