PopReach (PopReach Stock Quote, Chart, News TSXV:POPR) is all cashed up and ready for M&A, says Beacon Securities analyst Gabriel Leung, who on Friday gave a corporate update on the company where he reaffirmed his “Speculative Buy” rating.
Mobile game publisher PopReach announced on Friday the closing of a previously announced public offering of 13.8 million shares at $1.25 each for gross proceeds of $17.25 million, which included the full exercise of an over-allotment for 1.8 million shares. The company said it would use the funds for acquisitions, working capital and general corporate purposes.
Headquartered in Toronto with a studio in Bangalore, India, PopReach is a free-to-play mobile game company which focuses on acquiring, operating and growing proven and profitable games and franchises. The company has titles including War of Nations, Kitchen Scramble, Smurfs’ Village, Garden of Time and Kingdoms of Camelot.
Earlier in November, PopReach closed on a previously-announced investment from New Insight Incentive Plan, a 100-per-cent-owned subsidiary of eWTP Tech Innovation Fund LP, which is the investment arm of Alibaba Group. New Insight acquired about 6.9 million shares issued at a price of $0.72 per share for a total of about $5 million and giving New Insight about a 11.73-per-cent ownership in PopReach.
“The team at eWTP are preeminent investors in the games industry and we are delighted to have them as shareholders of PopReach,” said Jon Walsh, Co-Founder and CEO of PopReach, in an October 15 press release. “In addition to providing us with additional capital to execute against our pipeline of acquisition opportunities, we are thrilled be able to leverage eWTP’s strategic insights, connections, and expert advice as PopReach’s Special Advisor to Asia.”
After the financing round and New Insight investment, Leung estimated PopReach’s balance at about $18 million in cash against $7.1 million in debt. The analyst said given that PopReach is already cash flow positive, he expects the company to use the recent fund raises primarily for acquisitions.
“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 wrote.
“With the company’s large war chest, along with management’s strong relationships in the gaming space, which we believe has been augmented by its partnership with eWTP Tech Innovation Fund, we expect to see an acceleration in M&A activity over the near-term,” he said.
Looking ahead, Leung said outside of acquisition announcements, the next catalyst for POPR will likely be its third quarter 2020 results, due on November 30 and featuring what Leung describes as a seasonally slower quarter. Leung is forecasting Q3 revenues and EBITDA of $4.5 million and $458,000, respectively. Longer-term, the analyst is calling for 2020 revenue and EBITDA of $19.3 million and $4.6 million, respectively, and for 2021 revenue and EBITDA of $22.8 million and $5.6 million, respectively.
Leung estimates PopReach to be currently trading at 3.2x 2021 EV/Sales and at 13.2x EV/EBITDA whereas its peers in the Video Gaming sector are trading at an average of 5.4x and 16.3x, respectively.
“On the back of the equity financing, we have maintained our Speculative Buy rating, but we have lowered our target price slightly to reflect share dilution (i.e. ~23 per cent to basic shares) to $1.70 (was $1.85), which is based on 17x CY21 EV/EBITDA,” Leung wrote. “That said, we believe there could be upside to our target as the company provides more transparency to its M&A roadmap.”
PopReach, which went public this past July via reverse takeover at $0.72 per share, has seen its share price rise since then and is now trading in the $1.30-$1.50 range. Leung’s new $1.70 target represented at the time of publication a projected 12-month return of 27 per cent.
PopReach last reported earnings on August 24 where the company’s second quarter featured revenue up 12.1 per cent year-over-year and up 2.8 per cent sequentially to $4.9 million. Gross profit margin increased from 45.9 per cent in the first quarter to 56.6 per cent, while adjusted EBITDA went from $0.3 million a year ago to $1.5 million. The company has a net loss of $1.8 million or a loss of $0.05 per share compared to a loss of $0.7 million or $0.02 per share for the previous quarter.
“We are successfully executing against our strategy of reducing operating costs from acquired assets to increase cash flow while investing in our key franchises to ensure continued profitable growth,” said Walsh in a press release. “The completion of our server cost reductions in the second quarter drove significant gross profit margin improvement. Our ability to drive higher cash flows from our assets combined with our healthy balance sheet puts us in a strong position to execute against our pipeline of acquisition opportunities.”