Haywood launches coverage of LEAF Mobile with a Buy and $0.75 target

Haywood Capital Markets launched coverage of LEAF Mobile (LEAF Mobile Stock Quote, Chart, News, Analysts, Financials TSX:LEAF) on Thursday, with analyst Neal Gilmer saying the global opportunity in mobile gaming is huge and expanding.

LEAF Mobile hit the TSXV last April through a reverse takeover and then spent the next nine months on the Venture Exchange before graduating to the senior board this week. The company is a developer of mobile games and publisher of so-called counter culture titles like Archer: Danger Phone, FUBAR: Idle Party Tycoon and Cheech & Chong Bud Farm.

LEAF just completed the acquisition of East Side Games (ESG), a $159-million deal comprised of $19 million in cash, the issuing of 444 million common shares of LEAF and certain performance milestone payments. LEAF also recently completed a private placement raising about $23 million most of which went towards the ESG purchase.

Merging with ESG, an narrative idle game developer with titles such as Trailer Park Boys: Grea$y Money and The Goldbergs: Back to the 80s, is seen as a great fit by LEAF management.

“ESG has an outstanding track record of bringing world class franchises to life and providing top tier mobile experiences to their users,” said LEAF CEO Darcy Taylor in a February 5 press release. “The values and a purpose-driven mentality within ESG’s team culture are strongly aligned with LEAF’s. We are confident that this acquisition will generate significant long-term shareholder value and we look forward to continuing to add top-tier, like-minded studios to the LEAF Mobile family moving ahead.”

Gilmer said with ten current titles and seven more in the pipeline for 2021, the new combined entity creates an enviable platform and arguably the largest publicly traded mobile game developer in Canada. The analyst estimated annualized revenues at more than $80 million.

Gilmer touted the benefits of LEAF’s Idlekit platform, a proprietary, internally-developed platform designed for creating narrative-driven idle games, which reportedly drastically cuts down on development timelines, virtually cutting them in half, according to LEAF, which licenses out the platform to other game developers in exchange for revenue share.

“The IdleKit platform includes various features that support the game development life cycle that enables the focus to be on content creation rather than engine development, in addition to the Live Ops event manager and data analytics,” Gilmer wrote.

“The key benefits for other game developers creates a SaaS opportunity for LEAF Mobile,” he said. “As it signs up new game development contracts LEAF will diversify its revenue base from its own internally developed games. The typical margin profile of SaaS-based opportunities could help boost overall gross margins. Lastly, the company would gain visibility on the game development pipeline for potential M&A or partnership opportunities.”

On other notables about LEAF, Gilmer pointed to the company’s monetization strategy comprised in large part by in-app purchases on games offered for free to play, the use of celebrity intellectual property to drive in-game narratives and live ops development and events.

Moreover, Gilmer argued investors should take notice of the ongoing and expected growth in mobile gaming as it relates to LEAF.

“As a result of the extended impact of the pandemic, Newzoo increased its estimate for the size of the global games market by over ten per cent to US$174.9 billion. The new estimate implies an annual growth rate of 19.6 per cent prior to the old estimate. The mobile gaming segment was the largest contributor to the upward revision, now estimate to grow by 25.6 per cent and account for 49 per cent of the global games market revenue,” Gilmer wrote.

“Smartphone games are the largest contributor to the growth of the global market both in percentage terms as well as dollars. It is estimated there were 2.8 billion mobile gamers in 2020, a significant market opportunity for LEAF Mobile and its portfolio of existing games and its development pipeline heading into 2021,” Gilmer wrote.

Looking at the numbers, Gilmer thinks LEAF will generate, pro-forma with the ESG acquisition and net of inter-company adjustments, full 2020 revenue and EBITDA of $83.2 million and nmf (no meaningful figure), respectively, 2021 revenue and EBITDA of $135.4 million and $10.7 million, respectively, and 2022 revenue and EBITDA of $219.3 million and $38.4 million, respectively.

With his coverage initiation, Gilmer has given LEAF a “Buy” rating with a Very High risk factor and target price of $0.75 per share, which at the time of publication represented a projected 12-month return of 53 per cent.

LEAF Mobile last announced quarterly financials in late November when its third quarter 2020 featured total revenue of $11.1 million, up 16 per cent sequentially, and a net loss of $0.7 million compared to a loss of $0.2 million for the previous quarter.

“Our business performance results to date show strong execution of our strategy of ‘Live Ops’ excellence, creating new long-life cycle franchises, investing in new IP with the goal of creating highly engaging games that produce lasting player enjoyment,” said Taylor in a press release.