Update
Equity Research 1181 March March 2020 2020
EG7 (Toadman Interactive)
Sector: Gaming
A Growing Pipeline FAIR VALUE RANGE
BEAR BASE BULL Redeye raises estimates and valuation somewhat on the back of positive forecast 17.0 30.0 50.0 adjustments. We are excited about the pipeline and the acquisition of the EvilvEvil projects from Leyou, which we view as an attractive component of managements’ growth strategy. TOAD.ST VERSUS OMXS30 Q4 figures, proforma is the focus OMXS 30 Toadman Interactive The pro forma net sales amounted to SEK 155m during Q4, above our estimate of SEK 50
131m. The main driver behind the outperformance was a massive upswing in revenue for 40 Sold Out. Game development only showed a small deviation on the revenue level, while 30 Marketing was significantly below. The main reason for Marketing's slow performance was that Petrol had an internal focus. 20 10 EvilvEvil will be a key driver during 2020 0 11-mar 09-jun 07-sep 06-dec 05-mar On the 31 of December, EG7 signed an agreement to acquire the game project Osiris
(EvilvEvil) from Leyou Technologies. EG7’s investment in the game title and IP will have REDEYE RATING amounted to USD 4.1m, far below the actual development costs of USD 13m. The management has previously stated that they see a high revenue (+USD 20m) potential in EvilvEvil. As the information has been minimal about the game, we have kept our estimates 4 very conservative. But we have now adjusted our estimates upwards. The acquisitions of 3 2 Petrol and Sold-Out enables EG7 to self-publish the game. Previously the EvilvEvil was to be published in early 2020, now we see a release in late 2020. The potential for EG7 is higher now, but also the risks as they will bear the marketing expense for the game. People Business Financials
Fairly valued at current levels
We raise our Base-case valuation to 30 (28) SEK per share thanks to our positive forecast adjustments due to increased pipeline visibility. In our view, the journey has not even KEY STATS started yet for EG7, and the management team is building something highly exciting. The Ticker TOAD.ST stock price performance was stellar at the start of the year but has now declined sharply, Market Nasdaq just like the overall market. Sometimes we get the feeling that the market (or retail Share Price (SEK) 3 1.0 investors) overreacts to the news that should have a limited effect on the valuation of EG7.
Too high expectations priced in the share is not a good thing in our view, as it will be harder Market Cap (MSEK) 967
for the company to live up to those expectations. EG7 is currently trading at about 11.0x Net Debt 20E (MSEK) 124 our 2020 estimate of EBITDA, a fair level in our view. Free Float 42 % Avg. daily volume (‘000) 1 60
KEY FINANCIALS (SEKm) 2018 2019 2020E 2021E 2022E 2023E Net sales 73 152 620 720 777 748 ANALYSTS
EBITDA 6 3 111 144 160 149 Kristoffer Lindström
EBITA 6 3 106 134 147 131 [email protected] EPS (adj.) 2018 2019 2020E 2021E 2022E 2023E EPS (adj.) 0.26 -0.90 0.17 0.44 0.77 1.15 Tomas Otterbeck
EV/Sales 2.1 9.3 2.0 1.7 1.6 1.6 [email protected] EV/EBITDA n.m n.m 11.0 8.3 7.5 8.2 EV/EBITA n.m n.m 11.5 9.1 8.3 9.3 P/E n.m n.m. n.m. 71.2 40.4 26.9
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 EG7EG7 18 11 March March 2020 2020
United Globalt Seven
We initiated coverage of EG7 (then named Toadman Interactive) on the 19th of December, we will keep this update rather short and focus on recent development. For a longer description of EG7 and the case we advise a reader to download our initiation report. Link. Also, do not miss the interview with CEO Robin Floodin about the name change to EG7, latest news and more (in Swedish). Link.
Q4 figures, proforma is the focus We choose to focus on the pro forma numbers instead of the reported ones, which also includes Sold Out that will be consolidated from Q1'20.
EG7 (pro forma): Estimate vs outcome MSEK 2019-Q3 2019-Q4 2019-Q4E Dif.
Net sales 66 155 131 18% of w hich Game dev. 17 18 17 4% Marketing 50 25 54 -53% Publishing 41 112 60 87% Adj. EBITDA 17 14 18 -20% of w hich Game dev. 5 2 3 -89% Marketing 8 3 8 Publishing 4 9 7
Revenue growth rate EBITDA-margin 26% 9% 13%
Source: Redeye Research, EG7
The pro forma net sales amounted to SEK 155m during Q4, above our estimate of SEK 131m. The main driver behind the outperformance was a massive upswing in revenue for Sold Out. Game development only showed a small deviation on the revenue level, while Marketing was significantly below. The main reason for Marketing's slow performance was that Petrol had a focus on EG7's internal gaming projects and the name change of the Group to EG7 from Toadman Interactive. We see the former explanation (internal game projects) likely had the most prominent effect. The Game investment increased significantly during Q4 (SEK 6.4m) compared to Q3 (SEK 2.2m), which was mainly attributed to EvilvEvil. Internal focus on game projects leads to less income from external clients, but in the long-term creates significantly more value, so we this as something positive. On the pro forma level, the Adjusted EBITDA amounted to SEK 14m; after one-off costs, the EBITDA came in at SEK -8m. The EBITDA was lower than we had expected, mainly because of the lower Marketing division revenue and earnings.
As a whole, we see the pro forma figures as strong. It's tough to "guesstimate" the financial performance for the first quarter post significant acquisitions. There have been a lot of internal focus during the period which likely dampened the figures to some degree. In the report, EG7 provided an in-depth view of the pipeline. The initial idea was to present additional content for EvilvEvil on this year's GDC in March. However, the GDC has been moved to summer due to the Coronavirus outbreak. We want to, yet again, alert the reader/investor that EG7's accounting standard of K3 leads to significant acquisition-related D&A, which dampens the report earnings figures. The D&A will increase significantly during Q1 as Sold Out is consolidated, and the amortization begins. Compared to IFRS, where acquired companies are impartment tested continuously, in K3, the intangibles from the acquisitions are amortized over five years in a straight line.
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EvilvEvil
On the 31 of December, EG7 signed an agreement to acquire the game project Osiris (EvilvEvil) from Leyou Technologies.
EG7 has been working on Osiris for about two years. In September 2017, an agreement with Leyou was signed with a worth of USD 5m. At that time, EG7 had a 10% royalty agreement. In December 2018, the Group and Leyou signed an extended agreement worth another USD 8m. And in February 2019, the company increased its royalty share to 20% for USD 1.5m, which was deducted from the milestone payments (USD 8m) to EG7. In total, about USD 13m has been invested in the Osiris project.
The purchase for the full rights to EvilvEvil is divided into two installments; an initial payment of USD 1.3m, which gives EG7 a 100% ownership of the revenue from the game, the second payment of USD 1.3m is due within two years, which provides the Group with the full IP rights. EG7’s investment in the game title and IP will have amounted to USD 4.1m, far below the actual development costs of USD 13m.
Why would Leyou sell?
But why would Leyou sell EvilvEvil for roughly 30% of what they have put into the development of the game? Well, Leyou is quite a large company, and the project was a small one for them. Warframe, Leyou's main IP, generates annual revenue in excess of USD 180m and iDreamSky is in the talk about acquiring (which likely also effected Leyoy's decision in selling Osiris) the company for USD 1.4bn. For a company of that size, a game needs to be quite large to have an impact on the P&L. However, something that is too small for Leyou can be a large project for a company like EG7.
The management has previously stated that they see a high revenue (+USD 20m) potential in EvilvEvil. As the information has been minimal about the game, we have kept our estimates very conservative. In our projections, we previously assumed that the game would generate a mere SEK 21m (USD 2.3m) in royalty income. Our underlying assumption was that the game could make about SEK 70m in revenue during the first three years, but we discounted that by 30% as we did not know if the game actually would be published. Now we model about SEK 90m (~225k copies) sold during the release quarter (still far below EG7’s own estimate).
The new deal changes the board game
Osiris will not benefit from Leyou’s strong financial and marketing muscles, which likely leads to a lower revenue potential than before; at the same time, EG7 owns the IP and all the revenue now. If nothing unforeseen happens, the game will be published, which was not certain before. EvilvEvil is already a profitable project for EG7 as they have received USD 13m in milestone payments and paid USD 4.1m. The acquisitions of Petrol and Sold-Out enables EG7 to self-publish the game, so those two acquisitions enabled the Osiris deal. Previously the game as expected to be published in early 2020, now we expect a release in late 2020. The potential for EG7 is higher now, but also the risks as they will bear the marketing expense for the game. At the same time, they will own the IP, so if the game is successful, they can create expansions, DLC’s and new installments.
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A stream of news flow and the current pipeline There has been a steady stream of news from Sold Out regarding new publishing deals. There have been both deals for physical publishing and digital. We get the feeling that the market has a hard time understanding the future financial impact of some of the publishing deals (and most often overreact positively). One should remember that EG7 now is a company with SEK +620m in net sales, and SEK +100m in EBITDA, smaller physical publishing deals for indie titles have a limited impact on EG7's future cash-flow.
Pipeline 2020 for Publishing and Game Development
TBA: Confirmed:
Publishing: No Straight Roads (Physical and Q1
Digital) Publishing: Zombie Army 4 (Physical)
Publishing: Gestalt (Digital) Game Development: Milestone payment to
Antimatter for Rising Storm 2.
Game Development: EvilvEvil (Own IP, Q3-Q4)
Game Development: Westmark Manor (Q2-Q3) Q2
Publishing: Moving Out (Physical)
Q3
Publishing: Disjunction (Digital)
The pipeline during 2020 looks very compelling, and this will be a highly exciting year for the Group. Sold Out will have their first digital publishing titles that will be released, the margins will increase. We believe EvilvEvil will be released in Q4, which will generate a significant rise in net sales and margins. The timing of our quarterly projections holds a high degree of uncertainty as the exact release dates of some titles are yet to be confirmed. However, we see the full-year figures as more certain as we have a good understanding of the full-year pipeline.
EG7, quarterley Group estiamtes
250 25% 24%
200 20% 19% 17% 150 15%
100 9% 191.3 10% Sales(mSEK)
159.4 EBITDA margin% 141.7 127.6 50 5%
0 0% 2020-Q1E 2020-Q2E 2020-Q3E 2020-Q4E
Net sales EBITDA margin
Source: Redeye Research
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Estimate adjustments and Q1 forecast Compared to the estimates presented in the initiation report, we have conducted the following forecast adjustments.
Forecast adjustments Period 2020E 2021E 2022E Net sales 620 720 777 Old net sales 552 703 723 % change 12% 2% 7%
EBITDA 111 144 160 Old EBITDA 79 129 127 % change 40% 12% 26% Source: Redeye Research
Upwards adjustments: • A better understanding of the pipeline • That EvilvEvil is ow an internal project sure to be published • New sold Out deals announced
Downwards adjustments: • Slower development for Petrol during Q4 than expected • Likely increased focus for Petrol leading to less external revenue, but higher profitability long-term for the Group
EG7 financial forecast Year 2019 2020-Q1E 2020-Q2E 2020-Q3E 2020-Q4E 2020E 2021E 2022E Net sales 152 128 159 142 191 620 720 777 OPEX -149 -116 -130 -118 -146 -509 -576 -616 EBITDA 3 12 30 24 45 111 144 160 Depreciation -2 -1 -1 -1 -2 -5 -10 -14 EBITA 1 11 28 23 44 106 134 147 Amortization -24 -17 -17 -17 -17 -69 -80 -80 EBIT -23 -6 11 6 26 37 54 67
Growth Y/Y 107% 761% 1071% 113% 237% 309% 16% 8% EBITDA margin 2% 9% 19% 17% 24% 18% 20% 21% EBITA margin 1% 9% 18% 16% 23% 17% 19% 19% EBIT margin -15% -5% 7% 4% 14% 6% 7% 9%
Source: Redeye Research
Q1 will be the first quarter where both Petrol and Sold Out is fully consolidated. We expect to see net sales in the region of SEK 128m. We want to alert, once again, the reader/investor that there will be substantial amortizations of intangible’s from both the Petrol and Sold Out acquisitions, as EG7 follow K3 accounting. Just like embracer Group the reported EBIT and net profit will be of no use to look at. During the first quarter of the year, we believe that the EBITDA will land at SEK 12m. We expect to see higher margins in Q2-Q4 thanks to game releases and more digital revenue for Sold Out.
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REDEYE Equity Research EG7EG7 18 11 March March 2020 2020
Investment Case
EG7 (earlier Toadman Interactive) has transformed itself from a small gaming studio focused on work-for-hire to a presence across almost the whole gaming value chain. In our view, management is building a highly attractive operation with a clear focus on cash flow generation in combination with game development’s significant return potential.
Stable cash flow gives many shots at goal
Gaming is a volatile business where success depends on how well games releases perform. EG7 differs from most listed gaming companies by its stable cash flow from work-for-hire/financed projects, marketing consultancy (Petrol) and publishing (Sold Out). This is then reinvested into game development projects that could produce significant returns. Assessing games’ potential success before launch is almost impossible, but EG7’ strong financials enable it to manage title risk as its future does not depend on any single title. This structure gives it the ability to take many ‘shots at goal’ and increases the likelihood of a commercial success.
Marketing expertise in-house
Petrol’s services are highly sought after in gaming with over 50 clients including projects like ‘Call of Duty’, the highest-grossing game series on console. This world-class marketing expertise gives EG7 a valuable asset and advantage over many peers that should boost its prospects of successful releases – as well as lowering its marketing costs. Petrol generates annual revenues of SEK 179m with an expected 3-year CAGR of 7% and an EBITDA margin of 14-15%.
Skin in the game
58% of EG7 is owned by management, the board and other key employees, which shows that its leadership is highly incentivized to generate shareholder returns; we find this as undoubtedly positive. We genuinely prefer what we call “Owner Operators”, namely a management team that owns a substantial stake of the company. We regard Robin Flodin, founder, and CEO, as crucial for EG7's future success. He is the largest shareholder with over 12% of the capital. Fatshark, the renowned Swedish gaming studio, is both an owner and a close partner on work-for-hire deals.
M&A across the value chain
EG7 has an active M&A agenda with the aim of expanding across the gaming value chain. The company has used SEK 220m of its SEK 500m bond program. With an underlying pro forma EBITDA of some SEK 50m following the acquisition of Sold Out, there is still significant room to increase leverage. It is clear that we will see more acquisitions to strengthen EG7, either by filling current gaps or reinforcing current business areas. EG7 focuses on not overpaying for companies and has historically paid an EV/EBIT multiple of about 6x for their acquisitions. Compared to standard gaming valuations, this is low. EG7 has strengthened its M&A team significantly during 2019. We view the recruitment of COO Christopher Bergstresser as key in this.
Counter-arguments Investors should also consider the following counter-arguments to our case: • Title risk – Although EG7 has sought to build a broad portfolio of games, it nonetheless faces title risk (particularly on larger projects) like all of its gaming peers. Disappointing releases could dampen investors’ enthusiasm and hurt the company’s financials. Nonetheless, EG7 is protected by more stable cash flow than other small gaming companies thanks to its consulting, marketing agency and game publishing arms. • Somewhat unproven M&A strategy – Growing through acquisitions always involves the risk that targets fail to add shareholder value. As EG7 is a rather young company, it’s still too early to judge all of its acquisitions – especially the most recent. Investors should focus on tracking their performance during the coming years to judge management’s capacity to add value through M&A. • K3 and M&A is a bad match – Despite it not affecting cash flow, K3 accounting is a bad fit for a company conducting a lot of M&A. As reported profits will be artificially low compared to underlying earnings power, this can impact valuation and market perceptions of the company.
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REDEYE Equity Research EG7EG7 18 11 March March 2020 2020
Valuation
We raise our Base-case valuation to 30 (28) SEK per SOTP valuation share thanks to our positive forecast adjustments due to 2020 Multiple EV increased pipeline visibility. In our view, the journey has Sales EBITDA EV/EBITDA not even started yet for EG7, and the management team Marketing 148 21 9.0x 192 is building something highly exciting. The stock price Game Development 225 66 8.0x 527 Publishing 333 48 10.0x 478 performance was stellar at the start of the year but has Sum. 1197 now declined sharply, just like the overall market. When EV 1197 it comes to EG7, we get the feeling that the market (or Debt -135 retail investors) take out much in advance and Provisions -113 overreacts to the news that should have a limited effect Market Cap 949 on the valuation. Too high expectations priced in the Per share 30
share is not a good thing in our view, as it will be harder Source: Redeye Research for the company to live up to those expectations. EG7 is currently trading at about 11.0x our 2020 estimate of EBITDA, a fair level in our view.
Peer table SALES EV/Sales EV/EBITDA EBITDA margin CAGR Company EV (MSEK) 2020E 2021E 2022E 2020E 2021E 2022E 19-22E 2020E 2021E 2022E Gaming Embracer Group 25 964 3.3x 3.0x 2.9x 11.1x 8.2x 7.7x 30% 30% 37% 38% Paradox Interactive 14 086 7.6x 6.5x 5.5x 14.6x 12.7x 11.0x 26% 52% 51% 50% Team17 Group 8 272 9.1x 9.1x 11.1x 28.2x 25.8x 26.3x 0% 32% 35% 42% Frontier Development 5 799 5.5x 3.5x 3.8x 20.3x 14.6x 9.7x 13% 27% 24% 39% Codemasters 4 287 3.3x 3.1x 3.1x 20.3x 10.5x 12.5x 18% 16% 30% 25% Digital Bros 1 511 1.1x 1.0x 1.0x 6.7x 6.7x 6.3x 22% 16% 15% 16% Remedy 1 453 3.5x 3.1x 3.5x 15.3x 12.5x 10.0x 26% 23% 25% 35% Funcom 1 278 4.9x 4.3x 2.3x 11.1x 7.0x 3.5x 23% 44% 61% 67% Focus Home Interactive 827 0.6x 0.5x 0.4x 4.4x 6.0x 4.0x 18% 14% 8% 10% Low (25th perc.) 1 366 2.2x 2.0x 1.7x 9x 7x 5x 15% 16% 19% 21% Median 4 287 3.5x 3.1x 3.1x 15x 11x 10x 22% 27% 30% 38% High (75th perc.) 11 179 6.5x 5.4x 4.7x 20x 14x 12x 26% 38% 44% 46% IT/Media/Gaming services Keywords Studios 12 333 3.3x 3.0x 3.3x 22.0x 18.2x 16.0x 13% 15% 16% 21% Next Fifteen Communications 5 356 1.6x 1.5x 1.5x 8.1x 7.2x 6.7x 19% 19% 21% 22% Know IT 2 946 0.8x 0.7x 0.7x 6.9x 6.4x 6.0x 9% 11% 12% 11% Sumo Digital 2 870 3.8x 3.3x 3.0x 16.6x 14.1x 12.4x 29% 23% 23% 24% HiQ International 2 265 1.1x 1.1x 1.0x 8.3x 7.8x 7.3x 6% 14% 14% 14% Mission Group 986 0.9x 0.9x 0.8x 6.4x 5.9x 5.4x -14% 14% 15% 16% B3 441 0.5x 0.5x 0.5x 8.1x 7.1x 6.1x 8% 7% 7% 8% Low (25th perc.) 986 0.8x 0.7x 0.7x 7x 6x 6x 6% 11% 12% 11% Median 2 870 1.1x 1.1x 1.0x 8x 7x 7x 9% 14% 15% 16% High (75th perc.) 5 356 3.3x 3.0x 3.0x 17x 14x 12x 19% 19% 21% 22% EG7 1 216 2.0x 1.7x 1.6x 11x 8x 8x 72% 18% 20% 21%
Source: Bloomberg & Redeye Research
One should remember that EG7 is not a pure-play gaming company, and there is still a relatively high degree of uncertainty in the estimates due to the acquisition “roll-up”. Before we have a longer financial history and a successful launch of an on IP, we find that the EG7 should have a discount to other pure-play gaming companies.
Bear Case 17.0 SEK Base Case 30.0 SEK Bull Case 50.0 SEK • CAGR sales ’20-28: 5% • CAGR sales ’20-28: 8% • CAGR sales ’20-28: 11% • EBITA margin: 15% • EBITA margin: 17% • EBITA margin: 19% • Terminal FCF growth: 2% • Terminal FCF growth: 2% • Terminal FCF growth: 2% • Terminal EBITA margin: • Terminal EBITA margin: • Terminal EBITA margin: 17% 20% 23%
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REDEYE Equity Research EG7EG7 18 11 March March 2020 2020
Catalysts
Bond refinancing or new program
We view 12% interest as too high for a company with EG7’s high and stable cash flows. Its bond was issued prior to the acquisition of Sold Out and Petrol, which changed the business entirely. A refinancing or a new program at a lower rate is likely and would be positive.
EvilvEvil release and news flow
EvilvEvil is the largest game project in EG7's history, with a development budget in the region of EUR 15m. The game is expected to be released in Q3-Q4'20. News flow regarding the title and, obviously, the release is the most significant catalyst we see during 2020 for EG7.
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REDEYE Equity Research EG7EG7 18 11 March March 2020 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: 4
Over 58% of the capital in EG7 is owned by the management, board and key employees, which shows that the leaders of the Group are highly incentivized on generating shareholder returns; we find this as undoubtedly positive. We genuinely prefer what we call "Owner Operators", namely a management team that owns a substantial stake of the company. We regard Robin Flodin, founder, and CEO, as crucial for EG7’s future success. Robin is the largest shareholder of the Group, with +12% of the capital. The sellers of Petrol, Alan Hunter Ben Granados, are the CEO, and Vice president of Petrol owns 7.4% each of the capital. The previous owners of Sold Out, Garry Williams and James Cato, owns 4.4% each in the Group. EG7’s focus on using their own share as partial payment for acquisitions is, in our view, a great thing, as the new "members" of the Group have aligned interest with the rest. We view the management team and key employees of EG7 as highly experienced, and the company has been able to attract some industry- leading talent to join the team.
Business: 3
Gaming is by its nature a volatile business where the success depends on how well games that are released performs. EG7 differs from most public gaming companies as they have a stable cash flow generated from their work-for-hire/financed projects, marketing consultancy (Petrol) and publishing business (Sold Out). These cash-flows are then reinvested into EG7's game development projects, which could produce significant returns.
Financials: 2
EG7 (earlier Toadman Interactive) as the Group we see today was formed in conjunction with the acquisition of Artplant in June 2018; therefore, the historical figures before that are of limited usability. Our Financial Rating has a focus on historical figures, and as the history for EG7 is short they receive a relatively low rating. During 2019 the company also conducted a couple of major acquisitions which changed the margin levels, risks, cash flows and income mix complete. When looking at proforma figures we see a strong and solid company with healthy cash flow generating capabilities. The bond framework (SEK 220m of 500m utilized) has a 12% annual interest rate, which is high in today's interest rate environment and given the business characteristics of EG7 post the latest acquisitions. We find it likely that there will be a refinancing of the bond at more favorable terms.
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REDEYE Equity Research EG7EG7 18 11 March March 2020 2020
INCOMEPlease STATEMENT comment 2018 on the 2019changes 2020E in Rating2021E factors……2022E DCF VALUATION CASH FLOW, MSEK Net sales 73 152 620 720 777 WACC (%) 12.0 % Total operating costs -67 -149 -497 -576 -618 EBITDA 6 3 123 144 159 Depreciation 0 0 0 -2 -1 Amortization -1 -26 -86 -88 -91 Impairment charges 0 0 0 0 0 EBIT 6 -23 37 54 67 Assumptions 2020-2026 (%) Share in profits 0 0 0 0 0 Average sales growth 7.5 % Fair value e. per share, SEK 30 Net financial items 1 -5 -26 -26 -18 EBIT margin 10.7 % Share price, SEK 31.0 Exchange rate dif. 0 0 0 0 0 Pre-tax profit 6 -28 11 28 49 PROFITABILITY 2018 2019 2020E 2021E 2022E Tax -2 0 -5 -14 -25 ROE 24% -20% 2% 5% 9% Net earnings 4 -28 5 14 24 ROCE 34% -9% 7% 11% 15% ROIC 306% -142% 8% 14% 21% BALANCE SHEET 2018 2019 2020E 2021E 2022E EBITDA margin 9% 2% 20% 20% 20% Assets EBIT margin 8% -15% 6% 7% 9% Current assets Net margin 5% -19% 1% 2% 3% Cash in banks 15 23 126 198 116 Receivables 24 91 186 216 233 DATA PER SHARE 2018 2019 2020E 2021E 2022E Inventories 0 0 0 0 0 EPS 0.26 -0.90 0.17 0.44 0.77 Other current assets 0 0 0 0 0 EPS adj 0.26 -0.90 0.17 0.44 0.77 Current assets 38 114 312 414 349 Dividend 0.00 0.00 0.00 0.00 0.00 Fixed assets Net debt -0.96 7.28 3.96 1.67 -1.10 Tangible assets 0 1 2 1 1 Total shares 15.18 31.22 31.22 31.22 31.22 Associated comp. 0 0 0 0 0 Investments 0 0 0 0 0 VALUATION 2018 2019 2020E 2021E 2022E Goodwill 0 0 0 0 0 EV 155.4 942.8 1,391.6 1,320.4 1,233.7 Cap. exp. for dev. 0 475 394 316 239 P/E 43.0 -21.5 222.9 85.0 47.8 O intangible rights 8 21 35 46 55 P/E diluted 43.0 -21.5 222.9 85.0 47.8 O non-current assets 1 1 1 1 1 P/Sales 2.3 4.0 1.9 1.6 1.5 Total fixed assets 9 498 432 364 296 EV/Sales 2.1 6.2 2.2 1.8 1.6 Deferred tax assets 0 0 0 0 0 EV/EBITDA 24.4 304.3 11.3 9.2 7.8 Total (assets) 47 611 744 778 645 EV/EBIT 27.1 -41.4 37.7 24.5 18.5 Liabilities P/BV 5.5 2.4 4.5 4.3 3.9 Current liabilities SHARE PERFORMANCE GROWTH/YEAR 18/20E Short-term debt 0 0 0 0 0 1 month 41.8 % Net sales 191.2 % Accounts payable 9 61 124 144 155 3 month 80.4 % Operating profit adj 153.9 % O current liabilities 0 0 0 0 0 12 month 216.2 % EPS, just -20.2 % Current liabilities 9 61 124 144 155 Since start of the year 95.8 % Equity 189.6 % Long-term debt 0 250 250 250 82 SHAREHOLDER STRUCTURE % CAPITAL VOTES O long-term liabilities 0 0 0 0 0 Robin Flodin 12.2 % 12.2 % Convertibles 0 0 0 0 0 Rasmus Davidsson 12.2 % 12.2 % Total Liabilities 9 311 374 394 237 Alan Hunter 7.5 % 7.5 % Deferred tax liab 0 0 0 0 0 Ben Granados 7.5 % 7.5 % Provisions 8 113 113 113 113 Consensus Asset Management AB 6.5 % 6.5 % Shareholders' equity 31 252 257 271 295 Dan Sten Olsson med familj och stiftelse 6.4 % 6.4 % Minority interest (BS) 0 0 0 0 0 Johan Svensson 6.2 % 6.2 % Minority & equity 31 252 257 271 295 Alexander Albedj 5.6 % 5.6 % Total liab & SE 47 676 744 778 645 Länsförsäkringar Fonder 4.6 % 4.6 % James Cato 4.4 % 4.4 % FREE CASH FLOW 2018 2019 2020E 2021E 2022E SHARE INFORMATION Net sales 73 152 620 720 777 Total operating costs -67 -149 -497 -576 -618 Reuters code TOAD.ST Depreciations total -1 -26 -86 -90 -92 List EBIT 6 -23 37 54 67 Share price 37.0 Taxes on EBIT 0 0 0 0 0 Total shares, million 31.2 NOPLAT 6 -23 37 54 67 Market Cap, MSEK 1155.1 Depreciation 1 26 86 90 92 Gross cash flow 6 3 123 144 159 MANAGEMENT & BOARD Change in WC -12 -16 -32 -10 -6 CEO Robin Flodin Gross CAPEX -10 -514 -20 -23 -24 CFO Birtgitta Lönnberg Free cash flow -15 -527 71 112 129 IR Chairman Alexander Albedj CAPITAL STRUCTURE 2018 2019 2020E 2021E 2022E Equity ratio 65% 37% 35% 35% 46% FINANCIAL INFORMATION
Debt/equity ratio 0% 99% 97% 92% 28%
Net debt -15 227 124 52 -34
Capital employed 16 479 381 323 260
Capital turnover rate 1.5 0.2 0.8 0.9 1.2
ANALYSTS GROWTH 2018 2019 2020E 2021E 2022E Redeye AB Kristoffer Lindström Mäster Samuelsgatan 42, 10tr Sales growth 566% 107% 309% 16% 8% [email protected] 111 57 Stockholm EPS growth (adj) 0% -445% -118% 162% 78%
Tomas Otterbeck [email protected]
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REDEYE Equity Research EG7EG7 18 11 March March 2020 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 team
Management Editorial Björn Fahlén Eddie Palmgren [email protected] [email protected]
Håkan Östling Mark Siöstedt [email protected] [email protected]
John Hintze Technology Team [email protected] Jonas Amnesten [email protected] Johan Kårestedt (Trainee) [email protected] Henrik Alveskog [email protected] Life Science Team Gergana Almquist Havan Hanna [email protected] [email protected]
Kristoffer Lindström Oscar Bergman [email protected] [email protected]
Erika Madebrink Anders Hedlund [email protected] [email protected]
Fredrik Nilsson Arvid Necander [email protected] [email protected]
Tomas Otterbeck Erik Nordström [email protected] [email protected]
Eddie Palmgren Klas Palin [email protected] [email protected]
Magnus Skog Jakob Svensson [email protected] [email protected]
Oskar Vilhelmsson Ludvig Svensson [email protected] [email protected]
Viktor Westman [email protected]
Linus Sigurdsson (Trainee) [email protected]
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REDEYE Equity Research EG7EG7 18 11 March March 2020 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 (2020-03-18) Rating People Business Financials
5p 12 12 4
3p - 4p 95 73 31
0p - 2p 10 32 82
Company N 117 117 117
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 EG7: No Tomas. Otterbeck. owns shares in the company EG7: 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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