M Partners Initiates Coverage of TransGaming with a BUY, $1 Target

Until now, the story of TransGaming (TSXV:TNG) has been one of incremental gains.

The Toronto company got its start in 2001, designing porting software that allowed PC gamers to play games on other platforms without the time and cost of rewriting the code. The software became useful to gaming giant Electronics Arts because it could save money on coders while publishing simultaneously on multiple platforms. With this model, TransGaming revenue crept up from $1.59 million in fiscal 2008 to $5.07 in fiscal 2011.

But M Partners Ron Shuttleworth says if TransGaming’s business was boring before, investors might want to prepare themselves for a jolt of caffeine. Early in 2010, the company announced it was partnering with Intel to create GameTreeTV, an on demand gaming system that works much the way Netflix does for movies.

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Intel, sensing a first -mover opportunity in the space, enhanced its chipset for set-top boxes to support games rendering and graphics for IPTV. The rollout of GameTreeTV, however, was plagued by delays, and shares of TransGaming languished throughout 2010 before a downturn last year sent its shares near current levels.

Recent events, however, may soon make the frustration of a prolonged rollout a thing of the past, says Shuttleworth. With a quarter-million users as of November 8th, more than three times the number the company expected, GameTreeTV is a hit. The M Partners analyst thinks this development is significant enough that the company’s traditional revenue stream will be reduced to just 25% of its business by 2014. Shuttleworth initiated coverage on TransGaming today with a BUY rating and a twelve month target of $1.

The upside for GameTreeTV could, at maturity, says Shuttleworth, mean 1.25 million users. But that number is by no means the extent of TransGaming’s potential market penetration, he notes. Earlier this year, TransGaming acquired the interactive TV division of Oberon Media, a New York-based games distributor. The acquisition added more than a hundred game titles to TransGaming’s portfolio, including iconic Hasbro titles such as Scrabble, Risk, and Monopoly. The Oberon acquisition also brings distribution agreements with cable and satellite operators such as DISH Network and DirecTV, instantly expanding TransGaming’s reach to nearly fifty-million households. TransGaming also recently announced that it now supports MIPS set top box architecture, giving it reach to more than three-quarters of set top boxes worldwide.

Shares of TransGaming closed today up 1.1% to $.45 cents.

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