PopReach is deeply undervalued, says Echelon Capital

Mobile gaming company PopReach (PopReach Stock Quote, Chart, News TSXV:POPR) has a compelling investment strategy with solid consolidation prospects in the industry.

That’s according to Echelon Capital’s Rob Goff who initiated coverage on Monday with a “Speculative Buy” rating and $1.70 target, saying the company is undervalued against its current portfolio and deeply undervalued given its M&A potential. The analyst’s price target implied a return of 102.4 per cent at the time of publication.

Toronto-headquartered PopReach is a free-to-play mobile game publisher focused on acquiring and optimizing proven game franchises. It currently holds a roster of 24 games across 12 game franchises and over 1.2 million unique monthly users, with five primary titles —War of Nations, Kitchen Scramble, Smurfs’ Village, Garden of Time and Kingdoms of Camelot— which together account for more than 80 per cent of revenue.

As Goff explains it, PopReach looks to aggressively acquire games that can be immediately accretive, using a three-step optimization approach to revitalizing established titles with declining performance:

“First, investment is made to stabilize revenues and halt the decline; second, cost reduction is realized through game integration with PopReach’s team and through server cost optimizations; and third, improvements to gameplay experiences are made to improve player retention and ultimately increase in- game purchases,” Goff wrote.

Goff said the gaming market can use companies like PopReach that find a niche amid the current climate, where the mobile game market in 2019 hit $70 billion worldwide, surpassing the $35 billion in the PC video game industry and the $45 billion of the console market. Meanwhile, the maturing age of gamers has added to their appeal for advertisers, putting the market growth at a CAGR of 14 per cent across 2020 to 2025.

“The impressive growth of mobile games has created a top tier of marquee providers focused on maintaining market leadership with prioritization on early stage, hyper-growth titles. Consequently, many second tier or lower games are under-managed and underperform against potential long-tail revenue trend lines,” Goff said.

“At the other end of the spectrum, smaller publishers often fail to focus on either ongoing content development for maturing titles or on the adoption of cost optimization strategies afforded by cloud-based strategies. We look for PopReach to create significant shareholder returns executing on its consolidation strategy where the Company has demonstrated success realizing accretive acquisitions on upfront economics then adding value through implementing revenue-enhancing and cost-efficiency strategies,” he said.

Importantly, Goff says PopReach has realized an average cash return on acquisition exceeding 40 per cent, with an all-in cash payback of 2.3 years. On organic growth, the analyst is expecting PopReach to exceed ten per cent by the end of 2021, with specific initiatives around Smurfs and Kitchen Scramble.

“With access to public markets and growing scale, we see PopReach as an increasingly advantaged buyer in a market characterized by a supply/demand imbalance as larger players view PopReach’s target list as too small,” Goff wrote.

Looking ahead, Goff expects PopReach to generate fiscal 2020 (year end December 31) revenue and adjusted EBITDA of $17.7 million and $3.6 million, respectively, and 2021 revenue and EBITDA of $23.9 million and $5.0 million, respectively.

Comparatively, Goff estimates PopReach to be trading at 2.0x/1.5x EV/Sales for 2021/2022 compared to peer Stillfront Group at 5.7x/5.1x.

Goff summarized his investment thesis on the gaming company.

“We forecast aggressive shareholder returns as a proven management team deploys a clearly defined operating and acquisition game plan,” he said. “We believe, market growth together with the competitive landscape present a sustainable opportunity to add value as a consolidator of mature titles where PopReach (or “the Company”) has demonstrated its ability to shape-shift long-tail assets. As it gains scale and demonstrates access to capital, the Company’s ability to acquire and realize efficiencies are empowered as buyer synergies and economics strengthen. Across the current portfolio of 12 franchises(24 games), the Company has delivered a return on cash from the acquired assets of >40% with payback at 2.3 years.

The analyst said he expects both kinds of growth from PopReach.

“Having recently completed its RTO and with its TSXV debut on July 8th where it closed at C$0.88, we look for significant returns as the Company’s organic and inorganic growth profile gains traction,” he argued. “We look for acquisitions as positive catalysts demonstrating the Company’s ability to add value as a consolidator while further access to capital markets would be expected to raise its profile.”

Goff said shareholders can take comfort in a management team he believes is top notch.

“PopReach’s management has an exceptionally strong profile and network across the mobile gaming market with CEO Jon Walsh’s prior company publishing five #1 games that generated more than 50M downloads and with President & COO Chris Locke having launched two hundred-million-dollar franchises. Management’s network ensures a deep, prospective pipeline of acquisitions, while management’s track record at PopReach has demonstrated its ability to improve economics for acquired properties. Gaining access to public markets and building scale will continue to enhance management’s ability to source attractive and larger acquisitions that in turn enhance platform scale efficiencies.