Embracer Group

Update

Equity Research 7 November 2019

Embracer Group

Sector: Gaming

Q2’FY20 preview and a Q&A session FAIR VALUE RANGE

BEAR BASE BULL Q2 preview 60.0 100.0 125.0

Embracer Group will present their Q2 report for the Financial year of 2020 on the 14th of November. On the Group level, we project that the net sales will reach about SEK 1 008m,

with an Operational EBIT of SEK 157m. We expect to see a drop year over year in net sales EMBRAC.ST VERSUS OMXS30

as there is less Partner Publishing volumes, but a high Operational EBIT growth in the OMXS 30 region of 59% thanks to strong games sales. Embracer Group 300

Q&A session 250 200 On the 31st of October, the share of the Embracer Group fell sharply. The reason for that 150 was a published "short case" on the stock." Market talk" arose with a lot of claims regarding 100 Embracer Groups' accounting praxis, underlying profitability, and valuation. In this special 50

report , we present a type of Q&A session where we share our view on the following 0 questions: 05-nov 03-feb 04-maj 02-aug

• What is EV/Invested Capital? REDEYE RATING • Has the cash flow been weak? • Is Koch Medias profitability much lower than what Embracer Group has previously

communicated? 5 4 4 • Was Metro Exodus Koch Media's primary asset?

• Does the difference in accounting principles create an artificial boost in earnings

post acquisitions?

People Finance • Is the decline in the physical distribution for the gaming industry a risk for Business Embracer?

Unmotivated share price drop creates an opportunity KEY STATS

Our view is the following: As it seems like that the short case rest on a dubious valuation Ticker EMBRAC.ST Market Nasdaq approach, false claims, weird conclusions, and directly incorrect facts view the share drop as totally unmotivated (nothing has changed with the business). In our view, the decline in Share Price (SEK) 241.2

share price has led to an attractive opportunity for long-term investors to invest in a Market Cap (MSEK) 25045

genuinely quality growth company at attractive levels. Net Debt 19E (MSEK) - 2602 Free Float 50 % Avg. daily volume (‘000) 940

KEY FINANCIALS (SEKm) 2017 2018 2019E 2020E 2021E 2022E Net sales 508 5754 5572 6939 8118 9092 ANALYSTS

EBITDA 273 1592 1815 2478 2899 3420 Kristoffer Lindstrom

EBIT 188 575 556 941 1234 1546 [email protected]

EPS (adj.) 1.82017 3.52018 3.82019E 6.62020E 9.02021E 11.32022E Tomas Otterbeck

EV/Sales 19.9 3.2 4.0 3.1 2.6 2.3 [email protected] EV/EBITDA 37.0 11.7 12.4 8.7 7.4 6.1 EV/EBIT 53.6 32.4 40.4 23.0 17.4 13.6 P/E 77.0 59.9 63.5 36.5 26.8 21.4

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 7 November 2019

Q2’FY20 preview

Embracer Group will present their Q2 report for the financial year of 2020 on the 14th of November. On the Group level, we project that the net sales will reach about SEK 1 008m, with an Operational EBIT of SEK 157m. We expect to see a drop year over year in net sales as there is less Partner Publishing volumes, but a high Operational EBIT growth in the region of 59% thanks to strong Games sales.

Quarterly estimates Embracer Group FY19- FY20- MSEK Q2* Q2E

Net sales 1 273 1 008 of which New releases Games 117 249 Backlog Games 259 310 Partner Publishing/Film 897 448 Gross profit 377 524 EBITDA 215 313 Operational EBIT 99 157 EBIT 91 36

Revenue growth 1403% -21% Gross profit margin 30% 52% EBITDA margin 17% 31% Opr. EBIT margin 8% 16% EBIT margin 7% 4% Source: Redeye Research *FY19-Q2 w as the third quarter of the extended year 19/20, but for easier comparison, w e call it Q2.

Key drivers:

• Games: o New releases. We believe that new releases will create an income of about SEK 249m with a significant contribution from the latest acquisitions. During FY19’Q2 last year, Games had SEK 117m in revenue from new releases, compared to the releases during that time the line-up, this year feels much stronger. We might be a little conservative on the new release front, but it’s extremely hard to estimate these kinds of income flows. o Main releases include among others; ▪ Remnant: From the Ashes. Gunfires Remnant can only bee see as a real success. According to third-party data, it looks like the game sold approx. 700k on Steam and 200K on PS4. The Steam figure sounds a little too high according to us as the game topped out at a PCCU of 50k. On the 31th of October the publisher Perfect World announced that the game had sold 1 million copies, we think about 900k during Q2 sounds reasonably. One thing we want to stress is that Embracer is no the publisher of the game, so the income will not be that excessive even though the substantial number of copies sold. Remnant was a new IP from Gunfire, so the thing we look forward to is the next plans for this new franchise. ▪ During the quarter, Wreckfest was launched on consoles. The game has received a strong critic rating. According to third-party data, it seems like they have sold roughly 225k copies on PS4

REDEYE Equity Research THQ Nordic 7 November 2019

during the quarter, the likely total sold on consoles should be in the region of 370-400k. ▪ MXGP 2019 from the newly acquired Milestone was also released during the quarter. We believe that the game satisfies it’s fan- base with good user scores, but actual sales figures are harder to estimate. Overall, we think that the game has sold similar volumes as their precursors. ▪ DLC mania: There have been a lot of DLC’s released, with the main ones are: Metro Exodus DLC, Darksiders 3 DLC, and MX vs. ATV All Out! DLC. Overall, we fell that the reception for the DLC’s has been good. ▪ Red faction Re-mars-tered on Switch was another release, and there have been a few more. o Backlog: We expect that games will have a backlog sales of SEK 310m, this corresponds to a growth of 20% compared to the same period last year. We believe the main drivers will be Metro and Satisfactory sales, bundles, and subscription service inclusion. We also noticed that Darksiders III was included in PlayStation plus, which most often lead to a type of fixed payment from Sony. Many of Milestones titles have already been included in different subscriber packages like PlayStation Now.

• Partner Publishing: In conjunction with the last report, the management indicates that the business unit has notably fewer releases during the quarter compared to the same period last year. The new acquisition conducted during Q1 will add some top-line revenue. We expect to see a revenue level of roughly SEK 448m, a 50% drop compared to last year. • Profitability: We expect to see a healthy margin driven by digital sales and a relatively low-income share for Partner Publishing. Our assumptions lead to an Operational EBIT margin of 16%..

REDEYE Equity Research Embracer Group 7 November 2019

A Redeye Q&A session

On the 31th of October the share of Embracer Group fell sharply. The reason for that was a published “short case” on the stock. ”Market talk” arose with a lot of claims regarding Embracer Groups accounting praxis, underlying profitability and valuation. We view a part of the market talk as a direct distrust directed to the company’s management. One core part of our Investment Case in Embracer is their competent management team and strong shareholder focus. As such we find it prudent to present our view on the “market talk” that have reached our ears. We have had research coverage of Embracer Group for almost two and a half year soon, and thus far our track-record has not been that shabby.

Embracer Group: Share price and Redeye Base-case valuation (adj. For share split) (SEK per share)

120.0

100.0

80.0

60.0

40.0

20.0

0.0

2017-07-28 2017-08-28 2017-09-28 2018-03-31 2018-04-30 2018-05-31 2018-06-30 2018-07-31 2018-12-31 2019-01-31 2019-02-28 2019-03-31 2019-04-30 2019-05-31 2019-06-30 2017-10-28 2017-11-28 2017-12-28 2018-01-28 2018-02-28 2018-08-31 2018-09-30 2018-10-31 2018-11-30 2019-07-31 2019-08-31 2019-09-30 2019-10-31

THQN Base-case

Source: Bloomberg & Redeye Research

As it seems like the short case rest on a dubious valuation approach, falls claims, weird conclusions, and directly incorrect facts view the share drop as totally unmotivated. In our view, this has created an opportunity to buy shares in one of the most interesting and quality companies within the gaming space at an attractive valuation.

What is EV/Invested Capital? According to the market talk we have heard, the short case suggests using an EV to Invested Capital multiple to value Embracer Group. EV/Invested Capital an unusual valuation method, especially for a company with a significant intangible asset. Embracer, and many gaming companies, for that matter, have a lot of underlying value that is not recorded on the balance sheet. In all honesty, how to accurately record the value of a gaming franchise that lives on for ten plus years with multiple installments down the road? It’s extremely hard, and therefore the invested capital is an imperfect measurement of actual asset value, according to us.

REDEYE Equity Research Embracer Group 7 November 2019

According to the market talk we have heard, the short case suggests that a 1.5x multiple on Embracers invested capital seems fair. Everyone, of course, has their own opinion of valuation. A valuation multiple is a type of “fast” discounted cash flow, so the multiple is dependent on company performance and value-drivers. Multiples are also most often used in comparison to peers, and 1.5x is extremely low compared to other gaming companies. The current EV/IC valuation of Embracer is right on the average/median valuation of other gaming companies.

Enterprise Value to Invested Capital for Gaming companies Company Currency EV Invested Capital EV/IC Paradox Interactive SEK 13478 773 17.4x Funcom NOK 849 310 2.7x Stillfront SEK 7277 2947 2.5x Digital Bros EUR 152 57 2.7x Codemaster GBP 303 34 8.9x Focus Home Interactive EUR 115 26 4.5x Atari EUR 71 13 5.4x Team17 GBP 354 42 8.5x Median 5.0x Avereage 6.6x Embracer SEK 18370 3418 5.4x Source: Redeye Research

Has the cash flow been weak? One significant component in a cash flow calculation is the CAPEX. Here it’s essential to understand the difference between Growth CAPEX (GCAPEX) and Maintenance CAPEX (MCAPEX). MCAPEX is the amount needed to sustain the current business, while GCPAEX is to fuel further growth of the company. Embracer invests almost all of there free cash flow into new projects and their pipeline. Since going public, Embracer has produced almost SEK 2bn in cash flow, of which the main part has been reinvested into the pipeline. A game project usually takes 2-4 years to develop and release; this means that most of the development project that has started since going public has not been released yet. One simple measure of this is to look at the reported intangible assets as of the latest financial report (Q1 FY20). The company had SEK 427m in finished and completed games that are amortized, and SEK 1280m in ongoing game development projects. This means; that the current pipeline is almost 3x the size of the game asset that has been released and is currently generating revenue. To include all the M&A related payments in a cash flow calculation becomes utterly ill-advised as the time-frame is too short. An acquisition, like, for example, the Koch Media deal, will generate earnings and cash for many years (hypothetically for all eternity) to come. Taking the full purchase amount and compare that to the cash flow for just one and a half years is just plain incorrect in our view.

The investment into game projects is a key-driver of future growth. In our latest research report we noted the following:

“Investment into game projects continued at a record pace and amounted to SEK 356m during the quarter; the new game projects, of course, be a driver of growth for many years. On a t12m (trailing twelve months) basis, game-related investments reached a record high of approximately SEK 1.3bn. At the end of June, there were 81 projects in development where 47 I still yet to be announced. The new acquisitions of Milestone and Gunfire also add more projects and increase the pipeline.”

REDEYE Equity Research Embracer Group 7 November 2019

THQ Nordic: t12m; backlog, new releases, game CAPEX and dev. proj.

3000 90 80 2500 70

2000 1336 60 1317 50 1500 782

MSEK 40 651 1000 30 568 projects dev Nr. 1268 20 500 485 1021 1130 269 854 88 117 120 125 647 10 214 224 254 256 239 332 0 0

t12m backlog t12m new releases t12m Game CAPEX Dev. Projects

Source: Redeye Research

Just looking at Embracer Groups' cash flow statement, it's evident that the company generates healthy cash flow and then reinvest that into growth. Quarters where there has been relatively little M&A related CAPEX, like Q3FY19 and Q1 FY20, the "Other CAPEX" amounted to SEK 38-50m, this should be close to Embracers Maintenance CAPEX.

Embracer Group Cash-flow statement MSEK Q3 FY19* Q4 FY19** Q5 FY19*** Q1 FY20 Cash flow from operations 224 360 527 306 Changes in working capital -964 95 250 135 Cash flow from operations after changes in working -740 455 777 441 capital

Game development CAPEX 234 314 305 356 Other CAPEX 50 432 316 38 Total CAPEX 284 746 621 394 Source: Redeye Research *Working capital grew significantly in quarter, mainly as a consequence of replacing forfaiting of receivables with bank debt within Koch Media. **Q4 FY19 most of other CAPEX is related to acquistion of Coffee Stain and Bugbear. ***Q5 FY19 most of other CAPEX is related to acquistion of Warhorse Studios and 12POINT2

Is Koch Medias profitability much lower than what Embracer Group have previously communicated? The market talk that has reached us question if Embracer has overstated the underlying profitability of Koch Media. There have been mentioning that the company only produced revenues of EUR 130-200m with margins in the region of -5 to +8% during the years FY11 to FY’16. Well, these figures might be correct for the Austrian entity of Koch Media (we do not know for sure), but they do not include, for example, Deep Silver (where most of the profit lies), so these figures are not for the whole Group. Therefore, making a judgment and comparing these figures to the ones stated by Embracer is both incorrect and misleading as they do not include the whole Group that Embracer acquired, and basing any conclusion on solely these figures is faulty.

REDEYE Equity Research Embracer Group 7 November 2019

Was Metro Exodus Koch Medias' main asset? The market talk we have heard suggests that Metro Exodus is Koch Medias' main IP, and now when Exodus has been released, the "good times" are over, at least for some years. To clarify, Metro Exodus is a significant title for the whole Embracer Group, and the game continues to drive both sales and profits. We look forward to the Steam launch in February next year and more DLC's that are planned. However, Metro is not Deep Silvers (the games arm in Koch Media) biggest franchise. Before the release of Exodus, the Metro IP had generated roughly EUR 95m in lifetime revenue. The Saints Row franchise has made more than 6x that amount. A new Saints Row game is expected to be released during 2020, and we are looking forward to that.

Lifetime revenue of Deep Silver franchises up to end 2018 Title Saints Row Dead Island Metro Homefront EURm 600 185 95 33 Source: Embracer Group

Is the decline in the physical distribution for the gaming industry a risk for Embracer? The further down one travel on the Income Statements, the more distorted the figures becomes of different accounting practices. The market talk we have heard is that Operational EBIT is not a good measure of earnings and that it’s intentionally boosted when Embracer conducts M&A and converts the “target” to their account practices. Well, for most readers and investors, this is not easy to understand and follow. Two measures that are in general not affected by accounting practices, and especially not the capitalized costs for Game Development, are Gross profit and Cash flow from operations before changes in Working Capital. Here we graph the two and compare them to the Operational EBIT. The graph looks very healthy, and the Operational EBIT moves in the same direction as both the Gross profit and the cash flow. If Embracer would try and “boost” the Operational EBIT by using some accounting practices, the correlation should not be this high.

Embracer Group: Gross profit, Cash Flow & Oper. EBIT

1000 889 900 800 700 614 600 542 527 500

mSEK 371 377 400 360 313 306 300 224 186 192 200 146 137 100 55 33 0

Gross profit Cash flow fr. oper. bf. cha. in WC Operational EBIT

Source: Redeye Research

REDEYE Equity Research Embracer Group 7 November 2019

Not all acquired companies have a difference in accounting practices from Embracer, in some cases, there might be differences that create or decrease accounting-related profits, but that should play out in the long-term. However, as illustrated in the graph, the gross profit and cash flow keep growing in tandem with the Operational EBIT.

When Embracer makes an acquisition, it does not mean that all the intangible asset is moved to acquisition-related assets. Instead, Embracer takes over the balance sheet as a whole and continues the depreciation of the asset. The Q1 FY19 report is a good example of this practice as it shows the balance sheet before and after the Koch Media acquisition. The reported intangible asset rose significantly, with a large increase in ongoing game development projects and also finished projects.

REDEYE Equity Research Embracer Group 7 November 2019

Is the decline in physical distribution for the gaming industry a huge risk for Embracer? That there is a steady decline in physical game distribution is not something new, and it’s something that the management of Embracer is well aware of. Embracer is strong on physical as a part of their business is Partner Publishing, which stands for a substantial part of the revenue. However, the Partner Publishing does stand for a significant portion of the revenue mix; it does not contribute with that much profits. The margins within “Games” are much higher, and that is where all the investment goes. Most industry experts do also believe that despite the strong digital trend, the physical distribution will be important. Many of the more “hard-core” and most valuable customers still prefer buying physical games.

Benefits of the digital trends

We also want to stress that Embracer is not slow on the digital front; on the contrary, they stand at the forefront. Two of the twenty-first featured games of Stadia were Embracer Group’s titles.

We believe that the real strength of Embracer Group is its always growing portfolio of IPs. There are two major trends within the gaming market that we have dubbed ”Cloud gaming” and ”Platform wars.” Both these trends play out well for Embracer with their content focus.

REDEYE Equity Research THQ Nordic 7 November 2019

Investment Case

The acquisition of Koch Media is a prime example of Embracer Group's acquisition strategy and why we continue to be positive to the case. We believe that the market is still to fully grasp the underlying value and cash flow generating capabilities of Embracer's growing IP portfolio, which was enhanced to a significant degree following the purchase of the European publisher.

We believe that the markets overall low understanding of the Gaming industry and focus on the short-term creates an opportunity for the investor who see the bigger picture in Embracer. The following bullet points summarize our investment thesis;

• The company showed significant growth during 2017 but 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, 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, Koch Media acquisition as a prime example

A large part of the asset value is still untapped he company showed significant growth during 2017, but a large part of the IP portfolio is still not generating any income. Development projects including a few AAA will be released in the years to come. This will take revenues and the profits to entirely new levels.

Embracer's IP portfolio grew significantly following acquiring Koch Media. We believe that the company will use its asset care expertise and unlock a lot of value from the long tail part o0f the game asset in the coming years. Some key franchises included in the IP portfolio are Darksiders, MX vs. ATV, Red Faction, Delta Force, Titan Quest, SpellForce, Saints Row, Dead Island, Metro and 100+ more.

Focus on long-term value and buying cheap Embracer Group is what we like to call an owner-operator company where the management team owns 50%+ of capital, has extensive experience from the industry and is highly committed to building “something big.” We believe there should be a premium on the valuation because of the strong shareholder focus

Embracer's core strategy is to acquire IPs at depressed prices and then enhancing their value. We view the Koch Media acquisition as a prime example of this approach. This focus will continue to keep risks at low levels and create significant investment returns for shareholders going onwards Many public companies suffer from a short-term quarterly focus; this could not be further from the case when it comes to Embracer. We find the long-term thinking as a distinct advantage; we also believe this way of business will further increase following the Koch acquisition as the company will be less dependent on single releases for cash flow.

Our forecast, and therefore also our DCF valuation, does not factor in possible future value-adding acquisitions of IPs or companies, but it is a fact that Embracer will continue to acquire, and will do so with bravura

REDEYE Equity Research THQ Nordic 7 November 2019

Counterarguments (Bear-points)

It is always sensible to develop some counterarguments to an investment thesis. Below, we present some bear- points that an investor should consider and have in mind if the future development is not favorable.

• Title risks of larger releases – Despite Embracer’s extensive portfolio there is always some title risk when releasing larger projects. Disappointing releases and/or reviews could dampen investors’ enthusiasm and hurt the company’s financials. • Rising competition in bidding for acquisitions – As Embracer 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 risk.

REDEYE Equity Research THQ Nordic 7 November 2019

Valuation

Bear Case 60.0 SEK Base Case 100.0 SEK Bull Case 125.0 SEK Key model assumptions: Key model assumptions: Key model assumptions: CAGR of 6% during forecast period CAGR of 9% during forecast period CAGR of 11% during forecast period Average Op. EBIT margin of 16% Average Op. EBIT margin of 21% Average Op. EBIT margin of 24% Terminal growth 2% Terminal growth 2% Terminal growth 2% Terminal Op. EBIT margin of 15% Terminal Op. EBIT margin of 23% Terminal Op. EBIT margin of 25%

In our Bear-case, we have used In our Base-case scenario, we In our Bull-case we assume a larger much more conservative model that the investment in new success for the upcoming major assumptions regarding the success releases continues at a high phase releases during 2018, 2019 and of the larger upcoming releases. We the coming years. The size, 2020 the company then reinvest also model a much slower growth regarding income, of the company, those cash flows into even greater long-term of new release revenue, has increased significantly following projects, which also works out well. as in this scenario the earlier the Koch Media acquisition, and the In this scenario, some sales and disappointments makes the Group now has a huge partner cost synergies between Koch Media company more cautious of new publishing business. Profitability and the “old” THQ Nordic creates larger projects. However, the wise we believe it is possible that higher margins and sales growth. catalog revenue continues to the gross margins will expand as Our assumptions in the Bull-case develop at a healthy pace. The lower the revenue streams from the own regarding commercial success for assumed growth leads to less IPs will grow faster than the the larger upcoming releases should operational leverage, and we model publishing revenue and that the not be seen as any “Blue-sky” a less aggressive margin uptake and Group turns their profitable asset scenario with overly positive that no real synergies between Koch care focus on Koch Media IP asset. estimates. Media and THQ Nordic manifest. There is of course also the inherent scalability of Embracer Group’s business model that will come into play.

REDEYE Equity Research THQ Nordic 7 November 2019

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..

REDEYE Equity Research THQ Nordic 7 November 2019

INCOMEPlease STATEMENT comment on2017 the changes2018 2019E in Rating 2020E factors…… 2021E DCF VALUATION CASH FLOW, MSEK Net sales 508 5,754 5,572 6,939 8,118 Total operating costs -235 -4,162 -3,757 -4,460 -5,220 EBITDA 273 1,592 1,815 2,478 2,899 Depreciation 0 -23 -26 -49 -75 Amortization -84 -995 -1,234 -1,488 -1,590 Impairment charges 0 0 0 0 0 EBIT 188 575 556 941 1,234 Share in profits 0 0 0 0 0 Net financial items -6 -33 -35 -35 0 Exchange rate dif. 0 0 0 0 0 Pre-tax profit 182 542 521 906 1,234 PROFITABILITY 2017 2018 2019E 2020E 2021E Tax -43 -183 -126 -219 -299 ROE 20% 11% 7% 11% 13% Net earnings 139 359 395 687 935 ROCE 26% 17% 9% 14% 17% ROIC 91% 129% 20% 27% 36% BALANCE SHEET 2017 2018 2019E 2020E 2021E EBITDA margin 54% 28% 33% 36% 36% Assets EBIT margin 37% 10% 10% 14% 15%

Current assets Net margin 27% 6% 7% 10% 12% Cash in banks 627 2,929 3,002 3,370 3,564 Receivables 90 1,297 1,560 1,388 1,624 DATA PER SHARE 2017 2018 2019E 2020E 2021E Inventories 30 323 223 347 406 EPS 1.75 3.50 3.80 6.62 9.01 Other current assets 0 0 0 0 0 EPS adj 1.75 3.50 3.80 6.62 9.01 Current assets 747 4,549 4,785 5,105 5,594 Dividend 0.00 0.00 0.00 1.99 3.60 Fixed assets Net debt -7.89 -28.58 -25.06 -32.46 -34.33 Tangible assets 8 156 296 453 620 Total shares 79.36 102.49 103.84 103.84 103.84 Associated comp. 0 0 0 0 0 Investments 0 0 0 0 0 VALUATION 2017 2018 2019E 2020E 2021E Goodwill 24 0 0 0 0 EV 10,087.2 18,594.7 22,443.1 21,674.8 21,480.7 Cap. exp. for dev. 0 1,887 1,362 817 286 P/E 77.0 59.9 63.5 36.5 26.8 O intangible rights 541 1,820 2,696 3,529 4,952 P/E diluted 77.0 59.9 63.5 36.5 26.8 O non-current assets 0 196 196 196 196 P/Sales 21.1 3.7 4.5 3.6 3.1 Total fixed assets 573 4,059 4,550 4,995 6,054 EV/Sales 19.9 3.2 4.0 3.1 2.6 Deferred tax assets 2 0 0 0 0 EV/EBITDA 37.0 11.7 12.4 8.7 7.4 Total (assets) 1,322 8,608 9,335 10,100 11,648 EV/EBIT 53.6 32.4 40.4 23.0 17.4 Liabilities P/BV 10.0 3.8 4.1 3.7 3.3 Current liabilities SHARE PERFORMANCE GROWTH/YEAR 16/18E Short -term debt 0 0 400 0 0 1 month 0.0 % Net sales 231.4 % Accounts payable 208 2,018 1,950 2,429 3,247 3 month 7.7 % Operating profit adj 71.8 % O current liabilities 0 0 0 0 0 12 month 33.1 % EPS, just 47.2 % Current liabilities 208 2,018 2,350 2,429 3,247 Since start of the year 67.0 % Equity 138.5 % Long-term debt 0 0 0 0 0 SHAREHOLDER STRUCTURE % CAPITAL VOTES O long-term liabilities 0 211 211 211 211 Lars Wingefors 35.1 % 51.5 % Convertibles 0 0 0 0 0 Swedbank Robur Fonder 9.1 % 5.1 % Total Liabilities 208 2,229 2,561 2,640 3,458 Erik Stenberg 7.6 % 11.2 % Deferred tax liab 37 0 0 0 0 Handelsbanken Fonder 5.7 % 3.2 % Provisions 4 667 667 667 667 CMB Holding AB 2.6 % 3.8 % Shareholders' equity 1,073 5,712 6,107 6,794 7,523 Första AP-fonden 2.3 % 1.3 % Minority interest (BS) 0 0 0 0 0 Didner & Gerge Fonder 2.2 % 1.2 % Minority & equity 1,073 5,712 6,107 6,794 7,523 Skandinaviska Enskilda Banken S.A 2.2 % 1.2 % Total liab & SE 1,322 8,608 9,335 10,100 11,648 SEB Fonder 2.2 % 1.2 % Familjen Olsson med stiftelse 2.2 % 1.2 % FREE CASH FLOW 2017 2018 2019E 2020E 2021E SHARE INFORMATION Net sales 508 5,754 5,572 6,939 8,118 Total operating costs -235 -4,162 -3,757 -4,460 -5,220 Reuters code EMBRAC.ST Depreciations total -84 -1,018 -1,260 -1,537 -1,665 List EBIT 188 575 556 941 1,234 Share price 241.2 Taxes on EBIT 0 0 0 0 0 Total shares, million 103.8 NOPLAT 188 575 556 941 1,234 Market Cap, MSEK 25045.1 Depreciation 84 1,018 1,260 1,537 1,665 Gross cash flow 273 1,592 1,815 2,478 2,899 MANAGEMENT & BOARD Change in WC 73 310 -231 527 524 CEO Lars Wingefors Gross CAPEX -425 -4,504 -1,751 -1,983 -2,724 CFO Johan Ekstöm Free cash flow -79 -2,601 -166 1,022 699 IR Chairman Kicki Wallje-Lund CAPITAL STRUCTURE 2017 2018 2019E 2020E 2021E Equity ratio 81% 66% 65% 67% 65% FINANCIAL INFORMATION

Debt/equity ratio 0% 0% 7% 0% 0%

Net debt -627 -2,929 -2,602 -3,370 -3,564

Capital employed 447 2,783 3,505 3,423 3,958

Capital turnover rate 0.4 0.7 0.6 0.7 0.7

ANALYSTS GROWTH 2017 2018 2019E 2020E 2021E Redeye AB Kristoffer Lindstrom Mäster Samuelsgatan 42, 10tr Sales growth 68% 1,034% -3% 25% 17% [email protected] 111 57 Stockholm EPS growth (adj) 76% 100% 8% 74% 36%

Tomas Otterbeck [email protected]

REDEYE Equity Research Embracer Group 7 November 2019

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.

REDEYE Equity Research Embracer Group 7 November 2019

Redeye Equity Research team

Management Editorial Björn Fahlén Jim Andersson [email protected] [email protected]

Håkan Östling Eddie Palmgren [email protected] [email protected]

Technology Team Mark Sjöstedt [email protected] Jonas Amnesten [email protected] Johan Kårestedt (Trainee) [email protected] Henrik Alveskog [email protected] Life Science Team

Dennis Berggren Anders Hedlund [email protected] [email protected]

Havan Hanna Arvid Necander [email protected] [email protected]

Kristoffer Lindström 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 Oskar Bergman [email protected] [email protected]

Viktor Westman [email protected]

Linus Sigurdsson (Trainee) [email protected]

REDEYE Equity Research Embracer Group 7 November 2019

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 (2019-11-07) Rating People Business Financials

5p 11 10 2

3p - 4p 77 60 28

0p - 2p 10 28 68

Company N 98 98 98

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.