Eight Capital analyst Adhir Kadve has lowered his target on Toronto-based digital media company PopReach (PopReach Stock Quote, Charts, Financials, News TSXV:POPR). Despite maintaining a “Buy” rating Kadve has slashed his target price from $1.75/share to $0.60/share to suggest a one-year return of 58 per cent in an update to clients on Monday.
Kadve’s report comes a little over a month after PopReach completed its $160 million acquisition of Federated Foundry, first announced last August, which Kadve noted to be transformative for the company.
“In light of the current Adtech/Gaming backdrop where larger platforms like Google and Apple are taking steps to limit the amount of data transferrable between applications, POPR is attempting to build a platform to reduce its reliance on these companies,” Kadve said. “The combined PopReach and Federated Foundry will have a larger scale, allowing for larger M&A transactions with the ultimate goal of building a unified media company with ownership of content, audience and first-party data.”
While the merger is now complete, Kadve believes the new organization will need to adopt timeline-based goals to succeed.
“In the short-term, the new PopReach will concentrate on M&A to increase the overall company scale and fill technological white space between the FTP mobile gaming PopReach, and the adtech assets of Federated, namely, NotifyAI, Crucial Interactive, and Q1Media,” Kadve said. “In the medium term, we see technological integration – between acquired assets as a key focus, and this will allow for stage three. At that stage, management envisions a unified media company with complete control over content and audience, as well as data that will be used to deliver advertisements to that audience.”
According to Kadve, the new PopReach will be able to bring together content and users via PopReach’s portfolio of gaming titles and 1.5 million monthly average users, along with Federated’s advertising technology, which includes impressions for 500 advertising clients across 1,900 publisher sites.
“Out of the gate the new PopReach is growing and generating positive cash flow at scale, and with our recent debt refinancing and growth capital in place we are well positioned to capitalize on industry shifts that are creating unprecedented opportunities to acquire and optimize subscale assets across the digital media value chain,” said Jon Walsh, CEO and Co-Founder of PopReach in the April 28 press release.
“When Federated was founded, we moved quickly to acquire three complementary businesses with good growth profiles at attractive multiples,” added Ted Hastings, Executive Chairman of PopReach. “Now, as part of PopReach, we intend to use this successful playbook with a larger platform that will allow us to collectively grow and drive greater value accretion, and we cannot wait to get started on the pipeline of opportunities we have underway.”
With Federated Foundry now officially part of the fold, Kadve forecasts the new PopReach to take off financially, setting a 2022 revenue target of $61.9 million for a potential year-over-year increase of 262 per cent, followed by a projected 50 per cent jump to $92.9 million in 2023.
From a valuation perspective, Kadve forecasts the company’s EV/Sales multiple to drop from the reported 4.9x in 2021 to a projected 1.3x in 2022, then to a projected 0.9x in 2023.
Meanwhile, Kadve projects the company’s adjusted EBITDA to turn positive in 2022 at $6.2 million for an implied margin of 10 per cent, which he forecasts to widen to a 16 per cent margin in 2023 with adjusted EBITDA of $14.5 million.
In terms of valuation, Kadve introduces an EV/EBITDA multiple of 13.3x in 2022, which he forecasts to drop to 5.7x in 2023, which Kadve notes to present a discount compared to a peer group of AdTech peers who trade at 10.4x and a group of Independent Game Publishers who trade at 10.0x. Kadve indicated his target drop came on account of shifting the EV/EBITDA valuation multiple from 2022 to 2023, meaning a drop from 18x to 8.5x.
Going forward, Kadve fully expects PopReach to continue along its present path of mergers and acquisitions, with expected targets coming at 6-7x Adj. EBITDA and with positive cash flows, with Kadve believing the next acquisition will focus on the adtech space.
“Management notes that the PopReach mobile games business will continue its previous playbook of seeking out proven free-to-play titles with established brands and player bases with the aim of enhancing these titles, increasing their life span, and improving profitability,” Kadve said. “On the Federated Foundry side, the company will look to consolidate the fragmented digital technology sector and will look to acquire assets across the Connected TV, adtech, mar-tech, and ecommerce/content platform verticals.”
Since it began trading on the TSX Venture Exchange on May 3, PopReach’s share price has dropped by a penny (1.3 per cent), rebounding to approach level footing after dropping to $0.29/share on May 11.
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