Leaf Mobile is an industry leader, says Cormack

Cormark Securities analyst David McFadgen believes Leaf Mobile (LEAF Mobile Stock Quote, Chart, News, Financials Analysts TSX:LEAF) could be ready to grow, with the analyst initiating coverage on Tuesday with a “Buy” rating and a 12-month target price of $0.60/share.

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, which McFadgen believes can grow its margins with more third-party developers using the platform to bring its games to market faster.

With the mobile game industry experiencing significant growth to the tune of approximately 48 per cent of the global gaming revenue and a CAGR growth expectation of seven per cent from 2021 through 2025, McFadgen believes Leaf is set to be a significant player in the industry.

“We believe Leaf competes with gaming companies based on quality of experience, accessibility and value provided by its games,” McFadgen said. “We believe that Leaf’s Idle Kit is the only game development platform that offers a completed end-to-end solution in the Idle game genre.”

“There are many competitors with larger revenue and more resources, but we believe that Leaf is the dominant player in the idle game genre,” he added. “Leaf is a relatively new company that has come together through the formation and acquisition of companies resulting in relatively lower EBITDA margins compared with some of the bigger publicly traded companies.”

Leaf Mobile has been busy since announcing its first quarter results in May, gaining approval to trade shares on the OTC Markets Group’s OTCQB Marketplace in the United States, along with securing eligibility to complete electronic settlement and transfer of its shares from The Depository Trust Company.

Most recently, Leaf announced a definitive agreement to acquire Vancouver-based mobile game developer Truly Social Games, which has already used Leaf’s IdleKit platform for game development. The deal will see Leaf take an initial 20 per cent stake in Truly Social Games with an initial investment of up to $3 million to help Truly Social develop four new games, with East Side Games scheduled to publish two of the titles worldwide in the second half of 2021. The remaining ownership interest will be acquired based on achieving revenue targets, with the aim of generating approximately $60 million in revenue annually. The deal will also see Leaf Mobile expand its mobile game development capacity by adding a team of approximately 50 employees in studios based in Vancouver and Minsk, Belarus.

“We’re pleased to formalize our previously announced acquisition of Truly Social Games. TSG will add a very talented group of mobile game developers to our group of studios and allow us to increase our development capacity as we execute on our growth strategy,” said Darcy Taylor, CEO of LEAF in a June 22 press release. “The IdleKit platform not only allows developers to cut down development time and create immersive idle genre games, but also allows us to familiarize ourselves with other talented studios that may make good additions to LEAF. TSG is a great example of a successful and experienced partner that we welcome to the LEAF organization.”

After Leaf Mobile posted revenue of $80.5 million in 2020, Cormark Securities projects continued growth, with an estimate of $96.2 million in revenues in place for 2021, then nearly doubling to a projected $180.2 million in 2022.

McFadgen’s EBITDA projections feature some slight fluctuation, with a forecasted dip from the $11.2 million actual EBITDA (13.9 per cent margin) in 2020 to a projected $10.9 million (11.3 per cent margin) in 2021 on account of investments in the business, then jumping to a projected $24.3 million (13.5 per cent margin) in 2022.

Valuation ratio projections also appear to work in Leaf’s favour, as McFadgen estimates EV/Revenue (2.4x to 1.2x) and the price-earnings ratio (27.5x to 13.8x) to be cut in half from 2021 to 2022 respectively, with the EV/EBITDA multiple dropping by almost 60 per cent from 21.8x to 9.2x.

From a balance sheet perspective, McFadgen reports Leaf having $9.6 million in cash available with no debt as of March 31. The company also has an earnout obligation of approximately $40 million, half of which is due in the first quarter of 2022 with the rest potentially satisfied by stock, and McFadgen does not expect Leaf to need to raise capital, with the belief that the company will generate $5.9 million in free cash flow in 2021, followed by another $12.2 million in 2022.

With second quarter financial results coming on August 16, McFadgen believes Leaf is well positioned as a leader in the mobile gaming industry.

“Leaf has several super marquee new games backed by well-known IP that are expected to generate significant revenue in 2022 and beyond. As a result, we are forecasting organic revenue and EBITDA growth of 102% and 116%, respectively in 2022,” he said. “We are confident that Leaf will live up to these expectations and, if so, the stock price should rise materially.”

Leaf Mobile ended Monday trading at $0.30/share on the Toronto Stock Exchange, up 2 cents from its previous closing figure. Overall, Leaf stock prices have fallen about 39 per cent in the year to date, hitting a high point of $0.50/share on February 12. At press time, McFadgen’s $0.60 target represented a projected one-year return of 118 per cent.

Below: Leaf Mobile Founder and CEO Darcy Taylor talks to Cantech Letter