Embracer Group Fast Comment

Equity Research – 18 February 2021 06:41 CET Embracer Group Fast comment Estimate beat & regulated market announced Company-sponsored research: Not rated Q3 adj. EBIT SEK 603m, +19% vs. ABG, +6% vs. cons Share price (SEK) 15/02/2021 260.8 Switch to IFRS & listing on regulated market announced IT, Sweden Next FY game development cost SEK ~2.7bn (3X 20/21) EMBRACB.ST /EMBRACB ST Q3’20/21 details and forward outlook MCap (SEKm) 127,464 Embracer delivered a strong quarter today, which beat consensus MCap (EURm) 12,697 expectations, with an adj. EBIT of SEK 603m, +18.6% vs. ABGSCe and Net debt (EURm) -588 +15.6% vs. consensus. Reported net sales were SEK 2,168m, +8.7% vs. ABGSCe and +3.7% vs. consensus. The Games segment saw revenues No. of shares (m) 489 of SEK 1,356m, driven by strong back-catalogue sales in the Nov-Dec Free float (%) 60 ’20 period (which was previously confirmed by global gaming peers Av. daily volume (k) 3,403 reporting last few weeks) and as such represented 62.5% of net sales. The Game segment grew 21% organically in Q3 (local currencies), and Next event Q3 report: 18 Feb 54% over the last 9 months. The adj. EPS amounted to SEK 1.06 per share, growing 55.8% y-o-y. Management also announced that they’ve decided to implement IFRS and begin the process of switching to a main/regulated market, they estimate that the process will take 18-36 months. It also appears as if several game releases has been postponed to the next FY which will now feature new game releases with a development cost of SEK 2.5-3.0bn (3X that of current FY) excluding recent M&A of for example Gearbox. Q4’20/21e now has a lighter release pipeline than estimated, but drivers like Valheim (which Coffee Stain publishes and own a minority of the development studio) will certainly help, selling ~3mn copies on Steam so far. Consensus adj. EBIT revisions We can see consensus making positive estimate revisions to adj. EBIT for the next FY of at least 7-10%. But what’s going to excite investors the most is the confirmation of listing on a regulated market. Final thoughts Embracer is coming off a very strong 2020 performance with continued record M&A in 2021 (Gearbox, Easy Brain, Aspyr Media) and the share price is already up ~33% YTD. For the 21/22e FY we find a development pipeline now 3X that of 20/21e, M&A headroom likely to increase to SEK ~20bn following the extraordinary general meeting on 26 February and an enlarged underlying market following COVID-19. There is a webcast at 09:00 CET, link: https://tv.streamfabriken.com/embracer-group-q3- 2020-2021. Analyst(s): [email protected], +46 8 566 286 13 [email protected], +46 8 566 286 37 Please refer to important disclosures at the end of this report This research product is commissioned and paid for by the company covered in this report. As such, this report is deemed to constitute an acceptable minor non-monetary benefit (i.e. not investment research) as defined in MiFID II. Embracer Group Analyst Deviations Q3’20/21e vs. ABGSCe vs. FactSet consensus Deviation to estimates (SEKm) Actual Actual ABGSC Deviation Consensus Deviation Net sales Q3'19/20 Q3'20/21 Q3'20/21e SEKm % Q3'20/21e SEKm % Games - THQ Nordic 333 380 385 -5.2 -1.4% Games - Deep Silver 467 497 480 16.9 3.5% Games - Coffee Stain 36 99 110 -10.8 -9.8% Games - Saber Interactive n.a. 307 250 57.0 22.8% Games - DECA Games n.a. 73 70 2.7 3.9% Games Total 836 1,356 1,295 60.6 4.7% Partner Publishing/Film 673 813 700 112.5 16.1% Group 1,509 2,168 1,995 173.1 8.7% 2,090 78 3.7% COGS -747 -861 -898 36.7 - Gross profit 762 1,307 1,097 209.8 19.1% 1,147 160 13.9% Operating costs -536 -860 -738 -121.6 - EBITDA 518 879 754 125.1 16.6% 804 75 9.3% Depreciation & amortization -427 -940 -879 -61.0 - Adj. EBIT 302 603 509 94.6 18.6% 522 81 15.6% EBIT 91 -61 -125 64.1 - -90 29 - Net financials -15 9 -6 14.9 - Taxes -43 -138 0 -137.7 n.a. Adj. Net profit 245 475 503 -28.2 -5.6% 480 -6 -1.1% Net profit 34 -189 -131 -58.7 - -137 -52 - EPS Adj. (SEK) 0.87 1.06 1.20 -0.14 -11.6% 1.15 -0.09 -7.8% EPS Basic (SEK) 0.12 -0.45 -0.31 -0.1 - -0.33 -0.1 - Net sales grow th y-o-y Q3'19/20 Q3'20/21 Q3'20/21 Percentage point Q3'20/21e Percentage point Games - THQ Nordic -5.4% 14.1% 15.6% -1.6 pp n.a. n.a. Games - Deep Silver 149.9% 6.5% 2.9% 3.6 pp n.a. n.a. Games - Coffee Stain 159.7% 174.8% 204.7% -29.9 pp n.a. n.a. Games - Saber Interactive n.a. n.a. n.a. n.a. n.a. n.a. Games - DECA Games n.a. n.a. n.a. n.a. n.a. n.a. Games Total 51.3% 62.2% 55.0% 7.3 pp n.a. n.a. Partner Publishing/Film -18.7% 20.7% 4.0% 16.7 pp n.a. n.a. Group 9.3% 43.7% 32.2% 11.5 pp 38.5% 5.2 pp Margins Q3'19/20 Q3'20/21 Q3'20/21 Percentage point Q3'20/21e Percentage point Gross margin 50.5% 60.3% 55.0% 5.3 pp 54.9% 5.4 pp EBITDA margin 34.4% 40.5% 37.8% 2.8 pp 38.5% 2.1 pp Adj. EBIT margin 20.0% 27.8% 25.5% 2.3 pp 25.0% 2.9 pp EBIT margin 6.0% -2.8% -6.2% 3.5 pp -4.3% 1.5 pp Adj. Net margin 16.2% 21.9% 25.2% -3.3 pp 23.0% -1.1 pp Net margin 2.2% -8.7% -6.6% -2.2 pp -6.6% -2.2 pp Source: ABG Sundal Collier, FactSet, company data 18 February 2021 ABG Sundal Collier 2 Embracer Group SEKm 2018 2019 2020e 2021e 2022e Sales 5,754 5,249 8,724 15,140 16,633 Sales growth (%) 1,033.7 -8.8 66.2 73.5 9.9 EBITDA 1,592 1,821 3,648 5,983 6,714 EBITDA margin (%) 27.7 34.7 41.8 39.5 40.4 EBIT adj 880 1,033 2,580 4,842 5,564 EBIT adj margin (%) 15.3 19.7 29.6 32.0 33.4 Pretax profit 545 409 253 282 954 EPS rep 4.22 0.91 0.29 0.43 1.44 EPS growth (%) 140.3 -78.5 -67.8 46.4 237.9 EPS adj 7.47 3.11 5.88 9.72 10.84 DPS 0 0 0 0 0 EV/EBITDA (x) 1.6 11.8 28.7 20.3 17.8 EV/EBIT adj (x) 2.9 20.7 40.6 25.1 21.5 P/E (x) 11.4 78.0 893.3 610.2 180.6 P/E adj (x) 6.4 22.8 44.4 26.8 24.1 EV/sales (x) 0.4 4.1 12.0 8.0 7.2 FCF yield (%) -47.4 -8.4 -1.9 -0.6 1.1 Dividend yield (%) 0 0 0 0 0 Net IB debt/EBITDA -1.4 -0.5 -1.7 -1.1 -1.2 Lease adj. FCF yld (%) -47.4 -8.4 -1.9 -0.6 1.1 Lease adj. ND/EBITDA -1.2 -0.3 -1.0 -0.6 -0.7 18 February 2021 ABG Sundal Collier 3 Embracer Group Analyst certification I/We, Jesper Birch-Jensen, Stefan Knutsson, the author(s) of this report, certify that not withstanding the existence of any such potential conflicts of interests referred to below, the views expressed in this report accurately reflect my/our personal view about the companies and securities covered in this report. Analyst valuation methods ABG Sundal Collier analysts may publish valuation ranges for stocks covered under Company Sponsored Research. These valuation ranges rely on various valuation methods. One of the most frequently used methods is the valuation of a company by calculation of that company's discounted cash flow (DCF). Another valuation method is the analysis of a company's return on capital employed relative to its cost of capital. Finally, the analysts may analyse various valuation multiples (e.g. the P/E multiples and the EV/EBITDA multiples) relative to global industry peers. In special cases, particularly for property companies and investment companies, the ratio of price to net asset value is considered. Valuation ranges may be changed when earnings and cash flow forecasts are changed. They may also be changed when the underlying value of a company's assets changes (in the cases of investment companies, property companies or insurance companies) or when factors impacting the required rate of return change. Important Company Specific Disclosure The following disclosures relate to the relationship between ABG Sundal Collier and its affiliates and the companies covered by ABG Sundal Collier referred to in this research report. Unless disclosed in this section, ABG Sundal Collier has no required regulatory disclosures to make in relation to an ownership position for the analyst(s) and members of the analyst's household, ownership by ABG Sundal Collier, ownership in ABG Sundal Collier by the company(ies) to whom the report(s) refer(s) to, market making, managed or co-managed public offerings, compensation for provision of certain services, directorship of the analyst, or a member of the analyst's household, or in relation to any contractual obligations to the issuance of this research report.

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