Transact Technologies Inc. (“TACT” or the “Company”) is a manufacturer of printing solutions for Casino and Gaming, Food Service and Point of Sale (“POS”) automation. This idea has been written up on VIC and I would refer to past write-ups for greater detail of the operating segments.
The original investment case was for TACT to harvest the cash flows from its very stable and high margin casino printer (“Ticket-in Ticket-out or TITO”) business to grow Food Service Technologies (“FST”) products by developing and offering recurring software modules with its hardware.
This strategy did not gain the traction that was expected by investors. The former CEO (who was with the Company since 1996 and the mastermind behind the original plan) was replaced in 2023 by TACT board member and accomplished former tech and sales-oriented CEO John Dillon.
Mr. Dillon has embarked on several internal initiatives to streamline costs while refining the sales organization. To date, the success of such initiatives has been masked by several one-time events. Most notably, challenging compares in the Casino segment as customers overpurchased printers from TACT in 2022/3 due to a supply chain shortage that temporarily impaired TACT’s competitor.
The good news is that TACT thinks they have retained about 10-15% Casino and Gaming mkt share because of this event. Also, in Q124, TACT unexpectedly lost a large customer in FST.
TACT’s Casino and Gaming segment (~50% of revenues) is the crown jewel asset. Duopoly market structure with a Japanese company (Japan Cash Machine, 6418 JT) growing MSD% annually. TACT sells to Video Lottery Terminal (VLT) manufacturers (IGT, Aristocrat, etc). and has content in machines across the World (Wynn, Caesars Las Vegas and MGM Macau). TACT also manages relationships with casino operators to develop end user preference for its products.
This niche market has meaningful barriers to entry given strict gaming regulations. Every year about 10-15% of the video slot machine market is refreshed with new models which creates demand for casino printers. Other rev drivers include new casino openings (Indian, Macau, etc).
While not broken out, we believe the margin and cash flow characteristics of this business are extremely favorable. We estimate that the gaming business generates $6-10MM of free cash flow annually. We also estimate that public company costs to run TACT are ~$3 MM a year.
We don’t think it is unreasonable to assume that the Gaming Segment can be worth $60-80MM vs TACT’s current enterprise value of $40MM.
I won’t spend much time discussing the Food Service Technology (“FST”) segment but there is a lot to like there especially TACT’s long standing relationship providing printers to McDonalds (both point of sale and back of the house, “BOHA”). Furthermore, new FDA regulations and higher operating restaurant expenses (inflation) provide tailwinds for demand for TACT’s products.
After some trials and tribulations, TACT seems to have finally refined its BOHA product with its BOHA2 printer. Mkt penetration for this product is nascent, and sales are gaining traction with customers, including MCD franchisees globally. The opportunity set for sales is meaningful.
We estimate that this business has been a considerable drag on earnings and cash flow of the Company but see that there is a pathway to break even which will dramatically improve the overall earnings power of the Company.
Why is the Stock Mispriced?
In Q1, TACT lost a large 7/11 contract which put pressure on the share price. After the Q2 call, it seems that FST is back on track and is on a trajectory toward break-even. TACT is winning new business and is employing a more cost-effective land and expand sales strategy.
As previously mentioned, gaming comps have been difficult. However, it seems that barring two customers who overbought printers and are working down inventories, the channel is normalizing, and we should see a return to growth in a 1H25 time frame.
There has been a consistent seller of shares in the market. This is an extremely illiquid and closely held name. It is unclear who the seller is, however, there has been consistent selling pressure since Q1 which has kept shares artificially depressed.
Valuation / What is it Worth?
Under a variety of scenarios, we think the stock is worth $6-8 on a trading basis and $10+ under a transaction scenario.
Management has guided to ($1MM) to ($2MM) of EBITDA for 2024 and generated $10 million of EBITDA in 2023. Admittedly, the business was overearning that year, but we do not think its unreasonable for the business to generate $7-10MM of EBITDA inclusive of $3 million of public company expenses. Applying an 8x multiple translates into $6-8 stock on a trading basis.
In an M&A scenario this could go for a higher price as 1) public company costs eliminated, 2) sales team synergies, 3) Strategic access to large customers including casino operators, McDonalds, etc.
With regards to the Gaming segment, we think JCM purchased FutureLogic (the entity that currently competes with TACT) in 2014 for $110-120MM or roughly 2-2.5x sales.
Assuming normalized gaming segment revenue of $40MM, we don’t need nearly as high of a multiple for the stock to work.
It is possible the gaming segment could sell for $60-80MM ($6-8 a share). This would leave $~30MM of non-gaming revenue. At 1-1.5x could be another $3-5 a share of value or total transaction value of $10+.
Risks and Catalysts
Economic downturn could affect FST segment more than gaming
Inability to achieve a successful outcome with strategic process.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Soft Catalyst: FST segment to break even.
Hard Catalyst: Sale of part or all of the Company.
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