Accel Entertainment: Strong Growth In Gaming Terminal (NYSE:ACEL)

Synopsis

Accel Leisure (NYSE:ACEL) is a distributed gaming operator within the US. It specializes within the set up, upkeep, and operation of video gaming terminals, primarily in non-casino places.

ACEL’s previous income progress charges have been unstable because of the influence of COVID. Regardless of that, it managed to increase its margins and return to profitability. In its most up-to-date quarter’s earnings, it continues to report strong income progress whereas margins stay secure year-over-year. Trying forward, the robust progress in gaming terminals is anticipated to positively affect ACEL’s future progress. This tailwind, coupled with double-digit upside potential, leads me to suggest a purchase score.

Historic Monetary Evaluation

Over the previous 4 years, ACEL’s income year-over-year progress charges have proven vital fluctuations. In 2020, income progress decreased because of COVID-19. In 2021, income progress rebounded strongly when COVID eased and economies around the globe started opening up. In 2022, income progress slowed all the way down to ~32%, consistent with the 2019 pre-covid period’s progress price. Though income slowed down, it’s nonetheless rising strongly at double-digit charges.

Regardless of fluctuating income progress, ACEL managed to increase its working revenue margin [OIM] and web revenue margin [NIM], though I do discover a slight contraction in its gross revenue margin [GPM].

In 2019, NIM was detrimental because of rising working bills and non-deductible bills, which led to a rise in tax payable. These bills had been non-deductible as they had been related to enterprise mixtures and govt compensation. Nonetheless, by 2021 and 2022, ACEL reported constructive NIM of 4.30% and seven.64%, respectively, displaying nice indicators of enchancment.

Shifting onto its steadiness sheet, I might be analysing its debt-to-equity [D/E] ratio, as it is going to give us insights into its monetary well being. Since 2020, its D/E ratio has been secure, indicating no vital improve in leverage. That is essential as a result of rising debt equates to greater curiosity bills, which could eat into its modest NIM.

Evaluation of ACEL’s 3Q23 Earnings Outcomes

ACEL reported a robust 3Q23 earnings consequence. Complete income for the quarter grew 8% year-over-year to ~$287 million. Location elevated 5% year-over-year, whereas complete gaming terminals elevated 7% year-over-year, displaying robust progress and demand for ACEL’s merchandise.

The drivers of this robust income progress had been primarily attributed to the addition of latest places in Illinois and a modest 1% progress in same-store gross sales. Moreover, there was some progress in growing markets the place ACEL continued so as to add places and appeal to new gamers. This efficiency was highlighted as an illustration of the power of ACEL’s hyper-local enterprise mannequin.

Shifting onto margins, ACEL’s 3Q23 has proven strong efficiency. It was largely flat on a year-over-year foundation apart from 3Q23’s NIM. As said of their earnings report, web revenue for the quarter decreased ~53% year-over-year because of a $1.6 million loss on the change within the truthful worth of its contingent earnout shares. On an adjusted foundation, ACEL’s adjusted NIM is definitely consistent with the earlier interval.

With such strong margins, I anticipate ACEL will keep these margins transferring ahead. As well as, administration’s dialogue on ACEL’s bills additionally supported my outlook. Attributable to ACEL’s provider managing to iron out provide chain points and supply components in a well timed vogue, ACEL is ready to handle components prices, which bolsters margins as there are ample provides.

On the expense facet, our cost structure continues to stay secure, regardless of the inflationary impacts on labor and different bills corresponding to components. Our distributors have labored by means of almost the entire provide chain disruptions and are actually capable of present components on a well timed and constant foundation.”

Strong Development in Video Gaming Terminal

Primarily based on the next chart offered by the American Gaming Association, in 2022, the mixed income generated from online game terminals [VGT] in non-casino places throughout seven was greater than $6.05 billion, representing a progress price of ~25% year-over-year. During the last 10 years, the US VGT market has demonstrated steady and strong progress with Illinois progress being the best, and it’s not displaying any indicators of deceleration.

Sturdy Development in Illinois

Illinois continues to be the biggest marketplace for VGT as a result of, in 2022, the state’s ~45,000 VGT introduced in a complete of $2.71 billion in income, considerably greater than the remainder of the six states talked about within the report.

As well as, gamblers in Illinois are putting more bets on VGT than on different types of betting. At present, the lottery remains to be Illinois’ largest supply of betting income, however VGT is ready to outperform it as tax assortment from VGT accounts for almost 41% of the state’s complete betting income vs. the lottery’s 44%.

In 3Q23, ACEL’s capital expenditure elevated year-over-year because of accelerating purchases in Illinois. I count on its funding in Illinois will strengthen and help its future income progress, given the robust progress witnessed in that state.

Comparable Valuation Mannequin

When it comes to market measurement, ACEL is bigger than its competitor’s median. ACEL has a market capitalization of $853 million, whereas the median is $724 million, representing ~1.18x over the median.

With its bigger measurement, it has a greater ahead income progress outlook of 17.25% vs. the median of 10.06%. Nonetheless, in terms of profitability, ACEL considerably underperformed its rivals. When it comes to gross revenue margin, ACEL reported 30.04%, whereas its rivals’ median was 63.40%, twice as a lot as ACEL. Shifting onto web revenue margin, it additionally echoes the identical sentiment. ACEL’s web revenue margin is 3.74%, half of the median of seven.07%.

At present, ACEL’s ahead EV/Gross sales of 0.98x are buying and selling decrease than its rivals’ median of two.1x, and this represents a reduction of ~50%, which I argue is an excessive amount of. Over the previous few months, its share worth has been falling, which has resulted in its EV/Gross sales contraction. Once we take a look at ACEL’s 1-year common EV/Gross sales, it’s ~1.05x, and I consider this a number of is rather more cheap.

The market income estimate for ACEL is anticipated to succeed in $1.16 billion in 2023 and $1.18 billion in 2024, whereas the market estimate for ACEL’s 2024 EPS is $0.85. I consider these estimates to be dependable, as my dialogue on its strengths and progress catalysts above helps these estimates. By making use of its EV/Gross sales of 1.05x to its 2024 EPS estimates, my 2024 worth goal is $11.33, and this represents an upside potential of ~13%. With double-digit upside potential, I’m recommending a purchase score for ACEL.

Threat

One draw back danger can be associated to the expansion seen in Illinois. If the robust demand and progress of VGT in Illinois begin to diminish, it is going to probably decelerate the expansion of the overall VGT market generally. At present, the one benefit ACEL has over its rivals is its progress outlook. When it comes to profitability, it’s considerably behind them. If the expansion outlook had been to be lowered, we’d see ACEL’s multiples revise downward.

Conclusion

ACEL’s previous 4 years have proven fluctuating income progress because of the influence of COVID. Regardless of the fluctuation, its margins continued to increase through the years, most notable can be its web revenue margin. As well as, it managed its D/E effectively, because it has been secure through the years. In 3Q23, its income continued to develop, and margins had been secure year-over-year on an adjusted foundation.

Over the previous few years, the US VGT market has been persistently rising, with Illinois taking an enormous lead. Trying forward, I count on that the robust progress on this market will present ACEL with the tailwind wanted to develop sooner or later. In my conservative valuation mannequin, my goal share worth for ACEL signifies 13% upside potential. With that, mixed with the robust progress within the VGT market, I’m recommending a purchase score for ACEL.