Repriced Contracts And Catalyst Platform Will Drive Future Success In iLottery Market

Key Takeaways

• Increased contract pricing and iLottery technology investments position Pollard Banknote for enhanced revenue, margins, and competitive growth in digital lottery markets.
  
• Strategic acquisitions and innovations in proprietary high-value products reinforce leadership in gaming, bolstering cash flow and future earnings.
  
• Inflation and high investment requirements impact Pollard Banknote's margins and growth potential amid competitive pressures and slow retail sales growth.

Catalysts

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

• Pollard Banknote has successfully repriced the majority of its instant ticket contracts to higher selling prices, which is expected to positively impact future revenue and gross margins by the end of 2024. This will fully reflect in financials by 2025, leading to improved earnings.
  
• The ongoing development and investment in iLottery technology, specifically their Catalyst platform, has positioned Pollard Banknote for potential growth in digital lottery solutions. The recent contract award from the Kansas Lottery using Pollard's Catalyst technology signifies potential for future revenue growth and an increased competitive edge in the iLottery market.
  
• Expansion into new jurisdictions through acquisitions, such as the purchase of Clarene J Venne LLC, and investments in innovative products like e-gaming solutions further solidifies Pollard Banknote's leadership in the charitable gaming market, which contributes significant positive cash flow, enhancing overall net margins.
  
• The strategic focus on proprietary high-value products like Signature Scratch FX and new innovations such as EasyPack increases the company's appeal to the lottery market and is expected to continue driving revenue growth and gross margin improvements in the coming years.
  
• The NeoPollard Interactive joint venture's presence in North America, now with six iLottery installations, ensures continuous strong cash flow and organic growth, particularly bolstered by successful launches such as North Carolina, which enhances future earnings potential and shareholder value.

Pollard Banknote Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pollard Banknote's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.7% today to 6.8% in 3 years time.
• Analysts expect earnings to reach CA$44.4 million (and earnings per share of CA$2.57) by about February 2028, down from CA$48.3 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 30.8x on those 2028 earnings, up from 15.2x today. This future PE is greater than the current PE for the CA Hospitality industry at 12.2x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

Pollard Banknote Future Earnings Per Share Growth

Risks

• Inflationary cost increases on key inputs like paper and ink have negatively impacted gross margins, despite repricing efforts, potentially affecting future net margins.
  
• A slow growth rate in retail dollar sales of instant tickets, compared to previous post-pandemic spikes, could signal a limited revenue growth opportunity in this segment.
  
• Challenges related to NeoPollard joint venture and the competitive pressures from online iLottery options in various markets, such as those from Jackpocket and DraftKings, may impact future earnings.
  
• Increased administration and selling expenses, driven by compensation, consulting, and acquisition costs, without corresponding revenue growth, may compress net margins.
  
• High investment requirements in property, equipment, and technology development, alongside conservative debt management, may limit the availability of capital for growth or return to shareholders, potentially impacting earnings.

Valuation

• The analysts have a consensus price target of CA$40.75 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$46.0, and the most bearish reporting a price target of just CA$33.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$656.0 million, earnings will come to CA$44.4 million, and it would be trading on a PE ratio of 30.8x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of CA$27.1, the analyst price target of CA$40.75 is 33.5% 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.