PopReach has a 233 per cent upside, says Beacon

Beacon Securities analyst Gabriel Leung is having a peek at PopReach (PopReach Stock Quote, Chart, News TSXV:POPR), maintaining a “Buy” rating and C$1.30/share target price for a projected return of 233 per cent in an update to clients on Friday.

Toronto-based PopReach publishes free-to-play video games and game franchises in Canada, India and the United Kingdom, with its offerings available on most major mobile platforms and including names such as a Smurfs portfolio of titles, PAYDAY Crime War, Peak, Kitchen Scramble, Gardens of Time, City Girl Life, War of Nations and Kingdoms of Camelot.

Leung’s latest analysis comes after the company released its first quarter financial results for the 2022 fiscal year, which were headlined by $4.6 million in revenue for a 13.2 per cent year-over-year increase, while coming in slightly ahead of the $4.3 million projection set out by Beacon Securities. (All figures in US dollars except where noted otherwise.)

In-app revenue accounted for over 90 per cent of the company’s report in the quarter, with revenue from its Apple platform coming in at $2.5 million for a 38.6 per cent year-over-year increase, while settling in at 53.5 per cent of the company’s overall revenue mix. According to Leung, the company’s Facebook platform and its $0.9 million contribution continues to be its most volatile, though with PopReach’s recent acquisition of Federated Foundry, the impact is lessened significantly, dropping from 20 per cent of the company’s revenue to approximately five per cent.

The company’s bookings also saw an 8.2 per cent increase, coming in at $4.5 million.

PopReach saw its monthly average user count go up by over 50 per cent year-over-year to 1.52 million users in the quarter, though its average revenue per user dropped from $1.38/user to $1.01/user.

Meanwhile, the company produced mixed results on the margin, with its gross profit growing 16.4 per cent year-over-year to come in at $2.8 million for a 60.5 per cent margin, while the company’s EBITDA margin dropped year-over-year from 20.9 per cent to 18.2 per cent, with overall EBITDA dropping 1.3 per cent year-over-year to $841,000, though it still beat the $245,000 Beacon estimate.

In terms of liquidity, the company had free cash flow of $3,600 and $465,000 in operating cash flow, offset by $11,000 in capital expenditures. All told, the company ended the quarter with $10.6 million in cash compared to $4.6 million in debt.

“Consolidating the results of PopReach with Federated Foundry beginning in the second quarter will take us from strength to strength, as we combine businesses with strong organic growth profiles, positive cash flow, and meaningful Adjusted EBITDA margins,” said Christopher Locke, President of PopReach in the company’s May 30 press release. “Our increased financial scale and cash flow generation better protects us through business cycles, and provides the engine to drive our accretive M&A strategy to build shareholder value at a faster rate.”

Leung also noted that the company included pro-forma Federated Foundry financials, which were released one day later, bringing consolidated revenue to $19.1 million for a 22.1 per cent year-over-year increase, paired with $1.9 million in adjusted EBITDA for a year-over-year decrease of 13.6 per cent and a margin of 9.6 per cent.

“Our discussion with management suggests that the y/y decline in Federated EBITDA reflects investments being made into the business to accelerate organic growth,” Leung said.

With PopReach’s first quarter financial results now in the books, Leung forecasts the company’s overall 2022 revenue to come in at $60.2 million for a potential year-over-year increase of 252 per cent. Looking ahead to 2023, Leung projects a jump to $85.6 million for a potential year-over-year increase of 42.2 per cent.

In terms of valuation, Leung forecasts a drop in the company’s EV/Revenue from the reported 5.3x in 2021 to a projected 1.5x in 2022, followed by a forecasted drop to 1.1x in 2023.

Meanwhile, Leung maintained an EBITDA forecast of $7.2 million in 2022 for an implied margin of 12 per cent, which he forecasts to widen to an implied 12.4 per cent, paired with an EBITDA projected of $10.6 million.

From a valuation perspective, Leung projects a drop in the company’s EV/EBITDA multiple from the reported 37.9x in 2021 to a projected 12.4x in 2022, followed by a forecasted drop to 8.5x in 2023.

“We believe upside to our estimates could come from the upcoming launch of Payday, acquisitions, and better-than-expected growth from Federated,” Leung said.

Since it resumed trading on the TSX Venture Exchange on May 3, Popreach has remained relatively level with a 1.3 per cent loss, having begun its trading at $0.40/share and dropped to a low of $0.29/share on May 11.