Update Equity Research 25 May 2023 Embracer Group Sector: Gaming Lowered guidance for FY 2023/24 FAIR VALUE RANGE Redeye provides an update post Embracers Q4 2022/23 results. The report was softer than expected, while the guidance for FY2023/24e was lowered. As such, we revise our estimates and valuation accordingly. Weaker profitability than expected in PC/Console and Tabletop BEAR BASE BULL 50 70 90 Embracer VERSUS OMXS30 Net sales came in at SEK9,356m and decreased 4% organically. Preliminary figures of Adj EBIT were already announced and came in at SEK915m, 20% below our estimates and -30% below consensus figures. Negatively affected by lower than anticipated results in PC/Console and Tabletop. In addition, an impairment of cSEK100m also negatively affected Adj EBIT in the quarter. OMXSPI Indexed Price (SEK) 100 80 60 40 Lowered guidance for FY 2023/24e 20 The notable thing in the report was the lowered guidance for FY2023/24e. Embracer now expects an Adj EBIT of SEK7,000m-9,000m, c30% below versus earlier midpoint guidance of SEK11,950m. The lowered guidance is primarily due to the cancelation of the transformative partnership deals and some postponements of coming game releases in PC/Console. 0 09-maj 07-aug 05-nov 03-feb 04-maj REDEYE RATING Estimate changes and valuation On the back of the report and lower guidance, we revise our estimates and valuation accordingly. Our new base case stands at SEK70 (95), corresponding to 11.5x EV/Adj EBIT (24/25e). Embracer currently trades at c6x EV/Adj EBIT(23/24e) and at c8x EV/EBITDA-Capex (23/24e) while expected to deliver an Adj EBIT CAGR of 23% in 2022/23-2025/26e. 4 4 4 People Business Financials KEY STATS Embracer trades at a clear discount across its entire peer group. Even though we argue a discount versus the big 4 (Activision, Taketwo, EA, and Ubisoft) is warranted, we believe the discount and yesterday's steep decline in the share price is more of a trust issue. Key Financials (SEKm) 2022/23 2023/24E 2024/25E 2025/26E 37,665 43,612 47,650 50,345 Sales growth 121% 16% 9% 6% EBITDA 6,717 10,919 13,921 15,523 Adj EBIT 6,367 8,232 10,392 11,743 Adj EBIT Margin (%) 16.9% 18.9% 21.8% 23.3% Net Income 4,461 -877 3,542 5,058 2.2 1.1 0.9 0.6 EV/EBIT 12.2 35.1 6.8 4.5 EV/Adj EBIT 12.9 5.7 4.1 2.8 7.9 4.4 3.9 3.4 Sales EV/S Adj P/E Ticker Market Share Price (SEK) EMBRAC First North 24 Market Cap (SEKm) 32,808 Net Debt 2023/24E (SEKm) Free Float (%) 14,082 Avg. daily volume (‘000) ANALYSTS Viktor Lindström Viktor.lindstrom@redeye.se Tomas Otterbeck Tomas.otterbeck@redeye.se Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: info@redeye.se 62% 150,000 REDEYE Equity Research Embracer Group 25 May 2023 Q4 2022/23 results Preliminary figures of Adj EBIT were already released and came in at SEK915m, 20% below our estimates and -30% below consensus figures. PC/Console and Tabletop were the notable negative surprises and came well below expectations. PC/Console has increased its developing capacity with high fixed costs, directly mitigating profits as sales volume decreases. In addition, lower ROI for earlier game releases did not manage to meet the ratio of D&A. Tabletop had a higher ratio of sales from trading cards and board games from its distribution which comes with lower gross margins. Furthermore, Adj EBIT was also negatively affected by impairments of cSEK100m. Sales in the quarter held up well and performed above our expectations, where PC/Console, Tabletop, and EES were growing organically. In total net sales reached SEK9,356m, whereof organic growth was -4%. Embracer Group Deviation table (SEK m) Net sales - Games PC/Console Mobile Tabletop EES Total Net sales Q4'22/23a 7,869 3,478 1,317 3,074 1,487 9,356 Redeye Q4'22/23e 6,555 2,645 1,459 2,450 1,099 7,654 Diff (%) Q4'21/22a 4,417 2,097 1,749 571 811 5,228 Gross Profit 3,839 5,520.0 4,707 17% Net Opex -2,475 -3,540 -4,208 -16% Adj EBIT PC/Console Mobile Tabletop EES 1,069 545 490 74 32 915 338 324 250 66 1,179 473 321 331 88 -22% -29% 1% -24% -25% EBIT -1,726 -95 -254 -63% Adj Net income 1,128 473 860 -45% 374 -95 452 -121% 134% 73% 20.4% 7.2% 79% 59.0% 9.8% -1.0% 46% 62% 15.4% 5.9% Adj EBITDA - Capex KPI's Net sales y/y Gross margin % Adj EBIT margin % Adj EBITDA - Capex margin % 20% 31% -10% 25% 35% 22% Source: Redeye Research Net Opex in the quarter was lower than expected. However, this is due to lower M&A-related personnel expenses than expected, lower UA in the mobile segment, and a higher capitalization of own assets. Operating Cash flow was the positive aspect of the report and came in at SEK1,643m (1,431). Free cash flow was, however -32m and was negatively affected by higher net investments in intangible assets of SEK-1,855m. Embracer ended the quarter with a net debt of cSEK15.600m, equivalent to a net debt/Adj EBIT multiple of 2.45x, higher than its target of 1.0x. Management guides for improved cash conversion and that it is expected to reach a net debt / Adj EBIT ratio below 1x in FY 2023/24e. 2 REDEYE Equity Research Embracer Group 25 May 2023 Lower guidance for 2023/24e Transformative licensing deals off the table Since Q2 2022/23, Embracer has set its sights on closing transformative partnership and licensing deals, some of which have already been announced with limited short-term financial value. However, the uncompleted one was particularly focused on a ground-breaking strategic partnership agreement that had the potential to revolutionize the gaming industry. Unfortunately, the negotiations for this specific deal took longer than expected, despite having a verbal commitment in October 2022. According to Embracer, the agreement was expected to generate over USD 2 billion in contracted development revenue over six years while providing a catch-up payment for already capitalized development costs. The agreement was also expected to come with solid cash flow predictability. However, this deal was canceled by the counterpart. Nevertheless, Embracer remains dedicated to pursuing partnerships and collaborations with third parties for various occasions, including external game development and transmedia opportunities. Lower guidance for 2023/24e Management lowered its guidance for FY2023/24e and now expects to reach an Adj EBIT of SEK7,000m-SEK9,000m. Versus previous guidance of SEK10,300m-13,600m. The revised guidance is due to two major reasons. Firstly, the recently communicated transformative deals will not materialize. Secondly, notable game releases (at least six notable) with the potential to generate sales of more than SEK1,000m will be postponed into FY24/25e. We believe the tougher market for mobile due to lower advertising prices and high inventory levels across Tabletop are also reasons for the lower guidance. Management expects high cash conversion in 2023/24e, particularly driven by a +100% cash conversion in Asmodee. Embracer: Adj EBIT per semgent and group margin Embracer: Net Sales per segment 35% 12,000 30% 10,000 25% 60,000 50,000 40,000 8,000 20% 6,000 15% 4,000 10% 20,000 2,000 5% 10,000 0 0% 20/21 2021/22 SEK m SEK m 14,000 30,000 0 2022/23 2023/24e 2024/25e 2025/26e 20/21 Adj EBIT PC/Console Adj EBIT Table Top Adj EBIT margin Source: Redeye research Adj EBIT Mobile Adj EBIT EES 2021/22 Net sales PC / Console Net sales Tabletop Source: Redeye research 3 2022/23 2023/24e 2024/25e 2025/26e Net sales Mobile Games Net Sales EES REDEYE Equity Research Embracer Group 25 May 2023 Outlook Its latest major AAA game, Dead Island 2, has sold well over 2 million units. We previously estimated the game to sell 2 million units in Q1 2023/24e and c3.5 million units in FY 2023/24e, contributing more than SEK1,000m in Adj EBIT for the full year. Thus, we expect the game to deliver an ROI of c4.5x in FY 2023/24e. Dead Island 2 - Sensitivity Units sold '000 ASP (€/$) Discount ASP (€/$) - After discount Q1 23/24e expectations 1,900 2,150 59.9 59.9 15% 15% 50.9 50.9 1,400 59.9 15% 50.9 1,650 59.9 15% 50.9 Average ASP - After VAT (€/$) 47.9 47.9 47.9 Revenue (USDm) 67.1 79.1 avg eur/sek - usd/sek 10.25 Gross Sales (SEKm) Platform fee (Weighted) Net Sales (SEKm) (excl Platform deal) Net Sales (SEKm) (Incl Platform deal) Gross profit (SEKm) Gross margin % Gross profit (SEKm) incl platform fee Initial investment (SEK m) Platform Exclusive (EPIC) Total Investment Contribution profit ROI EBIT Contribution 2,400 59.9 15% 50.9 2,650 59.9 15% 50.9 47.9 47.9 47.9 91.1 103.1 115.1 127.1 10.25 10.25 10.25 10.25 10.25 688.0 810.9 933.7 1,056.6 1,179.4 1,302.3 27.3% 27.3% 27.3% 27.3% 27.3% 27.3% 500 890 590 980 679 1,069 768 1,158 857 1,247 947 1,337 428 85.5% 504 85.5% 580 85.5% 657 85.5% 733 85.5% 809 85.5% 818 894 970 1,047 1,123 1,199 650 390 260 557.7 2.1x 650 390 260 634.0 2.4x 650 390 260 710.4 2.7x 650 390 260 786.8 3.0x 650 390 260 863.1 3.3x 650 390 260 939.5 3.6x 601 677 754 830 906 983 Source: Redeye research Four AAA games are scheduled for release in FY 2023/24e. In total, 94 games are expected to be released in FY 2023/2024. Payday 3, Warhammer 40,000: SpaceMarine 2, and an unannounced title are the three remaining AAA game titles to be released by FY 2023/24e. Note that Embracer acts as the publisher for Payday 3, and Focus Entertainment is the publisher for Warhammer 40,000: Spacemarine 2. Thus, the EBIT contribution will likely be lower for those two titles. As of Q4 2022/23, total investments in games reached SEK6,079m on an LTM basis. Corresponding to 1.9x of LTM PC/Console sales. We note that eight AAA game releases are scheduled for 2024/25e, while seven are expected in 2025/26e. For new releases, we pencil in an ROI of 1.3x in 2023/24e and 1.4x in 2024/25e and 2025/26e, respectively. 4 REDEYE Equity Research Embracer Group 25 May 2023 Embracer: Sales distribution - PC/Console 3.5x 6,000 3.0x 5,000 2.5x 4,000 2.0x 3,000 1.5x 2,000 1.0x 1,000 0.5x 0 0.0x 25,000 20,000 SEK m 7,000 15,000 10,000 5,000 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20/21 Q2 20/21 Q3 20/21 Q4 20/21 Q1 21/22 Q2 21/22 Q3 21/22 Q4 21/22 Q1 22/23 Q2 22/23 Q3 22/23 Q4 22/23 SEK m Embracer: Game investments - R12m 0 20/21 21/22 22/23 Total investments in games R12m Net sales - New releases Game investments / Finalized games, R12m Net sales - Other (work-for-hire) Source: Redeye research 23/24E 24/25E 25/26E Net sales - Back catalog Source: Redeye research We expect PC/Console to be the strongest growth driver in the coming years and estimate it to represent c60% of Adj EBIT between 2023/24e-2025/26e. The mobile segment remains soft, and the advertising prices remain modest. Due to its hypercasual niche, Embracers mobile segment is particularly exposed to lower advertising prices. In Q4 2022/23, sales decreased 36% organically. However, it should also be noted that the mobile segment was positively affected by an ad-mediation deal of cSEK282m last year. Despite excluding this deal, the result in Q4 2022/23 suggests worse performance than the market in general. Positively, the mobile segment saw improvement at the end of the quarter, especially in terms of advertising prices. Management guides for low-single-digit sales growth in 2023/24e and a gradual improvement throughout the year. We estimate mobile sales to grow 3% y/y in 2023/24e and to deliver an Adj EBIT margin of c23%. Embracer: Mobile games - Net Sales and UA spending % 0.60 2,000 0.50 1,500 0.40 0.30 0.20 SEK m 450 400 350 300 250 200 150 100 50 0 ARPDAU Millions Embracer: KPIs Mobile units -70% -60% -50% -40% -30% -20% -10% 0% 1,000 500 0.10 0 0.00 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 21/22 21/22 21/22 21/22 22/23 22/23 22/23 22/23 Total Installs, million Source: Redeye Research MAU, million Net sales Mobile Games UA of Mobile games revenue % ARPDAU Source: Redeye Research Tabletop continues to perform ahead of expectations and also delivers strong cash flow during the quarter. However, management expects the margin development to be muted in FY 2023/24e, particularly due to a less favorable product mix from a higher share of sales from trading cards. 5 REDEYE Equity Research Embracer Group 25 May 2023 Estimate changes On the back of the canceled partnership deals, postponement of some game releases in FY 2023/24e, and a lower margin outlook than expected for Tabletop and mobile, We reduce our Adj EBIT estimates in 2023/24e-2024/25e. We reduce our Adj EBIT estimates from SEK11,788m in 2023/24 to SEK8,232m and from SEK12,789m in 2024/25 to SEK10,392m. New Estimates SEK m Old Estimates 2023/24e 2024/25e Diff % 2023/24e 2024/25e 2023/24e 2024/25e Games Net Sales PC/Console Mobile Tabletop EES Total Net Sales 39,272 19,289 5,976 14,007 4,340 43,612 43,084 22,182 6,334 14,568 4,566 47,650 40,294 20,809 6,414 13,071 4,686 44,957 44,087 23,306 6,991 13,790 4,929 49,007 -2.5% -7.3% -6.8% 7.2% -7.4% -3.0% -2.3% -4.8% -9.4% 5.6% -7.4% -2.8% P&L Statment Net Sales 43,612 47,650 44,957 49,007 -3.0% -2.8% COGS Gross profit -15,529 32,789 -17,708 34,869 -15,347 34,321 -16,238 37,630 1.2% -4.5% 9.1% -7.3% Net Opex -17,524 -16,421 -16,434 -17,675 6.6% -7.1% EBITDA 10,919 13,921 13,526 15,544 -19.3% -10.4% D&A -9,584 -7,641 -6,455 -6,722 48.5% 13.7% EBIT 1,335 6,280 7,071 8,823 -81.1% -28.8% Adj EBIT PC/Console Mobile Tabletop EES Central costs 8,232 4,896 1,384 1,961 212 -220 10,392 6,433 1,552 2,331 297 -220 11,788 7,595 1,680 2,287 375 -150 12,789 8,157 1,853 2,510 419 -150 -30.2% -35.5% -17.7% -14.3% -43.6% 46.7% -18.7% -21.1% -16.2% -7.1% -29.2% 46.7% Net finance -891 -825 -609.6 -555.6 46.1% 48.4% PTP 444 5,456 6,461 8,267 -93.1% -34.0% Tax -1,321 -1,914 -2,236 -2,447 Net income -877 3,542 4,226 5,820 -120.8% -39.1% Adj Net Income EPS adjusted 6,813 5.41 7,654 6.08 8,943 7.10 9,786 7.77 -23.8% -23.8% -21.8% -21.8% Source: Redeye research 6 REDEYE Equity Research Embracer Group 25 May 2023 Financial estimates 2022/2023 Q1 Q2 Q3 Q4'e 2023/2024 Q1e Q2e Q3e Q4'e 2020/21 2023/24e 2024/25e 2025/26e Games Net Sales PC/Console Mobile Tabletop EES Total Net Sales 6,447 2,294 1,488 2,665 671 7,118 8,785 4,097 1,441 3,247 784 9,569 9,294 3,575 1,573 4,146 2,328 11,622 7,869 3,478 1,317 3,074 1,487 9,356 8,734 4,450 1,458 2,825 698 9,431 8,353 3,441 1,470 3,442 823 9,176 12,094 6,006 1,652 4,436 1,630 13,723 10,091 5,391 1,396 3,305 1,190 11,281 6,451 6,241 210 0 2,577 9,028 13,937 8,500 4,866 571 3,102 17,039 32,395 13,444 5,819 13,132 5,270 37,665 39,272 19,289 5,976 14,007 4,340 43,612 43,084 22,182 6,334 14,568 4,566 47,650 45,574 23,291 6,841 15,442 4,771 50,345 P&L Statment Net Sales 7,118 9,569 11,622 9,356 9,431 9,176 13,723 11,281 9,028 17,067 37,665 43,612 47,650 50,345 COGS Gross profit -2,506 5,578 -3,300 7,495 -5,057 7,979 -3,905 7,042 -3,080 7,573 -3,477 6,891 -4,997 9,914 -3,975 8,411 -3,618 5,698 -4,697 14,996 -14,768 28,094 -15,529 32,789 -17,708 34,869 -17,005 38,271 Net Opex -4,014 -4,523 -4,672 -3,592 -3,799 -3,887 -5,287 -4,552 -1,915 -8,101 -16,801 -17,524 -16,421 -18,217 703 2,025 1,962 2,027 2,643 1,903 3,529 2,844 2,656 1,667 6,717 10,919 13,921 15,523 D&A -1,100 -1,565 -1,737 -2,122 -2,499 -2,279 -2,497 -2,308 -3,509 -2,793 -6,524 -9,584 -7,641 -7,527 EBIT -397 460 225 -95 144 -377 1,032 536 -853 -1,126 193 1,335 6,280 7,996 Adj EBIT PC/Console Mobile Tabletop EES Central costs 1,322 602 277 445 21 -23 2,121 1,384 315 451 7 -36 2,009 579 464 864 187 -85 915 338 324 250 66 -63 1,907 1,259 335 339 28 -55 1,381 619 309 482 26 -55 2,785 1,562 405 776 98 -55 2,159 1,456 335 364 59 -55 2,859 2,621 48 0 269 -79 4,465 2,926 1,389 74 247 -156 6,367 2,903 1,380 2,010 281 -207 8,232 4,896 1,384 1,961 212 -220 10,392 6,433 1,552 2,331 297 -220 11,743 7,337 1,744 2,548 334 -220 Net finance 538 2,162 1,368 753 -223 -223 -223 -223 203 2,896 4,821 -891 -825 -737 PTP 141 2,622 1,593 658 -79 -599 810 313 -650 1,770 5,014 444 5,456 7,259 Tax -322 -241 -102 112 -24 -168 -243 -94 -393 -693 -553 -1,321 -1,914 -2,201 Net income -181 2,381 1,491 770 -103 -767 567 219 -1,043 1,077 4,461 -877 3,542 5,058 Adj Net Income EPS adjusted 1,538 1.04 4,042 2.12 3,275 2.61 473 0.38 1,660 -0.08 991 -0.61 2,320 0.45 1,842 0.17 2,669 3.35 3,925 3.47 5,515 6.14 6,813 5.41 7,654 6.08 8,805 6.99 EBITDA - Capex -610 328 334 42 1,370 664 2,226 1,659 1,603 2,086 94 5,918 8,680 10,237 Growth y/y % Net Sales Organic Growth Adj EBIT Adj Net Income Adj EPS 108% -12% 3% 28% -14% 190% 32% 115% 458% 197% 129% -3% 78% 288% 217% 79% -4% -14% -58% -62% 32% 14% 44% 8% -108% -4% -12% -35% -75% -129% 18% 17% 39% -29% -83% 21% 18% 136% 289% -54% 72% 168% 166% 104% 89% 12% 56% 47% 4% 121.1% 2.0% 42.6% 40.5% 77.0% 15.8% 9.1% 29.3% 23.5% -11.9% 9.3% 9.3% 26.2% 12.3% 12.3% 5.7% 5.7% 13.0% 15.0% 15.0% Net Opex 238% 234% 51% 45% -5% -14% 13% 27% 65% 323% 107% 4% -6% 11% Margins % Gross margin % Adj EBIT margin % Adj Net Margin % EBITDA - Capex margin % Source: Redeye research 64.8% 18.6% 21.6% -8.6% 65.5% 22.2% 42.2% 3.4% 56.5% 17.3% 28.2% 2.9% 58.3% 9.8% 5.1% 0.4% 67.3% 20.2% 17.6% 14.5% 62.1% 15.1% 10.8% 7.2% 63.6% 20.3% 16.9% 16.2% 64.8% 19.1% 16.3% 14.7% 59.9% 31.7% 29.6% 17.8% 72.5% 26.2% 23.0% 12.2% 60.8% 16.9% 14.6% 0.2% 64.4% 18.9% 15.6% 13.6% 62.8% 21.8% 16.1% 18.2% 66.2% 23.3% 17.5% 20.3% SEK m EBITDA 7 2021/22 2022/23 REDEYE Equity Research Embracer Group 25 May 2023 Valuation Peer Valuation Company name EV SEK m 2023 EV/S 2024 2025 2023 EV/EBITDA 2024 2025 2023 EV/EBIT 2024 2025 Nordics Thunderful Paradox EG7 Remedy Stillfront G5 Entertainment MTG 1,482 24,689 2,155 3,143 14,264 1,387 5,614 0.5x 9.9x 1.0x 7.9x 1.9x 1.0x 1.0x 0.5x 9.0x 1.0x 4.8x 1.9x 0.9x 1.0x 0.5x 8.5x 0.9x 4.0x 1.8x 1.0x 0.9x 3.3x 14.0x 4.0x neg 5.3x 4.3x 4.5x 3.1x 12.4x 4.0x 26.7x 5.0x 4.0x 4.1x 2.9x 11.7x 3.9x 14.5x 4.7x 3.8x 3.9x 6.6x 23.7x 4.7x neg 6.9x 7.9x 8.9x 5.7x 21.5x 5.0x 60.0x 6.4x 6.6x 7.9x 5.4x 19.3x 4.8x 23.7x 6.0x 6.5x 6.9x 3,143 7,533 1.0x 3.3x 1.0x 2.7x 1.0x 2.5x 4.4x 5.0x 4.1x 8.5x 3.9x 6.5x 7.4x 8.4x 6.6x 16.2x 6.5x 10.4x 1,208 6,475 57,334 3,729 6,768 21,904 2,904 1,027 574,007 363,311 255,755 28,099 44,823 37,576 83,445 1.0x 1.8x 2.1x 11.9x 3.7x 2.3x 2.1x 1.4x 5.7x 4.5x 4.3x 10.8x 1.8x 1.2x 7.6x 0.9x 1.7x 2.0x 4.6x 3.4x 2.0x 1.9x 1.3x 5.5x 4.2x 3.0x 13.4x 1.7x 1.1x 6.9x 1.0x 1.7x 1.9x 4.4x 3.3x 1.9x 3.9x 1.2x 5.4x 3.9x 2.9x 13.8x 1.6x 1.1x 6.4x 5.4x 10.5x 6.5x 23.8x 10.2x 11.8x 6.1x 3.6x 15.0x 13.6x 25.1x 19.7x 4.2x 6.9x 17.2x 5.0x 10.4x 6.2x 6.8x 9.4x 10.5x 5.4x 3.3x 13.6x 12.1x 12.3x 27.3x 3.6x 6.3x 15.3x 4.8x 10.2x 5.6x 6.4x 8.8x 9.7x 11.0x 3.1x 13.4x 11.3x 12.5x 23.8x 3.2x 6.3x 13.7x 7.2x 14.2x 10.0x 30.6x 11.5x 15.7x 50.8x 4.2x 15.5x 14.9x 27.8x 28.5x 11.8x 8.6x 18.5x 5.9x 13.6x 9.4x 8.1x 10.6x 13.7x 25.7x 3.9x 14.1x 13.2x 13.2x 44.4x 10.1x 7.8x 16.4x 6.5x 12.5x 8.5x 8.3x 10.0x 12.7x 22.0x 3.6x 13.4x 12.5x 12.1x 54.7x 8.7x 7.5x 15.1x Median Average 28,099 99,225 2.3x 4.1x 2.0x 3.6x 2.9x 3.6x 10.5x 12.0x 9.4x 9.8x 9.7x 9.6x 14.9x 18.0x 13.2x 14.0x 12.1x 13.9x Median Gaming Average Gaming 15,621 53,379 1.7x 3.7x 1.5x 3.1x 1.9x 3.1x 7.5x 8.5x 6.8x 9.2x 6.8x 8.0x 11.1x 13.2x 9.9x 15.1x 9.3x 12.1x Tabletop Games & Ips Nintendo Hasbro Mattel 386,510 128,578 91,825 3.4x 2.1x 1.6x 3.6x 2.0x 1.5x 3.6x 1.9x 1.5x 11.2x 10.4x 9.4x 13.2x 9.6x 8.2x 17.1x 8.9x 8.0x 11.1x 13.0x 12.9x 12.4x 12.0x 10.8x 14.2x 11.0x 10.5x Median Average 128,578 202,305 2.1x 2.4x 2.0x 2.4x 1.9x 2.3x 10.4x 10.3x 9.6x 10.3x 8.9x 11.3x 12.9x 12.3x 12.0x 11.7x 11.0x 11.9x Peer Group Median 15,621 1.6x 1.5x 1.5x 7.4x 6.8x 6.4x 10.2x 9.3x 8.7x Embracer 45,617 1.1x 1.0x 0.9x 3.3x 2.9x 2.7x 4.7x 4.1x 4.1x Median Average International Ten Square Rovio Playtika 11 Bit Studios Team 17 KeyWords Studios Frontier Developments TinyBuild Activision EA Take Two CD Project Ubisoft Sega Capcom Source: Factset Embracer currently trades at a discount large discount versus peers. For 2023/24e and 2024/25e, the discount is at c50% versus global gaming studios and the big 4 (Activision, Taketwo, EA, and Ubisoft). Even though we argue a discount is warranted, we deem the current valuation to be a trust issue. 8 Sa REDEYE Equity Research Embracer Group 25 May 2023 DCF Valuation On the back of the worse than expected Q4 2022/23 report, canceled partnership, postponement of some PC/Console games, and a slightly lower margin outlook than expected for mobile and Table top. We reduce our estimates and valuation accordingly. Our valuation changes stem from lower revision between 2023/24e-2025-26e and higher net debt levels in the coming years. Our new valuation range is from SEK50-90 (64-136) with a base case of SEK70 (95). Bear Case SEK 50 Base Case SEK 70 Bull Case SEK 90 Sales CAGR 2022-27E: 6% Sales CAGR 2028-37E: 2% Sales CAGR 2022-27E: 7% Sales CAGR 2028-37E: 4% Sales CAGR 2022-27E: 8% Sales CAGR 2028-37E: 5% Avg EBITDA margin 2022-36E: 29% Avg EBITDA margin 2022-36E: 31% Avg EBITDA margin 2022-36E: 34% Terminal growth: 2% Terminal EBITDA margin: 30%. Terminal growth: 2% Terminal EBITDA margin: 34%. Terminal growth: 2% Terminal EBITDA margin: 38%. 9 REDEYE Equity Research Embracer Group 25 May 2023 Summary Redeye Rating The rating consists of three valuation keys, each constituting an overall assessment of several factors that are rated on a scale of 0 to 1 points. The maximum score for a valuation key is 5 points. People: 4 Embracer is a play on top-class capital allocators with a high proportion of insider ownership. On the negative side, there is no large outside shareholder on the board, poor bonus disclosure of bonus measurements, and two classes of stocks with different voting rights. Business: 4 Embracer operates in a highly competitive industry. However, the company takes market shares (even organically). A majority of total revenues is recurring (back-catalog and live-service games). We also think the premium games segment enjoys pricing power, meaning with the right quality standard, publishers can raise prices without losing customers. Financials: 4 Embracer is a company with a strong market position. One of the company’s core strategies is to acquire game IPs from companies in financial distress; this has led to a conservative approach regarding putting on debt. The income streams are diversified with a large portfolio of IPs and different games. Overall the video game industry is not sensitive to the business cycle, which dampens the financial risk of downturns. During the past years, Embracer has been growing heavily and still producing more than satisfying margins and return on assets. The future profitability levels will vary due to game release schemes as the business model inherits high scalability. Long-term increasing margins as the company continue to grow, and the revenue streams from their own IPs increase even further. 10 REDEYE Equity Research Embracer Group 25 May 2023 2022 2023E 2024E 2025E DCF Valuation Metrics INCOME STATEMENT Revenues 13589 57224 37,665 43,612 47,650 50,345 2026-2036 9,571 10,823 12,781 12,074 Terminal Gross Profit 28,094 32,789 34,869 38,271 Firm Value Operating Expenses Cost of Revenues 21,377 21,870 20,948 22,748 Net Debt EBITDA 6,717 10,919 13,921 15,523 Equity Value Depreciation & Amortization 6,474 7,672 7,641 7,527 EBIT 6,367 8,232 10,392 11,743 Net Financial Items 4,821 -891 -825 -737 EBT 5,014 444 5,456 7,259 CAPITAL STRUCTURE 553 1,321 1,914 2,201 53 0 0 0 4,461 -877 3,542 5,058 Income Tax Expenses Non-Controlling Interest Net Income Sum FCF (SEKm) 2022-2025 49600 120413 15581 104832 Fair Value per Share 2022 2023E 2024E 2025E Equity Ratio 0.6 0.6 0.7 0.7 Debt to equity 0.3 0.3 0.2 0.2 15,581 14,082 9,625 3,205 101,922 102,092 105,524 111,328 -33.3 -32.1 -55.2 -94.9 Net Debt Capital Employed BALANCE SHEET 70 Working Capital Turnover Assets Current assets GROWTH Cash & Equivalents 4,662 4,661 7,118 11,538 Revenue Growth 120.7% 15.8% 9.3% 5.7% Inventories 4,081 3,489 3,812 4,028 Basic EPS Growth -188.4% -119.5% -503.8% 42.8% Accounts Receivable 5,253 6,082 6,646 7,021 Adjusted Basic EPS Growth 77.0% -11.9% 12.3% 15.0% Other Current Assets 3,002 3,348 3,584 3,741 Total Current Assets 16,998 17,580 21,159 26,328 ROE 10% 10% 5% 6% ROCE 6% 8% 10% 11% PROFITABILITY Non-current assets Property, Plant & Equipment, Net ROIC 1,148 1,802 2,517 3,272 7% 7% 9% 10% Goodwill 48,524 48,524 48,524 48,524 EBITDA Margin (%) 18% 25% 29% 31% Intangible Assets 45,579 45,326 45,088 44,836 EBIT Margin (%) 17% 19% 22% 23% Right-of-Use Assets 1,423 1,423 1,423 1,971 Net Income Margin (%) 12% -2% 7% 10% Shares in Associates 253 253 253 253 Basic EPS 3.6 -0.7 2.8 4.0 Adjusted Basic EPS 6.1 5.4 6.1 7.0 P/E 7.9 4.4 3.9 3.4 Liabilities EV/Revenue 2.2 1.1 0.9 0.6 Current liabilities EV/EBITDA 12.2 4.3 3.0 2.1 12.9 5.7 4.1 2.8 0.9 0.4 0.4 0.3 Other Long-Term Assets 2,146 2,146 2,146 2,146 Total Non-Current Assets 99,073 99,475 99,951 101,003 Total Assets 116,071 117,055 121,110 VALUATION 127,331 Short-Term Debt 683 683 683 683 EV/EBIT Short-Term Lease Liabilities 444 444 444 444 P/B 2,809 3,253 3,554 3,755 Other Current Liabilities 10,213 10,583 10,906 11,122 Total Current Liabilities 14,149 14,963 15,587 16,003 Accounts Payable SHAREHOLDER STRUCTURE Lars Wingefors AB Non-current liabilities Long-Term Debt 19,560 18,060 16,060 14,060 Long-Term Lease Liabilities 1,044 1,044 1,044 544 Other Long-Term Liabilities 16,597 11,508 9,285 8,783 Total Non-current Liabilities 37,201 30,612 26,389 23,387 53 0 0 0 64,668 71,481 79,135 87,940 116,071 117,055 121,110 127,331 CAPITAL % VOTES % 20.9% 39.0% Savvy Gaming Group 8.0% 5.4% S3D Media Inc 6.6% 10.6% Canada Pension Plan 3.5% 2.3% PAI Partners 3.5% 2.3% SHARE INFORMATION Non-Controlling Interest Shareholder's Equity Total Liabilities & Equity Reuters code List Embrac First North Share price Total diluted shares, million 24.0 1367.0 CASH FLOW NOPAT Change in Working Capital Operating Cash Flow Capital Expenditures 5,814 6,911 8,479 630 230 -497 9,542 -332 5,382 9,066 10,774 12,312 MANAGEMENT & BOARD CEO Lars Wingefors CFO Johan Ekström Chairman Kicki Wallje Lund -497 -654 -715 -755 -5,996 -4,346 -4,527 -4,531 Investing Cash Flow -15,490 -7,567 -6,317 -5,891 Financing Cash Flow 8,501 -1,500 -2,000 -2,000 Viktor Lindström Mäster Samuelsgatan 42, 10tr Free Cash Flow -1,111 4,066 5,532 7,026 Tomas Otterbeck 111 57 Stockholm Investment in Intangible Assets ANALYSTS 11 Redeye AB REDEYE Equity Research Embracer Group 25 May 2023 Redeye Rating and Background Definitions Company Quality Company Quality is based on a set of quality checks across three categories; PEOPLE, BUSINESS, FINANCE. These are the building blocks that enable a company to deliver sustained operational outperformance and attractive longterm earnings growth. Each category is grouped into multiple sub-categories assessed by five checks. These are based on widely accepted and tested investment criteria and used by demonstrably successful investors and investment firms. Each sub-category may also include a complementary check that provides additional information to assist with investment decision-making. If a check is successful, it is assigned a score of one point; the total successful checks are added to give a score for each sub-category. The overall score for a category is the average of all sub-category scores, based on a scale that ranges from 0 to 5 rounded up to the nearest whole number. The overall score for each category is then used to generate the size of the bar in the Company Quality graphic. People At the end of the day, people drive profits. Not numbers. Understanding the motivations of people behind a business is a significant part of understanding the long-term drive of the company. It all comes down to doing business with people you trust, or at least avoiding dealing with people of questionable character. The People rating is based on quantitative scores in seven categories: • Passion, Execution, Capital Allocation, Communication, Compensation, Ownership, and Board. Business If you don’t understand the competitive environment and don’t have a clear sense of how the business will engage customers, create value and consistently deliver that value at a profit, you won’t succeed as an investor. Knowing the business model inside out will provide you some level of certainty and reduce the risk when you buy a stock. The Business rating is based on quantitative scores grouped into five sub-categories: • Business Scalability, Market Structure, Value Proposition, Economic Moat, and Operational Risks. Financials Investing is part art, part science. Financial ratios make up most of the science. Ratios are used to evaluate the financial soundness of a business. Also, these ratios are key factors that will impact a company’s financial performance and valuation. However, you only need a few to determine whether a company is financially strong or weak. The Financial rating is based on quantitative scores that are grouped into five separate categories: • Earnings Power, Profit Margin, Growth Rate, Financial Health, and Earnings Quality. 12 REDEYE Equity Research Embracer Group 25 May 2023 Redeye Equity Research team Management Danesh Zare danesh.zare@redeye.se Björn Fahlén bjorn.fahlen@redeye.se Fredrik Reuterhäll fredrik.reuterhall@redeye.se Tomas Otterbeck tomas.otterbeck@redeye.se Life Science Team Technology Team Gergana Almquist gergana.almquist@redeye.se Hjalmar Ahlberg hjalmar.ahlberg@redeye.se Oscar Bergman oscar.bergman@redeye.se Henrik Alveskog henrik.alveskog@redeye.se Christian Binder christian.binder@redeye.se Alexander Flening alexander.flening@redeye.se Filip Einarsson filip.einarsson@redeye.se Douglas Forsling douglas.forsling@redeye.se Mats Hyttinge Forbes Goldman forbes.goldman@redeye.se mats.hyttinge@redeye.se Ethel Luvall ethel.luvall@redeye.se Jessica Grünewald jessica.grunewald@redeye.se Gustaf Meyer gustaf.meyer@redeye.se Jesper von Koch jesper.vonkoch@redeye.se Erik Nordström erik.nordstrom@redeye.se Anton Hoof anton.hoof@redeye.se Richard Ramanius richard.ramanius@redeye.se Rasmus Jacobsson rasmus.jacobsson@redeye.se Kevin Sule kevin.sule@redeye.se Viktor Lindström viktor.lindström@redeye.se Fredrik Thor fredrik.thor@redeye.se Fredrik Nilsson fredrik.nilsson@redeye.se Johan Unnerus johan.unnerus@redeye.se Mark Siöstedt mark.siostedt@redeye.se Jacob Svensson jacob.svensson@redeye.se Niklas Sävås niklas.savas@redeye.se 13 REDEYE Equity Research Embracer Group 25 May 2023 Disclaimer Important information Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary authorization). Limitation of liability This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting from the use of this analysis. Potential conflict of interest Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the objectivity and independence of its analysts. The following applies: • For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees are not allowed to trade in financial instruments of the company in question, from the date Redeye publishes its analysis plus one trading day after this date. • An analyst may not engage in corporate finance transactions without the express approval of management and may not receive any remuneration directly linked to such transactions. • Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analysis, or from an underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of these reports should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report for the performance of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of the analysis. Redeye’s research coverage Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of significant changes in market conditions or events related to the issuer/the financial instrument. Recommendation structure Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decision-making. Redeye Rating (2022-08-25) Rating People Business Financials 5p 28 14 4 3p - 4p 160 139 47 0p - 2p 5 40 142 193 193 193 Company N Duplication and distribution This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other regulations. Copyright Redeye AB. CONFLICT OF INTERESTS Tomas Otterbeck owns shares in the company : Yes Viktor Lindström owns shares in the company : No Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this. 14
0
advertisement
Download
advertisement
Add this document to collection(s)
You can add this document to your study collection(s)
Sign in Available only to authorized usersAdd this document to saved
You can add this document to your saved list
Sign in Available only to authorized users