Digital Lotteries In Kansas And Belgium Will Redefine Markets

Key Takeaways

• Expansion in digital lottery, iLottery, and eInstant games is fueling recurring digital revenue growth and supporting better overall profit margins.
  
• Strategic acquisitions and repricing of contracts are broadening the product suite, diversifying revenue, and positioning the company for improved earnings stability.
  
• Weak physical ticket demand, integration risks from acquisitions, regulatory pressures, rising competition, and uncertain contract repricing threaten revenue stability and long-term profitability.

Catalysts

Manufactures and sells lottery and charitable gaming products and solutions in the United States, Canada, and internationally.

• Growing adoption of digital lottery and iLottery solutions by governments globally, combined with a strong pipeline of RFPs and recent state launches (Kansas, Belgium, Massachusetts in progress), positions the company to capture new high-margin digital contracts-supporting future top-line growth and improving earnings through both license and platform fees.
  
• Expanded eInstant content development and recent launches in new markets (Norway, Virginia, West Virginia, Kansas) leverage shifting player demographics toward digital and mobile gaming; as penetration increases, this is likely to drive recurring digital revenue growth and better blended net margins over the coming years.
  
• Continued repricing of instant ticket contracts (75% completed, more to come) at higher average selling prices, alongside a focus on securing higher-margin work, points to the potential for margin expansion and sustained improvements in gross profit as legacy lower-margin contracts come up for renewal.
  
• Strategic acquisitions (Pacific Gaming, Clarence J. Venne) in charitable gaming and cross-selling opportunities from integrating physical and electronic bingo/eTab solutions broaden the product suite and customer base-driving revenue diversification and supporting incremental adjusted EBITDA growth.
  
• Resilience in demand for core printed and digital offerings, along with operational efficiencies and investments in management and game innovation, positions the company to benefit from the trend of governments increasing reliance on lotteries for public revenue-enhancing revenue stability and long-term earnings visibility.

Pollard Banknote Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pollard Banknote's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 14.1% in 3 years time.
• Analysts expect earnings to reach CA$93.3 million (and earnings per share of CA$3.57) by about September 2028, up from CA$36.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, down from 14.0x today. This future PE is lower than the current PE for the CA Hospitality industry at 14.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.43%, as per the Simply Wall St company report.

Pollard Banknote Future Earnings Per Share Growth

Risks

• Declining instant ticket sales volumes, flat retail lottery sales growth, and explicit acknowledgement that physical instant ticket demand has been lackluster over the past two years may signal erosion in the long-term core business, which could negatively impact revenue and gross margin if not sufficiently offset by digital growth.
  
• Increased reliance on acquisitions (CJ Venne, Pacific Gaming) and joint ventures (NeoPollard Interactive) for growth introduces risk of integration challenges and dependence on partners, potentially leading to revenue volatility and higher administrative and interest expenses, weighing on earnings and net income.
  
• Regulatory changes, such as the Minnesota eTab restrictions, have already materially impacted charitable e-gaming revenues and margins; further regulatory tightening in key jurisdictions could impact product adoption and compress net margins.
  
• The competitive threat posed by alternative gambling formats (iCasino, iGaming, sports betting) is already evident in Pollard's comments-Michigan iLottery revenue has declined due to private iCasino competition, and this secular shift may erode market share and long-term revenue from digital gaming.
  
• Around 25% of instant ticket contracts have not yet been repriced to higher margins and face uncertain outcomes depending on future market pressure and competitive bids; unsuccessful repricing or aggressive competition in these tenders could apply downward pressure to future gross margins and overall profitability.

Valuation

• The analysts have a consensus price target of CA$33.5 for Pollard Banknote based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$38.0, and the most bearish reporting a price target of just CA$30.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$660.4 million, earnings will come to CA$93.3 million, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 8.4%.
• Given the current share price of CA$18.75, the analyst price target of CA$33.5 is 44.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.