PopReach keeps Buy rating with Eight Capital

Encouraging quarterly results have Eight Capital analyst Adhir Kadve staying positive on PopReach Corp (PopReach Stock Quote, Charts, News, Analysts, Financials TSXV:POPR). Kadve delivered an update to clients on Tuesday where he reiterated a “Buy” rating and C$0.60 target on the stock, which at the time of publication represented a projected one-year return of 38.3 per cent.

Toronto-based PopReach, a mobile game publisher and digital media advertising services provider, reported its second quarter 2022 financials on Monday. The company made a transformational M&A move in April when it combined through reverse takeover with digital tech company Federated Foundry. As such, the new quarterly numbers represented a full quarter from Federated with only a partial quarterly contribution from PopReach.

Pro-forma, revenue was $22.1 million, up 15.5 per cent sequentially and up 18.1 per cent year-over-year, with reported revenue coming in at $20.7 million. Reported adjusted EBITDA was $2.8 million with a 13.5 per cent margin and the new entity ended the quarter with cash and equivalents of $10.4 million (net debt of $14.3 million).

“Our media services businesses, which are tied to digital advertising growth, and our content business, which leverages our deep domain expertise in mobile games, are driving our organic performance. We are now gearing up for the launch of PAYDAY: Crime War this fall, which represents an additional catalyst in our multi-pronged approach to generate profitable growth,” said Jon Walsh, CEO of PopReach, in a press release.

Looking at the quarter, Kadve estimated that revenue at PopReach’s gaming business was essentially flat year-over-year, where Q2 2021’s revenue was $4.4 million. 

“While management commentary was positive on developments in the broader business, the Federated Foundry business performed particularly well. We estimate +24 per cent year-over-year revenue growth, while the Gaming business continues to work through the impact of [Identifier for Advertisers (IDFA)] and lower [User Acquisition (UA)] spending in the legacy gaming portfolio, which we believe resulted in flat year-over-year revenue growth. With upcoming game launches, a full financial profile in Q3 and M&A on the horizon we see a catalyst rich H2 in the works for PopReach,” Kadve wrote.

On the catalysts, Kadve said PopReach pulled back on UA spending given the impact of Apple’s IDFA, the device identifier used to track a mobile advertising campaign and one which now features a limit ad tracking feature for users to opt out of tracking. Kadve said PopReach is now taking a much more measured approach to ensure adequate return on investment. The analyst said key growth initiatives in its games portfolio include a ramp in UA spending for Smurfs Magic Match and the worldwide launch of PAYDAY: Crime War. He said that management believes growth in Smurfs should help offset drops in legacy games associated with IDFA, with Smurfs in soft launch since March and seeing strong initial unit economics.

“Given these results [on Smurfs], management is confident in their ability to navigate IDFA’s changes and thus expects to ramp UA spending and increase the UA team for the game. Results from the increase in spend are expected to bear fruit over the coming quarters. Payday enters soft launch in September with worldwide launch expected in November. We believe this title could provide incremental growth opportunities and expect the games portfolio to return to growth in Q1/F23,” Kadve wrote.

As for Federated on its own, Kadve estimate Q2 year-over-year revenue growth of 24 per cent to $17.6 million, led by the company’s Q1Media business, an outperformer in Federated’s portfolio.

“[Q1Media’s] focus on the SMB market is resonating well given a more uncertain macro backdrop, as SMBs are looking for a higher level of service and performance from their advertising campaigns. To that end, management noted that Q1 is seeing growth from both existing customers spending more with Q1 and also competitive displacements from larger agencies,” he said.

As well, Kadve sees interesting synergies emerging between Federated’s and PopReach’s assets, with the end goal for management likely being a unified ad tech platform, with the initial steps so far looking good.

On M&A, Kadve related that management sees the current environment in both the AdTech and Gaming sectors as favourable and private market valuations becoming more reasonable. Management aims to complete at least one acquisition before the end of the year, with a target for inorganic growth in 2023 of about 25 per cent.

“Our target price is based on 8.5x F23E EV/Adj. EBITDA. POPR currently trades at 5.5x F23E EV/Adj. EBITDA, a discount to a peer group of AdTech peers who trade at 11.6x and a group of Independent Game Publishers who trade at 10.5x,” Kadve wrote.