Pollard Banknote reported a strong fourth quarter, with revenue and underlying earnings coming in ahead of Canaccord Genuity's (TSX:CF, LSE:CF) expectations, warranting an upgrade to ‘Buy’ and an increased price target of C$24, up from C$18.50.
In a note to clients, analysts at the brokerage noted that gross margins at Pollard, which partners with lotteries around the world, remain pressured by cost inflation on raw materials, freight, and wages. However, they said they see this impact becoming fully absorbed in the 4Q, setting the stage for repriced contract renewals considering the higher costs.
“Seasonality weighs on 1Q, which we view as a trough before steady improvement through 2023, particularly in H2,” the analysts wrote. “Demand across all parts of the business remains strong, particularly in charitable and ilottery. Management framed demand as ‘at or near record levels, and we anticipate this to continue.’”
Fourth-quarter retail sales at the lottery (sell-through) remained at a high level although down slightly from 2021 levels, the analysts said, with the company reporting that sales had rebounded back to a high level so far in January and February. ilottery revenue on the back of significant large US jackpot activity was the driver of bottom-line performance, they added.
“In our view, Pollard's stock appears to have priced in these headwinds and trades at a historically low valuation of ~7.3x 2023E EBITDA (or 6.3x 2024E EBITDA),” the analysts said.
Contact the author at stephen.gunnion@proactiveinvestors.com