Update

Equity Research 15 December 2020

Embracer Group

Sector: Gaming

Loading the Next Level FAIR VALUE RANGE

BEAR BASE BULL Incentives to Acquire, but also Deliver 130 250 300

Our view is that Embracer has given the key personnel incentives to obtain growth and certain financial targets through acquisitions. But we do not believe they have incentives to EMBRAC.ST VERSUS OMXS30 acquire for the sake of its own, but to achieve overall profitability and growth in the Group. OMXS 30 In contrast to many other companies, Embracers shareholders will not be further diluted if Embracer Group 250 those entrepreneurs get their full earnouts. However, if they do not deliver according to the terms, shareholders instead will benefit from a stronger balance sheet as compensation. 200

150 The Sweet Spot 100 We believe Embracer still has much room to grow through small to medium-sized 50

acquisitions. And, of course, all former acquisitions will boost growth for many years to 0 come. The risk is also lower in releasing AA titles as the investment is lower, with a 16-dec 15-mar 13-jun 11-sep 10-dec

potential of a higher return on investment. We take a deeper dive into, three of the more REDEYE RATING interesting acquisitions since our last research update, namely Flying Wild Hogs, Purple Lamp Studios, and Vertigo Games.

5 Only a Bump in the Road 4 4

The Embracer-stock has shown some weakness lately but has still advanced 140% this year. We assume the weakness is only temporary due to investors feeling skeptical about People Business Financials the acquisition pace (too many, too small, and too fast). Another explanation is that the Q3- result (October-December) is also expected to be the weakest quarter this fiscal year. However, we believe this “big embracing elephant” will continue to grow significantly in a more long-term perspective. We have increased our estimates until 2023 and our valuation. KEY STATS Our new fair value range is SEK 130-300 (SEK 95-260) with a base case of SEK 250 (SEK Ticker EMBRAC.ST 205) per share. Market First North Share Price (SEK) 174.0

Market Cap (MSEK) 67447

Net Cash 20E (MSEK) 5649

KEY FINANCIALS (SEKm) FY20 FY21E FY22E FY23E

Net sales 5250 8910 11356 13468 ANALYSTS

EBITDA 1822 3830 5436 6886 Tomas Otterbeck

Op EBIT 345 2582 3983 5205 [email protected] EPS (adj.) 2018 2019 2020E 2021E 2022E 2023E EV/Sales 4.8 8.2 6.2 4.6 Danesh Zare

EV/EBIT 72.6 28 18 14 [email protected]

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: [email protected]

REDEYE Equity Research Embracer Group 15 December 2020

Top of Mind: M&A, Too Many and Too Fast

Shortly after the very strong Q2-results, the focus seems to have shifted to the high acquisition intensity in the last two quarters in Embracer. We think that it is a good thing that the potential risks have been a topic lately, as a subject to test our conviction in the investment case.

It is not a secret that Embracer, Stillfront, and now EG7 in the gaming sector have spoiled shareholders with high flying stock prices and, more importantly, mostly great financial results. However, a few years is a short period to determine the impact of all those acquisitions. And more “moving parts” in the Groups, of course, makes it harder to predict the future. More moving parts also create a more critical demand for an effective organization, which we believe Embracer has with its six business areas.

For example, we believe that the size of the acquisitions is in many ways more important than the number of acquisitions. The game studio “Flying Wild Hog” was approximately 60% of the initial purchase price during the quarter. Wild Flying Hogs and the VR-focused studio “Vertigo” have been the two largest acquisitions in the last six months. Both have been acquired by the subsidiary Deep Silver, not the recently more M&A intensive Saber Interactive and DECA.

Incentives to Uphold the Acquisition Pace

The two added business areas this year are Saber Interactive and DECA. The three founders of those two companies have earnouts with certain financial milestones in 3-7 years. If they are not able to reach certain milestones their Embracer-shares they “borrowed” in the acquisitions can be reduced. This is a way for Embracer to secure that key personnel stays loyal.

The subsidiaries’ incentives are aligned with the Group, and the management in the Group of course has the power to neglect acquisitions that are not considered a good fit. The two founders of Saber Interactive have operational earnouts, for example, they have to release a certain amount of games during a six years period. If they reach these milestones, they get a certain profit-share. The two founders currently own Embracer-shares for SEK 3.5 billion each.

The founder of DECA, Ken Go, owns “borrowed” Embracer-shares currently worth SEK 1 billion. He has different financial milestones in a 3 to 7-years period. If he reaches these milestones, he can keep his Embracer shares. In five years he must, for example, reach a certain level of revenues and profitability. Any acquisitions made will be added to milestones but will have a cost-of-capital formula that will be added to the hurdles.

In contrast to many other companies, Embracers shareholders will not be further diluted if those entrepreneurs get their full earnouts. However, if they do not deliver according to the terms, shareholders instead will benefit from a stronger balance sheet as compensation. Our view is that Embracer has given the key personnel incentives to obtain growth and certain financial targets through acquisitions. But we do not believe they have incentives to acquire for the sake of its own, but to achieve overall profitability and growth in the company. On the other hand, there is a great driving force to build great companies for these entrepreneurs, which we believe is the primary mission for them.

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The Market wants a Mega Acquisition

Wingefors sees somewhat increased competition amongst small to medium-sized private gaming companies, especially in the PC/Console so-called “premium-segment”, which is the core focus for the company. This often results in higher earnings-multiples in potential acquisitions. Amongst studios with a “free-to-play” business model, often found in online PC- games and mobile games, the competition is lower.

Embracer has significant room for a mega acquisition, through the mandate of new shares and a large cash position. Wingefors prefer acquisitions in a private environment. It is more complicated to buy a public company, and the price tag is, in most cases more expensive. We believe Embracer will buy more major studios like Saber Interactive. But it will of course be more complicated to buy/merge with some of the premium class studios like Bungie, Techland, Platinum Games, etcetera. As we all know Microsoft, Tencent, or Epic Games will likely win those targets if the highest price wins.

Many a Little makes a Mickle

With the latest acquisitions, Embracer has 58 in-house game studios under its umbrella, of which 20 have been added since August this year. We believe Embracer still has much room to grow through small to medium-sized bolt on-acquisitions. And, of course, all former acquisitions will boost growth for many years to come. The risk is also lower in releasing A/AA titles as the investment is lower, and we believe the return on investment is usually higher. The latest SpongeBob release being an excellent example of a game with a relatively small budget but still contributing materially to Embracers sales in the quarter.

Flying Wild Hog The most notable acquisition was the Polish game developer “Flying Wild Hog” with its 266 employees and an initial purchase price of USD 137.2 million. The developer, which was acquired by Koch Media, includes the game series Shadow Warrior and Hard Reset. One of the games that the studio is working on was announced during The Game Awards 2020, on December 11, 2020, and is called Evil West. The game is set to release in 2021 and Focus Home Interactive is the publisher. The announcement trailer has amassed almost a million views spread across different YouTube channels.

Flying Wild Hog is working on two additional unannounced projects. One of which is going to be published by Jagex. Flying Wild Hog has created two games on the Shadow Warrior IP. The games have sold over 9 million copies, and the sequel Shadow Warrior 3 is planned to be released in 2021. We think this is a great acquisition since it already has a wide pipeline of games. Shadow Warrior is a strong IP, and there is a high probability for the upcoming game to be a success.

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Purple Lamp Studios THQ Nordic has acquired 100% of the shares in Vienna-based studio, Purple Lamp, onboarding its team of 38 developers. The purchase price consists of a combination of cash and shares, but the acquisition price was not disclosed. The two companies have worked together on multiple projects in the past, including this year’s SpongeBob SquarePants: Battle for Bikini Bottom - Rehydrated and The Guild 3, which currently is in Early Access.

SpongeBob was one of the primary revenue drivers for the back-catalog sales in the latest quarter. Impressive, we believe, considering that this was a remake of the original that was released in 2003. The fact that Embracer published a press release about SpongeBob and Destroy all Humans, make us believe that THQ Nordic received a generous up-front payment from Google for releasing the games on the relatively small platform.

Purple Lamp Studios will now work exclusively on THQ Nordic titles, with two collaborations already in the works. In the future, the developer will focus primarily on titles based on licensed IP. We think it is highly likely that Purple Lamp Studios will create a new game based on the SpongeBob IP.

Vertigo Games Embracer acquired Vertigo Games, a VR developer and publisher, in September 2020. The upfront consideration was EUR 50 million (EUR 40 million in cash and EUR 10 million in shares), resulting in an EV of EUR 45 million, adjusted for the net cash position of EUR 5 million. Sales are estimated to reach between EUR 10 and 12 million in 2020, and operational EBIT is estimated between EUR 6 to 8 million. So it is a small but profitable company.

An earnout package was also disclosed, spanning up to 10 years. We view the long earnout period as positive as management is incentivized to continue the growth trajectory under the Embracer umbrella for a long time.

Vertigo Games was founded in 2008 and is based in the Netherlands and employs 50 people. VR is the fastest-growing secular trend within the gaming market, and Vertigo Games is one of the world’s leading VR developers. They have been working exclusively on VR titles since 2013 and have released four games to date. Its most significant commercial success is the VR zombie shooter game, Arizona Sunshine, which was the 4th most sold VR game during the last two years. Arizona Sunshine has received favorable reviews and has a Metacritic score of 80 and Steam reviews of 83%.

Its upcoming game After the Fall is planned to be released in early 2021. It is one of the few AAA VR titles that is being released in the next 12 months and is highly anticipated by the VR community. We have a positive view of this acquisition as the VR market is growing at a fast pace. Cheaper and better hardware is driving the adoption rate of VR. Oculus Quest 2 was five times more popular than the already popular Oculus Quest. Oculus Quest 2 might be just what VR needed for VR gaming to finally become mainstream at a low entry price of USD 299, coupled with the fact that there is no need for a computer. Exclusive AAA VR titles like Half-Life: Alyx has also helped drive the adoption rate.

Vertigo is estimated to grow sales and operation EBIT at between 80 and 100 percent in 2021. We think the price tag was quite low for this acquisition at an EV to sales ratio of 4.5 and an EV to operational EBIT ratio of 7.5 on the lower end of the estimates. Certainly attractive, considering the growth of the company and the underlying growth of the VR market.

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Obtained Synergies

Embracer has become a large gaming conglomerate, and they are now home to 58 game studios, and we predict there are more to come. Every studio in the company is in need of marketing and Quality Assurance (QA) services. We, therefore, see the potential for significant synergies via the acquisitions of Quantic Lab (QA company) and Sandbox Strategies (PR agency). The apparent reason for acquiring these companies is to do more of the marketing and Quality Assurance in-house, and this will lead to cost savings. But an added benefit is that Embracer is growing and becoming more of a “one-stop-shop”, giving acquisition targets further incentives to join Embracer.

One additional reason why we think the market was a little disappointed by the latest acquisitions is the lack of strong IP:s for many of the acquired companies. We believe that Saber Interactive wants to leverage experienced but less expensive programmers for their internal development projects. And that is why some of the acquired companies’ games portfolio might not have been a focus, but rather the team’s experience and execution. Saber has also collaborated with the acquired companies and know them well.

Continued Conviction in the Pipeline

Embracer’s cores are of course is in the business of developing and distributing games, and the acquisitions are a means to that end we believe. The best way to judge if the strategy is working or not is by closely following the company’s game releases and judging the quality and commercial success of these releases. Nothing we have observed lately changes our view of the company or its execution. The quality of their latest releases has been high, judging by Steam reviews and Metacritic scores, and sales have not disappointed.

The execution will be of higher importance as the company is now moving up to developing triple-A titles. We think this positive trend will continue and as long as it does, we see no point in changing our outlook for the company. The diversified portfolio enables the company the luxury to not release unfinished game titles on the market (Biomutant for instance).

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Financials

The Q2-result Embracer’s net sales amounted to SEK 2,383.2 million (1259.7), which was just over 15% higher than Redeye’s estimate of SEK 2,058 million. At the same time, operating EBIT was SEK 652.5 million (240.7). The bright star during the quarter was THQ Nordic, with its SEK 567 million in net sales.

Another bright spot was the strong gaming backlog of SEK 1 billion (0.55). Although successful game releases during the last quarter were one of the main reasons for the strong backlog, it shows the strength of having a large game library with associated loyal fans in many games.

Game Pipeline The game pipeline is minor (about half the value) in Q3 compared to Q4 (January-March) with game releases with a completion value of SEK 150-175 million in Q3 and SEK 300-350 million in Q4. In FY 2022 Embracer forecast to potentially double the value of completed games compared to the current financial year.

In the CEO-comments, Lars Wingefors writes of a notable release from THQ Nordic in Q4. We believe it is very likely he talks about the anticipated Biomutant. However, we have already estimated the release of Biomutant in Q4.

In the last two quarters, new game releases have been 33% and 45% of total sales. According to our estimates, the holiday season (Embracers Q3) will be the weakest quarter this financial year for the game division, but still close to last quarter (SEK 1,454 million vs SEK 1,495 million).

In Q4 (January-March) we estimate SEK 782 million will be generated from THQ Nordic, boosted by the release of Biomutant. Recently, a similar game called Immortals: Fenyx Rising (Gods and Monsters) was released from Ubisoft. The game was well-received by critics (Metascore of 82) but early indications by physical sales numbers were somewhat disappointing. Despite the similarities, we believe Biomutant looks like a more unique experience with edgy characters and almost endless choices (which is important in open- world games). We expect Biomutant will be a long-lasting IP for THQ Nordic and would not be surprised if a TV-series was released based on the franchise in the future.

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Detailed estimates Embracer Group

Period FY21-Q1 FY21-Q2 FY21-Q3E FY21-Q4E FY21E FY22E FY23E Net Sales 2069 2383 2093 2365 8910 11356 13468 THQ Nordic 488 567 443 782 2280 Deep Silver 613 507 504 530 2154 Coffee Stain 173 130 151 127 581 Saber Interactive 349 259 290 377 1276 Deca Games 0 33 65 78 176 Games Subtotal 1622 1495 1454 1895 6466 8 667 10 376 Partner Publishing/Film 447 888 639 470 2444 2 689 3 092 CoS -760 -1034 -931 -912 -3637 -3 701 -4 187 Gross profit 1309 1349 1162 1454 5273 7 655 9 281 Other OPEX -292 -360 -318 -317 -1287 -1476 -1482 Staff cost -379 -399 -412 -421 -1611 -2 271 -2 155 EBITDA 950 969 797 1114 3830 5 436 6 886 Operational D&A -256 -277 -324 -390 -1248 -1 453 -1 680 Op. EBIT 712 653 473 723 2582 3983 5205 M&A-related D&A -492 -520 -634 -633 -2279 -2523 -2475 EBIT 220 133 -161 90 303 1460 2731

Growth (YoY) 70% 27% 19% Gross profit margin 63% 57% 56% 61% 59% 67% 69% EBITDA margin 46% 41% 38% 47% 43% 48% 51% Op. EBIT margin 34% 27% 23% 31% 29% 35% 39% EBIT margin 11% 6% -8% 4% 3% 13% 20% Source: Redeye Research, Embracer Group

Estimate Changes Q3: Only minor changes. We estimate net sales of SEK 2.093 million (SEK 2,063 million) with an operational EBIT of SEK 473 million (SEK 454 million).

Q4: The communicated strong pipeline of new releases in Q4 and more signals from management that Biomutant will be released during the quarter make us raise our estimates. We expect net sales of SEK 2,365 million (SEK 2,059 million) and an operation EBIT of SEK 723 million (SEK 567 million).

FY2022: Management also communicated to double up the value of game releases next fiscal year (approximately SEK 2 billion in completed games). This would mean 2.1x invested capital in 2022, compared to 1.72 in FY2020 and an estimated 2.5x in FY2021. The multiple is higher than in 2020 mainly due to the expected increased quality of game releases. The multiple is lower than in 2021 due to at least two AAA-titles, it is harder to achieve a high multiple on a major budget.

We estimate net sales of SEK 11,356 million (SEK 9,549 million) with an operational EBIT of SEK 3,983 million (SEK 2,645 million).

FY2023: We expect more AAA-games, which means higher revenues but lower gross profit margins. Our estimate for the whole Group is SEK 13,468 million (SEK 11,543 million) with an operational EBIT of SEK 5,205 million (SEK 3,272 million).

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REDEYE Equity Research Embracer Group 15 December 2020

Valuation

Peer valuation EV/Sales EV/EBIT SALES CAGR EBIT margin Company EV (MSEK) 2020E 2021E 2020E 2021E 2022E 19-22E 2020E 2021E 2022E Nordic Gaming Stillfront Group 31 048 7.4x 5.6x 24.8x 17.8x 15.7x 47% 30% 32% 32% Paradox Interactive 24 618 13.4x 11.1x 32.5x 27.5x 25.9x 24% 41% 40% 39% Remedy 4 479 11.0x 10.2x 37.2x 35.5x 19.9x 20% 32% 31% 44% G5 Entertainment 3 545 2.5x 2.2x 19.6x 15.1x 11.7x 15% 13% 14% 16% Median 14 549 9.2x 7.9x 29x 23x 18x 22% 31% 31% 35% Mobile/casual Zynga 78 422 4.1x 3.4x 18.1x 14.6x 12.6x 25% 23% 23% 26% GLU 10 711 2.3x 2.1x 151.3x 17.6x 12.6x 14% 2% 12% 15% Com2us 9 770 2.5x 1.9x 10.4x 7.0x 6.3x 14% 24% 27% 27% Rovio 3 208 1.2x 1.2x 6.2x 9.1x 9.4x -2% 19% 13% 12% Median 10 240 2.4x 2.0x 14x 12x 11x 14% 21% 18% 20% International Gaming Tencent 6 059 294 9.7x 7.9x 33.3x 27.7x 22.3x 21% 29% 28% 29% Nintendo 550 828 4.3x 4.5x 12.3x 14.9x 15.1x 7% 35% 30% 31% Activision 508 171 7.4x 7.2x 18.0x 16.7x 17.1x 8% 41% 43% 38% EA 287 412 5.7x 5.4x 17.3x 15.8x 13.1x 8% 33% 34% 39% Take-Two 163 703 6.0x 5.7x 28.5x 24.3x 16.7x 17% 21% 23% 26% Bandai Namco 155 100 2.7x 2.4x 24.2x 18.9x 18.3x 4% 11% 13% 13% Ubisoft 101 327 4.2x 3.9x 22.7x 20.1x 17.4x 14% 19% 19% 20% CD projekt 61 692 9.0x 9.6x 13.1x 14.6x 15.9x 61% 68% 66% 73% Median 225 558 5.8x 5.5x 20x 18x 17x 11% 31% 29% 30% Peer Group median 14 549 5.8x 5.5x 20x 18x 17x 14% 31% 29% 30% Embracer Group 72 468 8.1x 6.4x 28x 18x 14x 53% 29% 35% 35%

Source: Bloomberg *Redeye Research

After the recent setback in the Embracer-stock, the valuation looks attractive according to us. Looking at the estimates for the fiscal year of 2021 (ending March 2021) the stock is fairly priced. But already in the fiscal year of 2022 (2021 in the peer-table) Embracer is traded at cheap multiples for a company focused on PC/Console games.

The discount is significant compared to Nordic-peers Paradox and Remedy. Stillfront Group focused on mobile games (which in general has lower valuations globally) has almost the same multiple as Embracer during the calendar year of 2021. With an expected growth of almost 30% and an operational EBIT-margin of 35% in the fiscal years 2022-2023and the optionality of further value-adding acquisition the Embracer stock looks like a good investment at SEK 174 per share according to us.

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REDEYE Equity Research Embracer Group 15 December 2020

Investment Case

• A large part of the IP portfolio is still not generating any income, this will change in the coming years • Embracer's IP portfolio grew significantly following acquiring Koch Media, Saber Interactive and more acquisitions, the asset care possibilities and thus value enhancement is vast • Owner operator with a highly skilled management team with the right focus on long-term value creation • The core strategy is to acquire IPs at depressed prices and then enhancing their value

Investment Risks • Title risks of larger releases – Despite Embracer's extensive portfolio there is always some title risk when releasing larger Disappointing releases and/or reviews could dampen investors’ enthusiasm and hurt the company’s financials. • Rising competition in bidding for acquisitions – As the Group is entering a new level as a company, so will the future acquisitions in terms of size and target reputation. Going from an unknown player to a more established company might make it harder to find cheap deals. • Management is paramount – Just as much we love a strong and committed management team, it is also a fact that relying on a few key individuals also poses a ris

Fair Value Range

Bear Case SEK 130 (95) Base Case SEK 250 (205) Bull Case SEK 300 (260) CAGR of 14 (11%) during forecast CAGR of 22% (19%) during forecast CAGR of 23% (21%) during forecast period Average Op. EBIT margin of period Average Op. EBIT margin of period Average Op. EBIT margin of 22% (20%) Terminal growth 2% 30 (28%) Terminal growth 2% 33% Terminal growth 2% Terminal Terminal Op. EBIT margin of 22% Terminal Op. EBIT margin of 26% Op. EBIT margin of 28% (30%) (25%) (28%) In our Bull-case we assume a larger In our Bear-case, we have used In our Base-case scenario, we success for the upcoming major much more conservative model that the investment in new releases during 2018, 2019 and assumptions regarding the success releases continues at a high phase 2020 the company then reinvest of the larger upcoming releases. We the coming years. those cash flows into even greater also model a much slower growth projects, which also works out well. long-term of new release revenue, We state that a quality company, in as in this scenario the earlier a growth industry, with highly Our assumptions in the Bull-case disappointments makes the capable management seldom regarding commercial success for company more cautious of new trades at the cheap. Our valuation is the larger upcoming releases should larger projects. only based on the organic not be seen as any “Blue-sky” development and do not factor in scenario with overly positive However, the catalog revenue future acquisitions. But as the estimates. continues to develop at a healthy company has shown when done pace. The lower assumed growth right they can create massive leads to less operational leverage, amount of value. and we model a less aggressive margin uptake and that no real synergies between Koch Media, Saber, and THQ Nordic manifest.

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REDEYE Equity Research Embracer Group 15 December 2020

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: 5

The management team of Embracer Group is by our measures highly competent with extensive experience from the Gaming industry. The company continuously puts emphasis on a shareholder focus to generate long-term value creation by keeping to their core strategy; acquiring IPs at the cheap and increase their value by asset care. Lars Wingefors, the CEO and co-founder, is an entrepreneur by heart; he started his first business at the age of 13 and has been selling video games for more than 20 years. We find the management of Embracer as trustworthy as they have never tried to misguide the market; instead, they always make conservative statements and educate the market about their business. The ownership structure of Embracer Group is, in our view, one of its key strengths. All the key personnel has substantial holdings in the company with the co-founder Lars Wingefors controlling more than 50% of the votes. The significant holdings create a focus on long-term value creation and not meeting short- term financial goals that a company led by “hired guns.” In addition to the substantial holdings of the management team, some of the most renowned institutional owners show up on the shareholder's list of Embracer Group.

Business: 4

Embracer Group has an extensive portfolio of game franchises with multiple streams of income and a massive player base. Some of the IPs, like Darksiders, Spellforce, Red Faction and MX vs. ATV, Saints Row, Dead Island, and Metro has a large following and good reputation in the gamer community; this creates a pricing power and demand for new products. Following the acquisition of Koch Media, Embracer has become a power-house, but as the gaming industry is so massive, they are still a relatively small player. The Partner Publishing business has lower margins than “Games”, but still generates a substantial EBIT contribution and acts as a “funnel” for further business development relationships and possible acquisitions.

Financials: 4

Embracer is a company with a strong cash 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 asset. The future profitability levels will vary due to game release schemes as the business model inherits a high degree of scalability. Long-term increasing margins as the company continue to grow and the revenue streams from their own IPs increase even further.

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REDEYE Equity Research Embracer Group 15 December 2020

INCOMEPlease STATEMENT comment 2019 on the2020E changes 2021E in Rating2022E factors…… DCF VALUATION CASH FLOW, MSEK Net sales 5,250 8,910 11,356 14,682 WACC (%) 8.0 % NPV FCF (2020-2021) 6424 Total operating costs -3,428 -5,016 -5,025 -8,001 NPV FCF (2022-2028) 24566 EBITDA 1,822 3,894 6,331 6,682 NPV FCF (2029-) 71004 Depreciation -30 -45 -51 -57 Non-operating assets 2510 Amortization -1,446 -3,527 -4,820 -3,894 Interest-bearing debt -1491 Impairment charges 0 0 0 0 Fair value estimate MSEK 103013 EBIT 345 322 1,460 2,731 Assumptions 2020-2026 (%) Share in profits 0 0 0 0 Average sales growth 23.0 % Fair value e. per share, SEK 265.7 Net financial items 57 -45 -52 -53 EBIT margin 18.2 % Share price, SEK 174.0 Exchange rate dif. 0 0 0 0 Pre-tax profit 403 278 1,409 2,678 PROFITABILITY 2019 2020E 2021E 2022E Tax -110 -17 -352 -669 ROE 5% 4% 15% 23% Net earnings 293 261 1,056 2,008 ROCE 5% 3% 11% 24% ROIC 12% 6% 12% 25% BALANCE SHEET 2019 2020E 2021E 2022E EBITDA margin 35% 44% 56% 46% Assets EBIT margin 7% 4% 13% 19% Current assets Net margin 6% 3% 9% 14% Cash in banks 2,510 3,564 1,136 1,468 Receivables 1,468 2,138 2,271 2,936 Inventories 353 535 681 294 Other current assets 0 0 0 0 Current assets 4,331 6,237 4,088 4,698 Fixed assets Tangible assets 185 210 236 262 Associated comp. 0 0 0 0 Investments 0 0 0 0 VALUATION 2019 2020E 2021E 2022E Goodwill 0 0 0 0 EV 25,060.3 73,096.0 70,457.2 66,858.1 Cap. exp. for dev. 3,065 10,524 7,156 4,943 P/E 89.1 258.6 63.8 33.6 O intangible rights 2,806 3,228 5,564 7,047 P/E diluted 89.1 258.6 63.8 33.6 O non-current assets 251 251 251 251 P/Sales 5.0 7.6 5.9 4.6 Total fixed assets 6,307 14,213 13,207 12,503 EV/Sales 4.8 8.2 6.2 4.6 Deferred tax assets 0 0 0 0 EV/EBITDA 13.8 18.8 11.1 10.0 Total (assets) 10,637 20,450 17,295 17,201 EV/EBIT 72.6 226.7 48.2 24.5 Liabilities P/BV 4.1 10.1 8.7 6.9 Current liabilities SHARE PERFORMANCE GROWTH/YEAR 18/20E Short-term debt 1,491 9,212 4,145 879 1 month 0.4 % Net sales 24.4 % Accounts payable 1,288 3,118 3,975 5,139 3 month 5.5 % Operating profit adj -25.1 % O current liabilities 0 0 0 0 12 month 150.6 % EPS, just -56.2 % Current liabilities 2,779 12,331 8,120 6,018 Since start of the year 145.8 % Equity 8.0 % Long-term debt 0 0 0 0 SHAREHOLDER STRUCTURE % CAPITAL VOTES O long-term liabilities 222 222 222 222 Lars Wingefors 23.5 % 38.0 % Convertibles 0 0 0 0 S3D Media Inc 9.9 % 13.8 % Total Liabilities 3,001 12,553 8,342 6,239 Cbny-Citibank N.A.-Private Bank 7.9 % 4.6 % Deferred tax liab 0 0 0 0 Swedbank Robur Fonder 6.3 % 3.7 % Provisions 1,241 1,241 1,241 1,241 Erik Stenberg 5.6 % 8.5 % Shareholders' equity 6,395 6,656 7,713 9,721 State Street Bank And Trust co 5.3 % 3.1 % Minority interest (BS) 0 0 0 0 Handelsbanken Fonder 4.6 % 2.7 % Minority & equity 6,395 6,656 7,713 9,721 Canada Pension Plan Investment Board (CPP) 3.1 % 1.8 % Total liab & SE 10,637 20,450 17,295 17,201 ML, Pierce, Fenner & Smith Inc 2.6 % 1.5 % Didner & Gerge Fonder 2.6 % 1.5 % FREE CASH FLOW 2019 2020E 2021E 2022E SHARE INFORMATION Net sales 5,250 8,910 11,356 14,682 Total operating costs -3,428 -5,016 -5,025 -8,001 Reuters code EMBRAC.ST Depreciations total -1,476 -3,571 -4,871 -3,951 List First North EBIT 345 322 1,460 2,731 Share price 174.0 Taxes on EBIT 0 0 0 0 Total shares, million 387.7 NOPLAT 345 322 1,460 2,731 Market Cap, MSEK 67447.5 Depreciation 1,476 3,571 4,871 3,951 Gross cash flow 1,822 3,894 6,331 6,682 MANAGEMENT & BOARD Change in WC -930 978 577 887 CEO Lars Wingefors Gross CAPEX -3,724 -11,478 -3,865 -3,246 CFO Johan Ekström Free cash flow -2,832 -6,606 3,043 4,322 Chairman Kicki Wallje-Lund

CAPITAL STRUCTURE 2019 2020E 2021E 2022E ANALYSTS Redeye AB Tomas Otterbeck Mäster Samuelsgatan 42, 10tr Equity ratio 60% 33% 45% 57% [email protected] 111 57 Stockholm Debt/equity ratio 23% 138% 54% 9%

Net debt -1,019 5,649 3,010 -589 Danesh Zare Capital employed 5,376 12,305 10,722 9,131 [email protected] Capital turnover rate 0.5 0.4 0.7 0.9

GROWTH 2019 2020E 2021E 2022E Sales growth -9% 70% 27% 29% EPS growth (adj) -76% -19% 305% 90%

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REDEYE Equity Research Embracer Group 15 December 2020

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 long- term 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.

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REDEYE Equity Research Embracer Group 15 December 2020

Redeye Equity Research team

Management Editorial Björn Fahlén Mark Siöstedt [email protected] [email protected]

Håkan Östling Gabriel Höglund [email protected] [email protected]

Technology Team Life Science Team Jonas Amnesten Gergana Almquist [email protected] [email protected]

Henrik Alveskog Oscar Bergman [email protected] [email protected]

Havan Hanna Anders Hedlund [email protected] [email protected]

Erika Madebrink Ludvig Svensson [email protected] [email protected]

Fredrik Nilsson Niklas Elmhammer [email protected] [email protected]

Tomas Otterbeck Mats Hyttinge [email protected] [email protected]

Oskar Vilhelmsson Forbes Goldman [email protected] [email protected]

Viktor Westman Nima Faroghi [email protected] [email protected]

Forbes Goldman Filip Einarsson [email protected] [email protected]

Mark Siöstedt Fredrik Thor [email protected] [email protected]

Nima Faroghi [email protected]

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REDEYE Equity Research Embracer Group 15 December 2020

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 (2020-12-15) Rating People Business Financials

5p 19 15 3

3p - 4p 109 90 38

0p - 2p 5 28 92

Company N 133 133 133

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 Danesh Zare owns shares in the company : Yes Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this.

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