LEAF Mobile trades at a “steep discount” to its peers: Eight Capital

Free-to-play mobile game developer Leaf Mobile reported its first quarter 2021 financials on Monday, posting record revenue of $25.3 million versus $13.0 million a year earlier and versus $23.0 million for the previous quarter. Adjusted EBITDA was $3.0 million compared to a loss of $1.4 million a year earlier.

The quarter included partial contribution from newly acquired East Side Games, which came aboard in early February.

“We completed our transformational acquisition of East Side Games and made significant progress executing on our three-pillar growth strategy in the first quarter of the year. By the end of this year, we expect our game portfolio to have almost doubled, from both in-house and Idlekit partner game launches including the highly anticipated title from the RuPaul’s Drag Race franchise,” said LEAF CEO Darcy Taylor in a press release.

Along with the ESG acquisition (for $159 million), LEAF’s Q1 involved the closing of a public offering for gross proceeds of $23 million including over-allotment, a non-binding LOI to acquire Vancouver-based game developer Truly Social Games and the company’s graduation from the TSX Venture to the senior board.

Since the end of the first quarter, LEAF has announced new partnerships for its IdleKit development platform and a proposed move to consolidate LEAF shares at a ratio of up to ten for one.

Like many names in the tech sector, 2021 has so far been a bit of a challenge as far as share price goes, with the stock currently down 18 per cent since its TSX debut at $0.50 on February 10.

But there should be upside over the next 12 months, says Sukumar, who in his new report reiterated his “Buy” rating for LEAF and $1.00 target price, which at the time of publication represented a projected one-year return of 141 per cent.

“While there was not much incremental in managements’ commentary on the [first quarter conference call], given the recent update only a couple weeks prior with the company’s FQ4 print, we grow more constructive on the organic growth potential ahead with new game launches planned over H2, given the strong performance in the existing game portfolio,” 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 the quarters ahead as they execute on their differentiated celebrity IP-based model for free-to-play (FTP) gaming. We view current valuation as highly attractive. Continued M&A remains a key near-term catalyst for shares,” he said.

On the Q1 numbers, Sukumar said LEAF’s $23.0-million topline compared to his estimate of $25.0 million and the consensus call for $26.3 million, while adjusted EBITDA at $2.7 million was a beat of both the analyst’s estimate at $1.2 million and the Street’s $0.9 million.

Sukumar related that management is calling for more modest growth in the current second quarter due to seasonality in the video game market and greater marketing spend by LEAF. The second half of the year should also be more stacked when it comes to game releases, where LEAF has several titles currently in soft launch, including RuPaul’s Drag Race which is set for a soft launch in September.

“With a robust pipeline of 11 titles (majority to be launched in F21) versus ten titles currently live, we see the high velocity of new game launches this year as potential catalysts, which should help drive strong revenue growth trends over H2 with stronger growth exiting Q4 into F22 as they ramp,” Sukumar said.

Sukumar said LEAF’s balance sheet looks solid at cash and equivalents at the quarter’s end of $9.6 million and cash flow from operations of negative $0.2 million (versus negative $1.4 million a year earlier. The analyst said M&A should continue to be a focus for management going forward, both in terms of IdleKit-related acquisitions as tuck-ins as well as the potential for larger scale purchases.

Overall, Sukumar said LEAF continues to trade at a significant discount to its gaming peers, currently trading at less than 2x 2022 revenues, by his estimate, which is “a steep discount,” Sukumar said, compared to global gaming peers at between 4-6x.

“Our $1/share target implies 4x, a modest discount reflecting LEAF’s early days execution as a pubco and smaller market cap. We believe LEAF’s higher-growth profile and M&A upside optionality justifies a premium multiple, and see a valuation re-rate opportunity in the quarters ahead as the company showcases better execution with upside to organic growth expectations,” Sukumar wrote.

The analyst’s forecast calls for LEAF Mobile to generate 2021 and 2022 revenue of $138.4 million and $231.9 million, respectively, and 2021 and 2022 adjusted EBITDA of $11.0 million and $35.9 million, respectively.

Disclosure: LEAF Mobile is an annual sponsor of Cantech Letter