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