Description

Executive Summary:

We believe Accel Entertainment, Inc (“Accel”, “ACEL”, or the “Company”) is a short at current prices of $7/share. Accel owns ~10,500 video gaming terminals (VGTs) across 2,312 third-party licensed establishments in Illinois. These gaming terminals are placed in restaurants, bars, taverns, convenience stores, liquor stores, truck stops, and grocery stores. Accel has more VGTs than all Illinois casinos combined.

In normal circumstances, this is a decent business that provides stable revenues and growth opportunities. Despite the recent decline, we believe Accel has additional downside to current prices. We believe that earnings will show a massive decline in revenues, material decremental margins, along with financial leverage stress.

Accel generates its revenue through terminal income split. As per most recent materials, ACEL receives 32.6% of revenue, the location owner receives 32.6%, taxes take 34%, and scientific games receives 0.9%. However, with the recent shutdown in restaurants and bars in Illinois, the Illinois Gaming Board has halted gaming operations from March 16th until at least April 7th. This means that ACEL will essentially generate $0 revenue. This loss of revenue is largely versus fixed costs in the near-term and will essentially all flow through and hit EBITDA.

This scenario is highly generous as restrictions will likely last further than April 7th. Furthermore, even once the bans are removed there could be restrictions to the amount of people allowed in bars and restaurants. There also will likely be a reasonable amount of people may avoid these establishments as long as the virus remains which could be a much longer period. Closures of restaurants that are unable to meet financial obligations could prove to be an additional headwind. We think the downturn also will limit their ability to expand operations in Pennsylvania and Georgia and limit any large acquisitions in the near-term hurting the growth story behind the stock.

Furthermore, Clairvest Group owns 23% of the stock. Clairvest has significant investments in casinos, gaming, and industrials. Any forced liquidation of stock would be material to ACEL share price.

Valuation:

Though it is impossible to predict the extent of the shutdown, here are some ways to think about the downside. Assuming revenue is earned equally in each month (likely conservative as this is normally a heavy time for bars due to NHL, NBA, March Madness, etc.) ACEL will generate 3 weeks of zero revenue from the current lockdown. From the curves of other countries, we think that restaurant/bar restrictions will ultimately go longer than April 7th.

To make it easy, say they close for an additional week making it a month of lost revenue. 10,500 terminals closed for 8.3% of the year that normally generate $14,500 of gross profit per terminal per year would result in a $12.7 million hit to gross profit and with little cost cuts we believe this would all flow through to EBITDA. We are spreading the declines in traffic evenly across the next 11 months for simplicity. Assuming an average 15% hit to traffic for the remaining 11 months 2020 (restaurant closings, restrictions, etc.) would result in an additional $21 million of gross profit hit. This results in a total hit of ~$34 million. Say they cut 15% of G&A expenses from 2019 levels over the course of the year, this would result in $11 million of savings. The Company had planned to roll out 1,500 additional VGTs in 2020. To be conservative, we give them credit for all 1,500 terminals at an average of 4 months of operation at 2019 levels of profitability adding $3.8 million of EBITDA.  Net, a $19 million hit to EBITDA would result in $61 million of adj. EBITDA. At 10.0x, this results in a share price of $4.9 or 24% downside.

At 2 months of shutdown plus a 15% decline the rest of the year (split evenly across next 11 months) would result in a $44 million decline in gross profit. Say again they cut $11 million of costs and get $3.8 million; this would result in a $29 million hit to adj. EBITDA for $51 million in 2020. At 10.0x, this results in a share price of $3.60 or 43% downside.

In a downside case scenario, they lose 100% of revenues for 3 months plus a 15% decline the rest of the year would result in a net decrease of $40 million or 50% decline resulting in $40 million of adjusted EBITDA. At 10.0x, this is a $2.30 stock or 64% downside. In this scenario downside scenario, they also would break financial covenants limiting net debt to EBITDA of 4.5x.

Catalyst

further shutdown of restaurants/bars

Q1/Q2 results