One Small-Cap Consumer Cyclical Stock to Punt on – PBL

Pollard Banknote Ltd. (TSX: PBL) is majorly involved in the manufacturing, development, and sale of lottery and charitable gaming products across the globe. The group operates through two major segments: Lotteries and charitable gaming, and the Diamond game.

Key highlights

• Dividend declaration: On March 9, 2022, the company declared a dividend of CAD 0.04 per common share for the period January 1, 2022, to March 31, 2022, which was on the similar lines of the previous dividend declared of CAD 0.04 per share on November 10, 2021.

• Higher revenues across all business segments: For FY21 the revenue increased to CAD 459.01 million as compared to the CAD 414.13 million in the FY20. The revenues from the Lottery rose to CAD 361.9 million in the reported period from CAD 348.4 million in the pcp. The company’s eGamming Systems revenue surged to CAD 37.8 million in FY21 from CAD 22.5 million in pcp. The Charitable segment revenue increased to CAD 59.3 million in the reported period vs CAD 43.2 million in pcp. Below is the pictorial representation of the revenue of individual segments.

Source: Company presentation

• Debt management: The company demonstrated a very strong approach in managing its Debt which is replicated across its books. For Q4FY21, the Debt-to-Equity ratio of the company stood at 0.64x which is lower than the industry median of 0.80x. Further, the company’s percentage of Long term Debt to Total capital was at 37.1% for the reported period which is lower than the industry median of 45.2%.

        Source: Refinitive, Analysis by Kalkine Group

Risks associated with investment

The key operational risks the company faces are foreign currency volatility, credit risk, liquidity risks, etc. The rise in interest rates can curtail discretionary spending for a while, which can also hamper the company's financials.  

 Financial overview of FY2021 (Expressed in thousands of CAD)

    Source: Company Filing 

• The company reported an increase of 10.8% in revenues to CAD 459.01 million in FY21 vs 414.13 million in FY20. The jump in the revenues was majorly contributed from the sales across the USA region of CAD 272.98 million in FY21 vs CAD 250.36 million in the pcp, especially from the eGaming systems segment.

• The income from operations declined to CAD 33.51 million in FY21 vs CAD 50.04 million in the pcp. There was an increase in Administration expenses of CAD 47.21 million for FY21 vs CAD 40.31 million in FY20. Also, the increase in Equity investments to CAD 12.33 in the reported period vs CAD 1.58 million in the pcp, were the major contributors for dragging down the income from operations in FY21.

• The income before income taxes was CAD 27.11 million for FY21 as compared to CAD 46.14 million in FY20.

• For FY21, the company reported a net income of CAD 19.70 million vs CAD 33.28 million in pcp.
  

 Valuation Methodology (Illustrative): EV/ Sales based multiple

 Analysis by Kalkine Group

 Stock recommendation 

The company reported an increase of 10.8% in FY21 revenue numbers of CAD 459.01 million vs FY20 revenues. The group is optimistic for the year 2022, especially the tablet-based eGaming business which the company expects to be a major contributor to its revenue in the coming period.

On the valuation front, the stock is measured on the Enterprise Value to Sales multiple, and currently trading at 1.5x as compared to the industry mean (Consumer cyclical) of 8.5x, this implies the stock is undervalued and there is much headroom for the stock to match the industry valuations. We have considered Sangoma Technologies Corp., Monarch Casino & Resort Inc., Century Casinos Inc. etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing market price of CAD 24.00 on March 21, 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 on March 21, 2022). Source: REFINITIV, Analysis by Kalkine Group

  Technical Analysis Summary

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.