East Side Games is a Buy, says Haywood

Haywood Capital Markets analyst Neal Gilmer is staying bullish on East Side Games Group (East Side Games Stock Quote, Chart, News TSX:EAGR), maintaining in an update to clients on Tuesday his Top Pick status and “Buy” rating for the stock along with a target price of $6.50/share for an implied return of 91.2 per cent.

Headquartered in Vancouver, East Side Games (previously Leaf Mobile) develops and publishes free to play mobile games, with a number of gaming titles leveraging celebrity-IP and using a proprietary game development platform called IdleKit.

The company’s portfolio includes casual titles such as Archer: Danger Phone, Bud Farm Idle Tycoon, Cheech & Chong Bud Farm, The Goldbergs: Back to the 80s, It’s Always Sunny: The Gang Goes Mobile, Trailer Park Boys Grea$y Money, RuPaul’s Drag Race Superstar and the soon to be released The Office: Somehow We Manage.

Gilmer’s update comes after East Side Games announced the acquisition of the Funko Pop! Blitz mobile game and all its related assets from N3TWORK Inc.

“The transaction extends on East Side’s existing catalogue of IP and adds a successful mobile game to the company’s portfolio of mobile games,” Gilmer said. “The all-stock acquisition will be immediately accretive to East Side Games growth trajectory and providers opportunity to optimize for synergies.”

The terms of the agreement see East Side Games issuing nearly 420,000 shares to N3TWORK, at an approximate value of $1.4 million. The deal also includes multi-year licensing agreements with Universal Games and Digital Platforms, which enable long-term growth opportunities.

Gilmer expects the transaction to be immediately accretive for East Side Games, particularly once the game’s stable revenue stream and intellectual property is integrated and synergized with the ESGG team, which is expected to happen in the opening quarter of 2022.

“While a relatively small acquisition, the game’s strong foundation provides opportunity for medium to long-term growth,” Gilmer said. “Additionally, the company will have the optionality to license the acquired proprietary game engine to other developers in the future.”

Funko Pop! Blitz is available on both the iOS and Android platforms, and features Funko Pop! Versions of characters from a variety of franchises including Jurassic World and Back to the Future from Universal Pictures and Amblin Entertainment, NBC’s U.S. adaptation of The Office, DreamWorks Animation’s Shrek and Trolls, as well as Masters of the Universe. The Funko fandom itself is itself booming around the world, with nearly 30 million people collecting the figures.

“Funko Pop! Blitz will add to our portfolio of premium IP games, expand our mobile game genre offerings, and allow us to implement our expertise in live ops as we scale the game into the future,”  said Darcy Taylor, Chief Executive Officer of East Side Games Group in the company’s January 18 press release.

“We are excited to add this high-quality game that melds pop culture’s biggest entertainment franchises into a single experience and has already been very well received by players, especially among the massive fan base of over 30 million Funko collectors worldwide. The game, which utilizes an iconic global franchise, allows for increased scalability in line with our IP-first strategy,” said Taylor.

Gilmer expects East Side’s financial trajectory to keep surging upward, setting an expectation of $91.2 million in revenue for the 2021 year-end figures, followed by a projected increase into nine figures at $152.1 million in 2022, implying year-over-year growth of 66.8 per cent. In 2023, Gilmer projects an increase to $212.1 million, implying a year-over-year increase of 39.4 per cent.

Meanwhile, Gilmer has East Side’s EBITDA set at $8.2 million for the 2021 year-end to imply a margin of nine per cent. From there, he expects an increase to a projected $18.3 million in 2022, growing the implied EBITDA margin to 12 per cent before a projected jump to $31.6 million in 2023, good for an implied margin of 14.9 per cent.

Gilmer also expects East Side to turn in positive EPS beginning in 2022 at $0.09/share, then doubling to a projected $0.18/share in 2023.

According to Haywood projections, East Side is currently trading at 1.4x the 2023 fiscal year estimate compared to its peer group at 3.7x.

“We believe East Side Games has created a strong free-to-play mobile game development platform poised for growth and potential acquisition opportunities,” Gilmer said. “The recent speedbump in growth rate does not alter our fundamental view and outlook on the company and its growth strategy.”

Since it began trading on the Toronto Stock Exchange on February 10 of last year, East Side’s stock price has gone south by 31.6 per cent, dropping off after an early high of $4.95/share on February 12. However, since it hit a low of $2.30/share on November 11, the stock has bounced back with gains of 45.7 per cent.

Disclosure: East Side Games Group is an annual sponsor of Cantech Letter.