EG7 (Toadman Interactive)
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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. 2 dsfdsf REDEYE Equity Research EG7EG7 1811 MarchMarch 20202020 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).