PopReach is an undervalued gaming stock: Beacon Securities

Beacon Securities analyst Gabriel Leung launched coverage on Tuesday of mobile gaming company PopReach (PopReach Stock Quote, Chart, News TSXV:POPR), starting the stock off with a “Speculative Buy” rating and C$1.85 per share target price.

Leung said there’s promise in PopReach’s approach to building its business and he sees the stock as an attractive option for Canadian investors looking to gain exposure to the global gaming industry here in our own backyard.

Toronto-headquartered PopReach is a mobile game publisher of Free-to-Play (FTP) video games and franchises. The company has 120 employees including 100 at its PopReach subsidiary in Bangalore, India. PopReach’s revenue comes from in-app purchases along with advertising and its games are available for download on a variety of platforms, while its strategy is to acquire and consolidate proven and profitable FTP games and franchises.

PopReach currently has a roster of 26 games, acquired over the past couple of years.

“We are a different kind of mobile gaming company. We don't try to build new hit games; our organic growth is driven by investing in proven franchises and focusing on user optimization and retention and operating cost reductions.  We minimize risk through a disciplined approach to identifying and executing acquisitions coupled with maintaining a diverse portfolio,” said co-founder and CEO Jon Walsh, in a July 8 press release to mark POPR’s new listing by RTO on the Venture Exchange.

In his coverage initiation, Leung noted the size of the global gaming market which will hit about $159 billion in revenues in 2020 with mobile gaming expected to take in the lion’s share at 48 per cent versus console and PC gaming at 28 per cent and 23 per cent, respectively.

“The challenge for Canadian investors has been a lack of compelling (mobile) gaming investment vehicles (outside of the larger-cap US gaming publishers), along with the ‘hit-or-miss’ nature of smaller game publishers,” Leung wrote.

“In our opinion, PopReach fills this void with a strong, experienced (gaming) management team, which is pursuing a strategy of consolidating, operating and growing proven, profitable games and game franchises. We believe the company’s strategy of acquiring mobile gaming assets in the ‘stable decline’ or ‘long-tail’ phase of their revenue generation life cycle helps to provide better visibility into a game’s potential growth prospects,” Leung said.

“The company can also acquire assets cheap (~2 – 3x EBITDA) and can drive significant value on the back of cost reductions (leverage shared cost infrastructure, including PopReach’s Bangalore live operations studio) and game (revenue) optimization initiatives,” Leung wrote.

The analyst praised the company’s acquisition of two gaming portfolios which have together generated about $19 million in revenues and about $3 million in EBITDA in calendar 2019, with strong organic growth expected in 2020 and 2021.

As for catalysts for the stock, Leung pointed to M&A and further evidence of PopReach’s ability to drive earnings accretion from acquired gaming assets.

Leung is calling for fiscal 2020 revenue and EBITDA of $18.7 million and $3.9 million, respectively, and for fiscal 2021 revenue and EBITDA of $22.1 million and $5.6 million, respectively. At press time, his C$1.85 target represented a projected 12-month return of 118 per cent.