Pollard Banknote Ltd

Pollard Banknote Ltd (TSX: PBL) is a Canada-based company primarily involved in the manufacture and sale of lottery and gaming products.

Why Investors Should Book Profit?

• Overvalued Relative to Peers: From the valuation standpoint, PBL shares are now trading at significantly higher valuation, which is highlighted in the below table. Therefore, given the relatively stretched valuation, we believe that the valuation gap is likely to narrow in coming quarters which could bring consolidation in the PBL stock price.

Source: Refinitiv (Thomson Reuters) 

• Shrinking Margin and Shareholder’s Return: In the December quarter of FY20, company’s margin profile was slightly lower on a sequential quarter, with Gross Margin declined to 22%, down 180bps on Q-o-Q basis, EBITDA Margin was at 18.2%, down 70bps, and Operating Margin at 13.6%, down 70bps. As the stock is commanding a premium valuation over the industry, the margin profile has to be sustained otherwise market premium would come down. Further, Return on Equity was also lower by 110bps in Q4F20 on sequential quarter basis.

­­Source: Refinitiv (Thomson Reuters)

• A Resurgence in Covid-19 Cases Would Disrupt Charitable gaming and Diamond Game Segment: A fresh wave of COVID-19 has witnessed in many parts of the world, and cases are also increasing in Canada. A fresh travel restriction and any kind of stringent measure on travelling could further dent the group’s Charitable gaming and Diamond Game Segment. As these products are sold at retail through various bars, veteran organizations and bingo halls, a closure of these place on the onset of the COVID-19 virus may weigh on the segment, which would further hit margin and return to shareholder’s return. ­­­­­

Stocks Recommendation: After hitting a new high of CAD 67 on April 28, 2021, the stock has plummeted approximately 13% and now trading below the immediate support level of 5-day and 10-day SMAs. Therefore, give the stretched valuation, shrinking margin profile, lowering shareholder’s return, and stock price below the immediate support levels, we suggest investors to book profit. Hence, we suggest a “Sell” recommendation on the stock at the closing price of CAD 58.48 on May 05, 2021.

Technical Price Chart (as on May 05, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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