LEAF Mobile has a 182 per cent upside, says Eight Capital

Eight Capital analyst Adhir Kadve is confident in Leaf Mobile (LEAF Mobile Stock Quote, Chart, News TSXV:LEAF), maintaining his “Buy” rating and target price of $10.00/share in an update to clients on Tuesday.

Headquartered in Vancouver, Leaf Mobile Games develops and publishes free-to-play mobile games through its studio networks and partners primarily for Apple’s iOS and Google’s Android platform. The company operates two subsidiaries: East Side Games (ESG) and LDRLY. In addition to game development, Leaf generates revenue through third-party games that are developed on its Idle Kit platform

Kadve’s latest analysis comes after Leaf Mobile released second quarter financials on Monday, the first full quarter to reflect results since the acquisition of Eastside Games.

“Revenues were impacted by unfavorable FX headwinds, seasonality inherent in the mobile gaming industry which was exacerbated by global re-openings on the back of vaccine rollouts and strategic pullback of UA spending on account of Apple’s IDFA changes,” Kadve said.

Leaf Mobile reported $22.5 million in total revenue for the second quarter, slightly below the consensus expectation of $23.9 million and the Eight Capital expectation of $25 million. The topline represents a two per cent drop on a quarterly basis, but still represents a 28 per cent year-over-year increase. Kadve noted that an eight per cent foreign exchange headwind affected the company’s revenue figures for the quarter, with revenue coming in at $24.3 million on a constant currency basis.

Meanwhile, the company’s adjusted EBITDA result of $2.6 million with an 11 per cent margin came in slightly ahead of the $2.3 million consensus projection for a ten per cent margin, while being in line with the $2.6 million projection and ten per cent margin from Eight Capital.

“We saw strong results for our second quarter, which is a historically slower quarter across the mobile game industry. This quarter was also unique as we saw global reopening plans and changes to IDFA in Apple’s iOS operating system start to enter the mobile market and evolve conventional marketing practices. In spite of this, our investments in our games continued to pay off, allowing us to continue to outperform the first half of 2020 with good player retention from our existing games,” said Darcy Taylor, CEO of LEAF in the company’s August 16 press release.

“Looking at our IdleKit business, we’ve continued to maintain the momentum we saw at the start of the year, attracting four new IdleKit partners including Mighty Kingdom Games, which recently listed on the Australian Stock Exchange. These four new partners will add up to an additional nine games to our existing pipeline, which will result in the most games in development we’ve ever had,” he added.

With multiple game launches delayed to the third and fourth quarters and the subsequent potential benefits pushed to the first half of 2022, Kadve has downshifted some of his financial metrics with his most recent update, lowering his revenue projection for 2021 by 29 per cent from $138.4 million to $98.2 million, though it would still mark a 22 per cent year-over-year increase. Kadve similarly lowered his 2022 revenue projections, dropping from his initial estimation of $231.9 million to $184 million, which would still mark an 87.4 per cent year-over-year increase.

Kadve’s adjusted EBITDA figures were also lowered, dropping his 2021 projection to $10.4 million (11 per cent) from $11 million (7.9 per cent margin), and lowering the 2022 projection from $35.9 million (15.5 per cent margin) to $20.7 million (11 per cent margin).

However, the company’s adjusted EPS projections got a boost, with Kadve now projecting $0.20/share instead of $0.02/share for 2021, with the 2022 projections now coming in at $0.27/share from $0.05/share.

Kadve’s valuation projections also come into clearer focus, with the EV/Sales multiple dropping from 3.4x in 2020 to a projected 2.8x in 2021 and a projected 1.5x in 2022. Kadve also projects the EV/EBITDA multiple to drop from a projected 25.9x in 2021 to a projected 13.1x in 2022, while he sees the price-earnings ratio coming in at a projected 13.2x in 2022.

Overall, Kadve still believes Leaf will be successful on its current path.

“LEAF’s underlying portfolio of games demonstrated strong organic growth and with a stacked pipeline of game titles slated for H2 and strong early results from anticipated marquee games we continue to grow constructively on LEAF’s organic growth potential from its existing and upcoming game Portfolio,” he said. “We continue to view LEAF as an under the radar mobile gaming powerhouse that is well positioned to deliver on its differentiated celebrity-IP based model for the FTP gaming.”

At press time, Kadve’s $10.00 target represented a projected one-year return of 182 per cent. Year-to-date, LEAF Mobile’s share price is currently down about 35 per cent. On August 17, LEAF completed a ten-for-one share consolidation.

Disclosure: LEAF Mobile is an annual sponsor of Cantech Letter.