A bet on lottery ticket provider Pollard Banknote Ltd. has been paying off for investors as the Winnipeg-based company continues to gobble up industry players to capture a larger share of the market.
Pollard shares have jumped about 20 per cent since the company announced on Sept. 25 it was buying Schafer Systems Inc., an Iowa-based global provider of lottery ticket dispensers, for US$23.5-million. Pollard stock hit an all-time high of $25.70 on Sept. 27. The shares have since pulled back, and were trading at $23.74 on Tuesday afternoon, which is still a gain of about 70 per cent over the past year. All four analysts who cover the stock have a “buy” recommendation with an average 12-month price target of $25.25.
“Pollard is doing what it told investors it would do,” Canaccord Genuity analyst Robert Young said in a note on Sept. 26. He has a $25 target on the stock. “We believe the company is acting strategically on its M&A [mergers and acquisition] mandate, announcing its third acquisition in a little over a year.”
In February, the company bought International Gamco Inc., which makes tickets and other products for charity fundraising, for US$17.6-million. In the summer of 2017, the company bought INNOVA Gaming Group Inc., which is focused on providing lottery services for states and provinces, for about $51-million. Today, about 60 per cent of Pollard’s revenue is from the United States and the rest from Canada and a number of other countries.
The company isn’t well known and the stock is tightly held, with the Pollard family owning about two-thirds of the shares. Still, Mr. Young believes the latest acquisition will help to increase its profile and position in the market. “Pollard will attract more investors as it becomes more broadly known,” Mr. Young said in his note.
Acumen Capital Research analyst Brian Pow said in an interview that Pollard’s acquisitions have “crystallized for investors [the company] won’t just have organic growth in the business" and are helping the company “become a major player in the industry.” Mr. Pow has a $24 target on the stock, saying it’s a conservative company with a strong balance sheet and disciplined acquisition strategy.
Risks for the company include changes to government regulations in the industry and a potential downturn in the economy, which can affect the growth in lottery sales. Competition in the lottery industry and the broader gambling industry is also a risk.
According to a report from Mr. Pow of Acumen Capital, Pollard has about 22 per cent of the global market for instant lottery ticket sales and its major competitors include Scientific Games Corp., the largest market player with a roughly 70-per-cent share, and International Game Technology, with approximately 8 per cent of the same market..
A longer-term risk for the company and the broader lottery industry is a shrinking player base, Doug Pollard, the company’s co-chief executive alongside his brother, John, said in an interview. For instance, while there has been growth in sports betting activity, it’s a market the casino operators are also vying for. “We have to be careful that we don’t let our lottery player base get chipped away by other competition,” Mr. Pollard said.
There are high barriers to entry into their business, which Mr. Pollard said gives the company a competitive advantage. Its focus has been to acquire companies that will help it diversify across different parts of the lottery industry, including digital sales.
“Our M&A strategy starts with the fact that there are a lot of companies that are more valuable with us than on their own,” Mr. Pollard said.
While the company is still actively seeking acquisitions, Mr. Pollard noted they didn’t do any deals from the time the company went public in 2005 until mid-2017. “We are still actively looking for acquisitions but we have to be prudent about how much we can digest,” he said.
Mr. Pollard also acknowledged his firm’s tightly held stock is a potential “challenge” for investors. The company diluted its position to two-thirds from three-quarters in a public offering a few months back.
“We still lack a little bit for liquidity. I wouldn’t say that issue has gone away,” Mr. Pollard said. “We aren’t opposed to further dilution if it’s the right opportunity and we want to preserve an appropriate balance sheet. We won’t rule it out, but at the same time, there are certain thresholds you want to be careful with to make sure we still have control, at least for now. It’s an option for us if the time is right and the opportunity is there.”
Ryan Modesto, CEO of the independent firm 5i Research, said Pollard is a solid company with growing sales, margins and return on equity. “There’s a lot to like here,” he said.
Still, it’s expensive for investors today, trading at about 22 times forward price-to-earnings, compared with 16 times for the S&P/TSX Composite Index.
Mr. Modesto said investors might wish to wait before buying in at this point, given the recent runup in the stock. “There is justification for it being more expensive,” he said. “It’s [a stock] you can probably wait on, or average into.”
Special to The Globe and Mail