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LEAF Mobile is undervalued, Eight Capital says

Canadian mobile gaming company LEAF Mobile (LEAF Mobile Stock Quote, Chart, News, Analysts, Financials TSX:LEAF) continues to trade at a steep discount to its peers, says Eight Capital analyst Suthan Sukumar, who reviewed LEAF’s latest quarterly results in an update to clients on Friday.

Vancouver-based free-to-play mobile game maker LEAF Mobile released its fourth quarter and full-year 2020 results on Thursday, showing Q4 revenue of $11.9 million compared to $3.4 million a year earlier and an adjusted EBITDA loss of $1.4 million compared to a loss of $0.5 million for Q4 2019.

LEAF had a transformational acquisition in East Side Games on February 5 of this year, and as such, LEAF posted ESG’s financial highlights for the quarter, as well, which featured Q4 revenue of $19.2 million compared to $10.6 million a year earlier. ESG’s adjusted EBITDA was $6.6 million for the Q4 compared to $1.1 million a year earlier.

Commenting on the quarter, LEAF CEO Darcy Taylor said the company remains focused on its three-pillar growth strategy in organic growth from game development and publishing, distributed growth from its development platform IdleKit and growth from accretive M&A.

“I’m proud of the team at LEAF for executing on our vision even as the world navigated uncharted territory. We have been carrying the momentum we built in 2020 into the new year with the signing of a number of IP, IdleKit and publishing agreements and continue to finalize the Truly Social Games acquisition,” said Taylor in a press release.

Also subsequent to the end of the fourth quarter, LEAF closed on a public offering for gross proceeds of $23 million, graduated to the TSX senior board from the Venture and announced partnerships for a number of games in development, including a mobile game based on RuPaul’s Drag Race and an NFT game, Bud Farm Nifty Stash.

Sukumar said the top and bottom lines for LEAF’s fourth quarter were in line with his estimates, while the company’s strong year-over-year organic growth was noted, as was ESG’s solid organic growth and its 34-per-cent adjusted EBITDA margins.

“LEAF reported in-line FQ4 (ending December) results after-market yesterday. While we view the quarter as largely a non-event given the transformational change in the company’s profile and growth outlook post the East Side Games acquisition, the additional disclosure around standalone and proforma consolidated financials for LEAF and ESG reaffirmed strong organic growth momentum across the board, with a better than expected margin performance from ESG, highlighting the leverage upside in its operating model,” Sukumar wrote.

“As per our recent initiation, we continue to view LEAF as an ‘under the radar’ mobile gaming powerhouse that is well positioned to deliver on organic growth upside in quarters ahead as they execute on their differentiated celebrity IP-based model for free-to-play (FTP) gaming. We expect to see continued trends with the first (partially) consolidated results with the FQ1 print expected in a couple of weeks (mid-May),” he said.

Sukumar said IdleKit remains both LEAF’s top investment priority and M&A flywheel for 2021. IdleKit is a proprietary, internally-developed platform for designing narrative-driven idle games. LEAF says it essentially cuts development timelines in half, with the company now licensing out the platform to other developers in exchange for revenue share. Sukumar said the focus will be on enhancing IdleKit’s underlying technology stack and expanding outbound sales expertise to continue sourcing quality studio partners.

“Management reiterated plans to reinvest EBITDA over F21 to realize greater scale and leverage potential in IdleKit over F22,” Sukumar said. “Recall, IdleKit allows LEAF to uniquely identify M&A targets with high-potential for hit-driven success, given an early look into game performance with new/emerging titles, a key proprietary advantage, in our view.”

Since joining the TSX in February, LEAF’s share price has been down and then now back up to where it started at close to the $0.50 mark. But Sukumar thinks there’s lots of upside from here, reiterating in his report both his “Buy” rating and $1.00 target price, which at the time of publication represented a projected 12-month return of 122 per cent.

Comparing LEAF to its global gaming peers, Sukumar said the stock is currently trading at less than 2x 2022 revenue which represents a steep discount to the field at 5-7x.

“Our $1/share target implies 4x, a modest discount reflecting LEAF’s early days execution as a pubco and smaller market cap,” Sukumar said.

The analyst is calling for LEAF to deliver 2021 revenue and adjusted EBITDA of $138.4 million and $11.0 million, respectively, and 2022 revenue and adjusted EBITDA of $231.9 million and $35.9 million, respectively.

“LEAF’s core gaming portfolio continues to exhibit durable underlying growth fundamentals, despite reduced user acquisition spend in the [fourth] quarter due to rising marketing costs ahead of the planned iOS IDFA changes in Q2, underscoring the resiliency in active users and monetization with the company’s celebrity IP model and its built-in fan bases,” Sukumar said.

Disclosure: LEAF Mobile is an annual sponsor of Cantech Letter

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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