Haywood Capital Markets analyst Neal Gilmer remains eager about the potential of East Side Games Group (East Side Games Stock Quote, Chart, News, Analysts, Financials TSX:EAGR), maintaining a “Buy” rating and target price of $6.50/share for an implied return of 75.2 per cent in an update to clients on Thursday.
Headquartered in Vancouver, East Side Games develops and publishes free to play mobile games, including Archer: Danger Phone, Cheech & Chong Bud Farm, It’s Always Sunny: The Gang Goes Mobile, Trailer Park Boys Grea$y Money, RuPaul’s Drag Race Superstar and The Office: Somehow We Manage.
Gilmer’s updated analysis comes after East Side reached an earnout milestone stemming from the merger of LEAF Mobile and East Side Games, completed last February (after which the merged company changed its name to East Side Games). The deal involved a payout to East Side shareholders upon hitting revenue milestones over the 12-month period following the deal’s close.
Gilmer is taking the event as a positive for EAGR.
“The announcement demonstrates the success of the business combination to date and most notably the recent launched RuPau’s Drag Race Superstar and The Office: Somehow We Manage mobile games,” Gilmer said.
Former East Side Games shareholders will be paid contingent consideration of $20M in cash and stock within the next 30 days. All told, $10 million will come in cash, with the remainder being issued in common shares valued at $2.25/share. Notably, over three-quarters of the 4.4 million shares to be issued will go into the family trust of Executive Chair Jason Bailey, which will give him 50.5 per cent of the company’s outstanding shares once the payout is completed.
An identical $20 million payout awaits if East Side can achieve $150 million in gross TTM revenue as of Feb. 5, 2023.
Even after the earnout cash goes out, Gilmer estimates the company will still have $1.8 million in cash available, along with a $13.5 million undrawn debt facility at five per cent.
East Side has been busy to start 2022, having extended a partnership with Australia-based Mighty Kingdom Games to release three free-to-play mobile games, acquired the assets to the Funko Pop! Blitz mobile game from N3TWORK, announced a new game based on BBC’s Doctor Who series, then launched The Office: Somehow We Manage on January 27; Gilmer expects the latter game, along with RuPaul’s Drag Race Superstar, to drive strong revenue growth in the final quarter of 2021 fiscal and the opening quarter of the 2022 fiscal year.
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.
Overall, Gilmer continues to believe in East Side as a top pick in the industry.
“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.”
East Side’s share price has dropped by 23.5 per cent in the last 12 months, but has produced a 7.1 per cent return since the start of 2022. A year ago, East Side was at a high of $4.90/share, then dropped to a 52-week low of $2.30/share on November 11.
Disclosure: East Side Games is an annual sponsor of Cantech Letter.