Update
Equity Research 27 May 2020
Embracer Group
Sector: Gaming
Pipeline in Focus FAIR VALUE RANGE
BEAR BASE BULL Redeye reiterates its positive view of Embracer Group. The Q4 report was solid, and the 65.0 130.0 170.0 update to the pipeline has not led to any significant changes to our forecasts. A substantial amount of available capital for M&A indicates that something big could be in the making. Embracers' quality and M&A track-record should justify a premium valuation; the company EMBRAC.ST VERSUS OMXS30
is still valued in line with peers based on Oper. EBIT multiples. We believe that the growth EMBRAC OMXS30
journey of Embracer Group will continue for many years more. 140
120 Solid report, focus on pipeline 100
Q4 was a solid report with better than expected margins. The biggest takeaway was 80 60 increased pipeline visibility; the planned release schedule indicates 2x the amount of new 40
release (of capital invested) we saw during FY20. Earlier expected AAA titles have been 20
moved to FY22; this year, we will see a multitude of mid-sized games instead. The pipeline 0 27-maj 25-aug 23-nov 21-feb 21-maj adjustments have only led to small forecast changes for our part.
More M&A will come REDEYE RATING
Despite the market’s “cravings” of deals, no new M&A was announced. We feel confident that management will not stress in making acquisitions just because the market wants 5 them to. At the end of the quarter, the company had cash and unutilized credit facilities of 4 4
approximately SEK 5bn. In addition to this, the company raised SEK 1.6bn after the close of the quarter through a directed share issue. The company now states that they might consider temporary financial leverage for the right deal. Also, Embracer can issue 10% new People Business Financials shares if they need to. With the current cash position, some leverage, and a share issue (to the seller), Embracer has about SEK 10bn in available capital for M&A. Big things could be in the making, time will tell. KEY STATS A quality company at a fair price Ticker EMBRAC.ST Our Base-case of 130 SEK per share is unchanged. Embracer trades at an EV/Oper. EBIT Market Nasdaq multiple of 23x on our FY21 estimate, in line with the median valuation for the Nordic Share Price (SEK) 10 9 gaming peers. Embracer’s track-record in M&A, broad game portfolio, shareholder focus,
and growth potential deserve a premium valuation in our view. Embracer is a company that Market Cap (MSEK) 43509
seldom will look cheap. We regard it far better to buy quality at a fair price than a fair Net Debt 20E (MSEK) - 700 company at a low price, and that is what you currently get in Embracer. Free Float 6 0 % Avg. daily volume (‘000) 100 0
KEY FINANCIALS (SEKm) FY19 FY20 FY21E FY22E FY23E FY24E Net sales 508 5754 7390 8721 10269 11604 ANALYSTS
EBITDA 273 1592 3210 3665 4487 5192 Kristoffer Lindstrom
Oper. EBIT 202 880 1959 2403 2944 3414 [email protected] EPS (adj.) 2018 2019 2020E 2021E 2022E 2023E EPS (adj.) 1.8 3.5 -0.3 1.0 2.1 3.0 Tomas Otterbeck
EV/Sales 1.2 0.9 6.0 5.1 4.3 3.8 [email protected] EV/EBITDA 13.6 13.8 13.8 12.1 9.9 8.5 EV/Op. EBIT 24.3 24.3 22.6 18.4 15.0 13.0
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 27 May 2020
A solid report
Estimates vs Outcome Embracer Group FY19- FY20- FY20- Diff % MSEK Q4* Q4 Q4E
Net sales 1 631 1 339 1 310 2% of which New releases Games 781 345 250 38% Backlog Games 254 559 584 -4% Partner Publishing/Film 596 436 476 -9% Gross profit 889 673 706 -5% EBITDA 619 495 444 11% Operational EBIT 396 286 241 19%
Revenue growth 158% -18% -20% Gross profit margin 55% 50% 54% EBITDA margin 38% 37% 34% Opr. EBIT margin 24% 21% 18% Source: Redeye Research *FY19-Q4 w as the fith quarter of the extended year 19/20, but for easier comparison, w e call it Q4.
Summary: • Solid report with better than expected margins • Increased pipeline visibility, the planned release schedule indicates 2x the amount of new release (of capital employed) we saw during FY20. AAA titles likely moved to FY22. This year we will see a multitude of mid-sized games instead • The Saber acquisition going well and SnowRunner (the first game released as an Embracer company) have exceeded management expectations
Embracer showed yet another stable quarter. The net sales were almost spot-on our projections while the Operational EBIT came in 19% higher. That the company showed a decline in net sales compared to last year was entirely in the cards; as during Q4'FY19, Embracer had a couple of major releases. The main reason we saw a better margin than we had expected was a far lower SG&A, probably a COVID19, and release schedule effect with fewer gaming conferences, events, and marketing. During the period, cash flow was robust and amounted to SEK 765.7m, fueled by both the high operating profit and reduced working capital.
The biggest takeaway from the report was an update on the game pipeline ahead. Most notably; we won't see a AAA game during FY21, but instead a multitude of mid-sized releases. Still, the release schedule implies more than double capital tied up in development will come to the market during FY'21 compared to FY'20. Embracer expects that the first AAA game since Metro Exodus will be released in FY'22.
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Games
Embracer: New release sales, Finalized dev. & Sales return
900 4.0x 781 800 3.5x
700 3.0x 600 2.5x 500 2.0x 400 345 mSEK 321 291 1.5x 300 246 261 Sales return 190 200 1.0x 98 117 117 100 0.5x 30 15 34 0 0.0x
New releases per quarter Finalized development Sales return New releases to fin. dev.
Source: Redeye Research
The sales within the Games area exceeded our expectations, fueled by a higher new release revenue, which came in at SEK 345m. The most significant contributors to new release revenue were Darksiders Genesis, Metro DLC, Metro Redux, Hunt: Showdown, and a couple of smaller titles. During the quarter, Embracer recorded SEK 165m in finalized development. The sale return landed at a high level of 2.1x, likely driven by the high market demand for gaming content.
Embracer: Backlog sales, Finished Games asset & sales return
600 2.5x 555 545 559 524 500 2.0x
400 386 1.5x
300 259 254
mSEK 232 1.0x 200 salesx return 145 0.5x 100 71 52 51 65
0 0.0x
Backlog Finished Games asset % return on released dev asset -1Q
Source: Redeye Research
The backlog sales, which amounted to SEK 559m, were in line with our projections and saw a stable development during the period. Key franchises like Metro Exodus (release on steam),
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Kingdom Come: Deliverance, Wreckfest, and Milestone games. Update III of Satisfactory (Coffee Stain) was well received, and the business unit had its strongest quarter ever.
Embracer: Sales development Games & sales mix
1200 90%
80% 1000 98 70% 82 800 45 36 60%
50% 600 83 467 515
794 442 40% % of sales of % 187
Net salesNet (mSEK) 400 30% 373 142 342 338 326 252 20% 200 178 352 330 333 119 255 307 10% 138 146 143 185 82 86 85 124 0 0%
THQ Nordic Deep Silver Coffee Stain Own IPs % sales Digital % sales
Source: Redeye Research
Digital sales reached record levels and amounted to 78% of game sales. That the digital share continued to climb is an effect of consumer behavior of buying digital goods, which has increased even further with the COVID-19 outbreak. An enhanced digital sales are beneficial for Embracer’s gross profit margin.
Amplifier
Amplifier continues there work with establishing new studios and conduct smaller game investment. During the quarter, the unit set up a new game studio in Gothenburg called RiverEnd Games lead by industry veterans. They also increased their stake in Misc Games to 55% from 45% and acquired a small indie studio in Italy named DESTINYbit.
Partner Publishing
The business unit had net sales of about 9% below our projections. Partner Publishing is the segment within the Group that has been affected the most by COVID-19 in a negative way. Physical store sales have gone down dramatically, but most consumers then shifted to e- tailers instead. Still, Partner Publishing’s logistic hubs have remained operational.
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Update on the pipeline We find that the most interesting info in the report was related to the pipeline in the coming years. We have previously expected to see two AAA games come to market during FY’21 (this financial year), now the company indicates that the first AAA release after Metro will take place in FY22. In isolation, that would mean less new release income then we previously expected. However, at the same time, the management states that the value of completed games (reported as finalized development during the quarter) will more than double from SEK 589m during FY’20 to SEK 1200-1400m in FY21. We regard a AAA game a title with a development budget above USD 30m. The pipeline during FY’21 will be filled with a sizeable amount of midsized games rather than a few big ones. In a way, this reduces the title risk with more income streams but also reduces the blockbuster potential to some degree. During the past twelve months, the Game Capex has amounted to SEK 1385m. The game investment is a key driver of growth, and we expect it to continue.
Embracer: Net sales, Game CAPEX and Development projects
3500 3328 120 3196 3044 3000 100 2604 2447 2500 80 2000 1803 1506 60 1500 1214 1385 1277 1347 40 1000 817 1168 1019 508 887 500 302 341 374 380 701 20 546 135 180 208 251 291 397 0 0
LTM net sales LTM Game CAPEX Development projects
Source: Redeye Research
Embracer owns 160+ IPs and is currently working on 103 game projects, of which 43 are announced. Some notable releases during FY21 are:
• SnowRunner • Biomutant • Saints Row the Third Remastered • Spongebob Battle for Bikini Bottom • Destroy All Humans • Desperados III • RIDE4 • Wasteland 4 • And many more…
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Embracer: LTM new release sales, LTM finalized dev. & Sales return
3.0x Projections 2000 1852 1731 2.5x 1600 1480 1450 1500 1336 2.0x 1317 1248 1014 1.5x
mSEK 1000 782 1042 1234 896 1.0x Sales return
655 654 500 601 644 589 480 0.5x 383 0 0.0x
LTM new release sales LTM finalized dev. Sales return New releases to fin. dev.
Source: Redeye Research
We now model that the finalized development will land at SEK 1234m during FY21. We expect to see the most significant pipeline roll-out in Q2 and Q3 (calendar Q4 and high- season for games). To be conservative, we assume a diminishing return on new releases. Our estimates translate to a new release revenue of SEK 1852m during FY21, which amounts to annual growth of 83%. Embracer will likely continue to invest heavily in their pipeline during the year; looking at the current development recognized (SEK 2118m at FY year-end) on the balance sheet, more than 50% will come to market during FY21.
Embracer: LTM backlog sales, Sum game asset LTM & Sales return
1.4x Projections 3000 1.2x 2551 2411 2500 2291 2183 2235 1.0x 1878 2246 2672 2000 0.8x 1565 1948 1725 mSEK 1500 1268 1624 1668 0.6x 1130 1472 1021 Sales return 1254 1000 0.4x 1033 839 500 0.2x
0 0.0x
LTM backlog sales Sum of game asset LTM Sales return backlog
Source: Redeye Research
As there will be a substantial new release revenue expansion, so will also the backlog (more games in the market generating revenue). We believe Embracer will produce a backlog sales of SEK 2551m during the year. We model lowered sales return compared to last year as Metro Exodus has contributed to extremely high return levels, and that effect should plan out during this year.
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Up for leverage in an M&A deal No new M&A deal announced. We know that the market almost craves new deals from Embracer. However, we feel confident that management will not stress making acquisitions just because the market wants them to. Embracer’s success thus far is only to make great deals, and we believe they will continue on that road. The company continues to state that they are in multiple discussions with attractive targets that might form a new operating unit. The management also means that the current COVID-19 environment has not affected the deal-flow, but that they rather have seen it increase since the Saber acquisition.
At the end of the quarter, the company had cash and unutilized credit facilities of approximately SEK 5bn. In addition to this, the company raised SEK 1.6bn after the close of the quarter through a directed share issue. Embracer has always intentionally decided not to leverage its operation and take on debt to finance an acquisition. But as the current pipeline now will unfold in the coming years, the management expects to see a notable improvement in free cash flow that view has changed somewhat. The company states that ambition is still to keep a net cash position, but for the right inorganic (M&A) opportunities, they might consider temporary financial leverage. Embracer also has the authorization by the general meeting to use about 10% new shares if they find the right target, which translates to about SEK 4.2bn. With the current cash position, some leverage, and a share issue Embracer has about SEK 10bn in available funds for M&A. We believe the now stated possible intention of using leverage for M&A could imply an even larger deal then Saber Interactive in the making, time will tell.
Projections We have only made some minor forecast adjustments in this report. We still see healthy growth and expanding margins in the coming years. As always, our projections do not account for any future M&A deals, that certainly will happen.
Estimate adjustments FY21E FY22E FY23E Period
Net sales 7 393 8 724 10 272 Old net sales 7 844 9 493 10 632 % change -6% -8% -3%
Oper. EBIT 1 959 2 404 2 944 Old oper. EBIT 2 010 2 573 2 924 % change -3% -7% 1% Source: Redeye Research
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Q1 estimates
For Q1, we expect to see net sales in the region of SEK 1567m with an Operational EBIT of SEK 363m. We believe that Q2 will be the slowest quarter in terms of new releases, and in that sense the “low” quarter of the year.
Detailed estimates Embracer Group Quarterly projections Yearly projections Period FY21-Q1E FY21-Q2E FY21-Q3E FY21-Q4E FY21E FY22E FY23E Net sales 1564 1947 2065 1815 7390 8721 10269 Of w hich New releases games 351 613 422 466 1852 2222 2778 Backlog games 576 611 665 699 2551 3061 3734 Partner Publishing/Film 376 510 639 457 1982 2181 2355 Saber Interactive 261 213 338 193 1006 1257 1402 Other income 264 317 366 398 1345 1412 1483 CoS -644 -826 -930 -754 -3154 -3633 -4026 Gross profit 919 1121 1135 1061 4237 5088 6243 Other OPEX -188 -234 -248 -236 -905 -1134 -1335 Staff cost -360 -370 -392 -381 -1503 -1744 -1951 EBITDA 636 834 861 842 3173 3622 4439 Depreciation -274 -321 -320 -300 -1214 -1219 -1496 Op. EBIT 362 513 541 543 1959 2403 2944 Amortization -507 -512 -497 -522 -2038 -1870 -1848 EBIT -145 1 44 21 -79 533 1096
Gross profit margin 59% 58% 55% 58% 57% 58% 61% EBITDA margin 41% 43% 42% 46% 43% 42% 43% Op. EBIT margin 23% 26% 26% 30% 27% 28% 29% EBIT margin -9% 0% 2% 1% -1% 6% 11% Source: Redeye Research
Games: New releases: We expect that about 11% of the development game asset will be released, so the finalized development will amount to SEK 233m. We expect that the new release sales amount to SEK 351m with a sales return of 1.5x. Some of the more notable releases include: • MotoGP 20 from Milestone • Huntdown and the full version of Deep Rock Galactic also came to market after the quarter ended, from Coffee Stain Publishing. • Saints Row the Third Remastered released by Deep Silver • Spongebob Battle for Bikini Bottom Rehydrated (Arrr you ready kids?) and Desperados 3 will be released from THQ Nordic
Saber Interactive: We expect Saber Interactive to have net sales of about SEK 261m with healthy profitability, the company was consolidated from the first of April. The main driver during Q1 will be backlog and the release of SnowRunner. The game IP is owned by Saber (Embracer) but published by Focus Home. SnowRunner has shown a strong reception with over 1 million copies sold on all formats since the release on the twenty-eighth of April.
Backlog: We expect to see a continued stable performance of the backlog with a net sales of SEK 576m. This translates to a 1.3x return on completed games asset that was recorded at SEK 484m at the end of FY’20. The sales return is roughly the same as the level we have seen during the previous two quarters
Partner Publishing: There are no significant releases during Q1; however, there are multiple smaller ones. We are likely in for an ok quarter in terms of business volumes, but not more than that. We project net sales of SEK 376m during Q1.
Profitability: Thanks to the consolidation of Saber and high share of game revenue the margins will increase compared to Q4. We expect to see an Operational EBIT of SEK 362m.
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REDEYE Equity Research Embracer Group 27 May 2020
Valuation
We reiterate our Base-case valuation of 130 SEK per share. The current market valuation translates to an EV/Oper. EBIT multiple of 23x on our FY21 estimate, in line with the median valuation for the Nordic gaming peers. We regard Embracer as much a quality company as one can get and believe that their track-record in M&A, broad game portfolio, shareholder focus, and growth potential deserve a premium valuation. Embracer is a company that seldom will look cheap. We regard it far better to buy quality at a fair price than a fair company at a low price, and that is what you currently get with an investment in Embracer.
Bear Case 65.0 SEK Base Case 130.0 SEK Bull Case 170.0 SEK Key model assumptions: Key model assumptions: Key model assumptions: CAGR of 5% during forecast period CAGR of 12% during forecast period CAGR of 13% during forecast period Average Op. EBIT margin of 19% Average Op. EBIT margin of 26% Average Op. EBIT margin of 30% Terminal growth 2% Terminal growth 2% Terminal growth 2% Terminal Op. EBIT margin of 27% Terminal Op. EBIT margin of 27% Terminal Op. EBIT margin of 30%
Peer valuation EV/Sales EV/(Op.)EBIT S. CAGR EBIT margin Company EV (MSEK) FY21E FY22E FY21E FY22E 18-21E FY21E FY22E Nordic Gaming Stillfront 24 961 6.4x 5.4x 16.1x 13.3x 58% 40% 40% Paradox Interactive 24 080 13.5x 12.4x 30.3x 31.6x 20% 44% 39% Remedy 2 608 6.6x 5.6x 25.4x 20.9x 18% 26% 27% EG7 1 568 2.2x 2.0x 29.0x 23.4x 143% 8% 9% G5 Entertainment 1 401 1.1x 0.9x 14.6x 12.2x 9% 7% 8% Atari 781 2.3x 2.1x 18.2x 14.6x 24% 13% 14% Median 2 088 4.4x 3.7x 22x 18x 22% 19% 20%
International Gaming Tencent 5 098 336 7.9x 6.5x 26.7x 22.1x 31% 30% 30% Activision 512 663 7.5x 7.0x 20.4x 17.4x 9% 37% 40% Nintendo 437 328 3.7x 3.7x 13.1x 13.8x 6% 28% 27% EA 289 703 5.3x 5.0x 16.4x 14.8x 12% 32% 33% Take-Two 136 734 5.3x 4.1x 27.6x 16.9x 17% 19% 24% Bandai Namco 98 981 1.4x 1.4x 12.4x 11.5x 8% 11% 12% Ubisoft 96 011 3.6x 3.4x 17.9x 16.2x 14% 20% 21% CD projekt 88 899 11.6x 17.3x 16.1x 27.7x 84% 72% 62% Median 213 218 5.3x 4.5x 17x 17x 13% 29% 28% Peer Group median 107 653 4.8x 4.1x 19x 17x 17% 24% 24% Embracer Group 44 209 6.0x 5.1x 23x 18x 15% 20% 27%
Source: Bloomberg & Redeye Research
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REDEYE Equity Research Embracer Group 27 May 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.
Rating changes in the report
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 27 May 2020
INCOMEPlease STATEMENT comment onFY19 the changesFY20 FY21E in RatingFY22E factors……FY23E DCF VALUATION CASH FLOW, MSEK Net sales 5,754 5,250 7,390 8,721 10,269 WACC (%) 9.0 % NPV FCF (2020-2021) 5535 Total operating costs -4,162 -3,428 -4,180 -5,056 -5,782 NPV FCF (2022-2028) 13029 EBITDA 1,592 1,822 3,210 3,665 4,487 NPV FCF (2029-) 29996 Depreciation -23 -30 -37 -43 -48 Non-operating assets 2510 Amortization -995 -1,446 -3,252 -3,089 -3,344 Interest-bearing debt -1491 Impairment charges 0 0 0 0 0 Fair value estimate MSEK 49579 EBIT 575 345 -79 533 1,096 Assumptions 2020-2026 (%) Share in profits 0 0 0 0 0 Average sales growth 13.6 % Fair value e. per share, SEK 130 Net financial items -33 57 -37 -43 -49 EBIT margin 15.8 % Share price, SEK 108 Exchange rate dif. 0 0 0 0 0 Pre-tax profit 542 403 -116 490 1,047 PROFITABILITY FY19 FY20 FY21E FY22E FY23E Tax -183 -110 -9 -123 -262 ROE 11% 5% -2% 6% 11% Net earnings 359 293 -125 368 785 ROCE 17% 5% -1% 7% 15% ROIC 129% 12% -1% 7% 17% BALANCE SHEET FY19 FY20 FY21E FY22E FY23E EBITDA margin 28% 35% 43% 42% 44% Assets EBIT margin 10% 7% -1% 6% 11% Current assets Net margin 6% 6% -2% 4% 8% Cash in banks 2,929 2,510 739 872 2,754 Receivables 1,297 1,468 1,478 1,744 2,054 DATA PER SHARE FY19 FY20 FY21E FY22E FY23E Inventories 323 353 443 523 205 EPS 3.50 0.83 -0.34 0.99 2.11 Other current assets 0 0 0 0 0 EPS adj 3.50 0.83 -0.34 0.99 2.11 Current assets 4,549 4,331 2,661 3,139 5,013 Dividend 0.00 0.00 0.00 0.00 0.95 Fixed assets Net debt -28.58 -2.89 3.47 -0.68 -7.40 Tangible assets 156 185 213 239 264 Total shares 102.49 352.43 372.35 372.35 372.35 Associated comp. 0 0 0 0 0 Investments 0 0 0 0 0 Goodwill 0 0 0 0 0 Cap. exp. for dev. 1,887 3,065 5,741 3,871 2,023 O intangible rights 1,820 2,806 3,484 4,273 4,929 O non-current assets 196 251 251 251 251 Total fixed assets 4,059 6,307 9,688 8,634 7,466 Deferred tax assets 0 0 0 0 0 Total (assets) 8,608 10,637 12,349 11,773 12,479 Liabilities Current liabilities SHARE PERFORMANCE GROWTH/YEAR 18/20E Short-term debt 0 1,491 2,029 621 0 1 month 0.0 % Net sales 13.3 % Accounts payable 2,018 1,288 2,587 3,052 3,594 3 month 0.0 % Operating profit adj � O current liabilities 0 0 0 0 0 12 month 9.3 % EPS, just � Current liabilities 2,018 2,779 4,616 3,673 3,594 Since start of the year 0.0 % Equity 4.8 % Long-term debt 0 0 0 0 0 SHAREHOLDER STRUCTURE % CAPITAL VOTES O long-term liabilities 211 222 222 222 222 Lars Wingefors 29.0 % 42.2 % Convertibles 0 0 0 0 0 S3D Media Inc 10.8 % 14.6 % Total Liabilities 2,229 3,001 4,838 3,895 3,816 Cbny-Citibank N.A.-Private Bank 8.6 % 4.7 % Deferred tax liab 0 0 0 0 0 Swedbank Robur Fonder 7.1 % 3.9 % Provisions 667 1,241 1,241 1,241 1,241 Erik Stenberg 6.3 % 9.1 % Shareholders' equity 5,712 6,395 6,270 6,638 7,423 Handelsbanken Fonder 4.3 % 3.0 % Minority interest (BS) 0 0 0 0 0 Didner & Gerge Fonder 3.1 % 1.7 % Minority & equity 5,712 6,395 6,270 6,638 7,423 Första AP-fonden 2.9 % 1.6 % Total liab & SE 8,608 10,637 12,349 11,773 12,479 State Street Bank And Trust co 2.3 % 1.2 % CMB Holding AB 2.2 % 3.1 % FREE CASH FLOW FY19 FY20 FY21E FY22E FY23E SHARE INFORMATION Net sales 5,754 5,250 7,390 8,721 10,269 Total operating costs -4,162 -3,428 -4,180 -5,056 -5,782 Reuters code EMBRAC.ST Depreciations total -1,018 -1,476 -3,289 -3,132 -3,391 List EBIT 575 345 -79 533 1,096 Share price 241.2 Taxes on EBIT 0 0 0 0 0 Total shares, million 372.4 NOPLAT 575 345 -79 533 1,096 Market Cap, MSEK 89811.4 Depreciation 1,018 1,476 3,289 3,132 3,391 Gross cash flow 1,592 1,822 3,210 3,665 4,487 MANAGEMENT & BOARD Change in WC 310 -930 1,197 120 550 CEO Lars Wingefors Gross CAPEX -4,504 -3,724 -6,671 -2,077 -2,224 CFO Johan Ekström Free cash flow -2,601 -2,832 -2,264 1,707 2,813 IR Chairman Kicki Wallje-Lund
CAPITAL STRUCTURE FY19 FY20 FY21E FY22E FY23E Equity ratio 66% 60% 51% 56% 59% FINANCIAL INFORMATION
Debt/equity ratio 0% 23% 32% 9% 0%
Net debt -2,929 -1,019 1,290 -252 -2,754
Capital employed 2,783 5,376 7,560 6,386 4,669
Capital turnover rate 0.7 0.5 0.6 0.7 0.8
ANALYSTS Redeye AB GROWTH FY19 FY20 FY21E FY22E FY23E Kristoffer Lindstrom Mäster Samuelsgatan 42, 10tr Sales growth 1,034% -9% 41% 18% 18% [email protected] 111 57 Stockholm EPS growth (adj) 100% -76% -140% -394% 114%
Tomas Otterbeck [email protected]
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REDEYE Equity Research Embracer Group 27 May 2020
Redeye Rating and Background Definitions
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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 27 May 2020
Redeye Equity Research team
Management Editorial Björn Fahlén Eddie Palmgren [email protected] [email protected]
Håkan Östling Mark Siöstedt [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]
Kristoffer Lindström Arvid Necander [email protected] [email protected]
Erika Madebrink Erik Nordström [email protected] [email protected]
Fredrik Nilsson Klas Palin [email protected] [email protected]
Tomas Otterbeck Jakob Svensson [email protected] [email protected]
Eddie Palmgren Ludvig Svensson [email protected] [email protected]
Oskar Vilhelmsson Niklas Elmhammer [email protected] [email protected]
Viktor Westman Mats Hyttinge [email protected] [email protected]
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REDEYE Equity Research Embracer Group 27 May 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 (2020-05-27) Rating People Business Financials
5p 14 11 4
3p - 4p 105 81 30
0p - 2p 7 34 92
Company N 126 126 126
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
Kristoffer. Lindström owns shares in the company Embracer Group: Yes Tomas. Otterbeck. owns shares in the company Embracer Group: 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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