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Ten Square Games Sector Report 1/2020/SR (50) May 5, 2020 This is a selected fragment of DM BOŚ SA’s research report. Analyst: Tomasz Rodak, CFA, [email protected], +48 (22) 504 33 23 Video Games; Recommendations Company Last Market LT fundamental ST market- 12M EFV Upside price Cap rating relative bias (PLN) (downside) (PLN) (US$ m) to 12M EFV Gaming is crisis-proof* 11 bit studios 415.00 949 Hold (↓) Neutral (↓) 538.0 (↑) 30% CD Projekt 357.50 34,363 Hold (→) Overweight (→) 352.0 (↑) -2% CI Games 0.70 113 Hold (→) Neutral (→) 0.64 (↑) -9% PlayWay 426.50 2,815 Hold (→) Neutral (→) 376.0 (↑) -12% Ten Square Games 453.00 3,280 Buy (→) Overweight (→) 503.0 (↑) 11% *at least in the short term Source: WSE, DM BOŚ SA estimates Video games developers; Multiples Since the bottom of the market collapse in mid-March, Market Cap P/E EV/EBIT WIG.GAMES has grown 86%, already exceeding the (US$ m) 2020E 2021E 2022E 2020E 2021E 2022E WSE listed companies pre-crisis level by 12%. At the same time the WIG index 11 bit studios 227 33.0 40.6 9.0 26.6 31.8 6.6 increased 21% and still stays 23% off of February’s CD Projekt 8,215 17.5 24.3 17.2 15.1 20.9 14.4 highs. The relative strength of game developers (vs wide CI Games 27 neg. 5.3 neg. neg. 2.9 neg. PlayWay 673 28.2 23.3 19.4 24.3 19.7 16.5 market) seems fully warranted as we observe a positive Ten Square Games 784 16.9 14.5 12.5 14.3 12.0 10.1 impact of the stay-home regulations imposed in the global Median 22.9 23.3 14.8 19.7 19.7 12.3 combat against the COVID-19 epidemic. Interestingly, Global PC and consoles games publishers Activision Blizzard 51,156 26.5 22.9 20.2 19.4 15.5 12.0 since February (before the epidemic triggered the market Electronic Arts 33,837 23.2 23.7 21.0 18.4 16.7 14.2 correction) the valuation multiples for foreign gaming Ubisoft 8,996 n.m. 23.5 20.4 n.m. 16.6 14.4 companies have not changed much in spite of the visible Take-Two Interactive 14,100 26.4 29.1 20.1 20.5 19.2 12.0 Konami 4,477 20.7 14.8 13.9 11.1 7.4 6.3 negative influence of the COVID-19 epidemic on the global Capcom 4,188 28.9 25.1 22.8 17.7 14.9 13.5 equity markets. In the current environment video games Median 26.4 23.6 20.3 18.4 16.1 12.8 are a form of “a safe haven”, at least in the short term Global mobile games publishers G5 134 19.1 14.1 11.1 14.9 10.7 8.1 perspective. In the medium term the intensifying crisis may Dena 1,763 n.m. 26.7 28.5 n.m. 14.5 12.6 lead to lower households’ budgets which may also decrease GLU Mobile 1,201 29.7 18.5 12.8 26.5 15.7 n.m. the propensity to buy games. Please find the summary of Konami 4,477 20.7 14.8 13.9 11.1 7.4 6.3 NCSOFT 11,201 16.4 13.3 13.0 11.2 8.5 7.5 our video gaming companies recommendations below. Netmarble 6,489 28.3 24.2 20.5 23.0 19.0 15.5 Nexon 14,283 16.1 14.9 14.9 9.6 7.5 6.3 We still believe that Project 8 will become another milestone Rovio 484 17.4 18.8 18.1 9.1 9.2 8.4 Square Enix 5,082 25.2 16.7 15.9 13.7 9.4 8.1 allowing to constantly exceed the PLN 100 million 11 bit studios Zynga 7,147 29.8 25.2 19.8 18.6 15.1 13.5 net profit threshold annually. However, after the confusion created Median 20.7 17.6 15.4 13.7 10.1 8.1 by the release of the motivation program we don’t feel comfortable Multiples for foreing companies as of May 4. Multiples for Polish companies as of May 5 close. Source: Bloomberg, DM BOŚ estimates with our forecasts and the Company’s future plans. Due to increased uncertainty, we downgrade our recommendations to Stock performance Hold + Neutral (from Buy + Overweight); 12M EFV at PLN 538. 400% WIG 350% 11 Bit Studios With only five months to goCD Projekt (Hold + Overweight; CD Projekt CI Games 12M EFV at PLN 352.0 per share) is on the final stretch to the 300% PlayWay Ten Square Games most important debut in their history. As the debut approaches, 250% we expect the marketing campaign to intensify, incl. more 200% trailers, gameplays, articles, reveals, hands-on presentations, previews and reviews, and eventually – a huge final marketing 150% campaign worth over US$ 100 million. The marketing team from 100% CD Projekt have ultimate expertise in building up expectations 50% and sparking excitement in both the gamers and investors. We, 0% therefore, believe that during this final run before the debut the Company’s shares will remain strong lining up with growing 2019-05-06 2019-06-06 2019-07-06 2019-08-06 2019-09-06 2019-10-06 2019-11-06 2019-12-06 2020-01-06 2020-02-06 2020-03-06 2020-04-06 2020-05-05 expectations. Source: Bloomberg CI Games’ (Hold + Neutral; 12M EFV at PLN 0.64 per share) current release calendar includes Sniper Ghost Warrior Contracts 2 and Lords of the Fallen 2. We currently assume that one of these games will debut in 2021. Due to the long lasting poor track record in delivering a quality content we would sustain from investing in the Company until it finally proves successful. Video Games Among the most important premiers of PlayWay (Hold + Based on our forecasts Ten Square Games (Buy + Neutral; 12M EFV at PLN 376.0 per share) upcoming in 2020 Overweight; 12M EFV at PLN 503.0) trades at 18% discount we include: Junkyard Simulator (PC), Contraband Police (PC), vs foreign peers. We underline that the potential success of any I am Your President (PC), Cooking Simulator (PS4, X1) and of three games (currently in the soft-launch stage) would turn out Builders of Egypt (PC). Although our 12M EFV remains 12% to be a strong positive signal for investors. We also believe that below the current market valuation, we do not see any significant a well-thought-out acquisition may add significant value to the triggers that may help to close the valuation gap. Company’s earning potential by allowing to skip over a tiresome soft-launch process. 2 Sector Report 1/2020/SR (50) May 5, 2020 This is a selected fragment of DM BOŚ SA’s research report. Analyst: Tomasz Rodak, CFA, [email protected], +48 (22) 504 33 23 Sector: TMT – media & entertainment Market Cap: US$ 227 m Fundamental rating: Hold (↓) Bloomberg code: 11B PW Market relative: Neutral (↓) Av. daily turnover: US$ 1.82 m 11 bit studios Price: PLN 415.00 Free float: 74% 12M EFV: PLN 538.0 (↑) 12M range: PLN 280.00-484.00 Guide to adjusted profits Investment story and recommendation Adj numbers exclude the impact of c. PLN 18.0 million cost of the share-based motivation program in 2Q18-2Q20. After the presentation of the new 2020-2024 motivation program Key data targets we remain confused and misinformed. On the one IFRS 2019 2020E 2021E 2022E Sales PLN m 71.7 66.8 66.9 169.2 hand, the Company presented very conservative and cautious EBITDA PLN m 30.3 36.0 36.8 131.7 motivation targets, which in our view, imply a single, not particularly Adj EBITDA PLN m 38.3 40.0 36.8 131.7 successful, big debut until 2024. On the other hand, according to EBIT PLN m 23.9 26.9 25.8 118.1 Adj EBIT PLN m 31.9 30.9 25.8 118.1 the press release issued the following day, the Company aims to Net profit PLN m 21.7 24.0 22.8 103.2 release as many as ten games until 2024 including three big own Adj Net profit PLN m 29.7 28.0 22.8 103.2 games. We understand that the management plans may be more Adj EPS PLN 13.34 12.56 10.23 46.29 Adj EPS yoy chg % -32 -6 -19 353 ambitious than motivation program targets, however that huge Net debt PLN m -70.1 -103.8 -104.7 -148.6 discrepancy is unusual and confusing. Adj P/E x 31.1 33.0 40.6 9.0 Adj P/CE x 25.6 24.9 27.4 7.9 Adj EV/EBITDA x 22.3 20.5 22.3 5.9 Since the recent guidance coming from the Company is Adj EV/EBIT x 26.8 26.6 31.8 6.6 ambiguous we decide to ignore it. We modify our forecasts for Gross dividend yield % 0.0 0.0 0.0 0.0 the Company based on: (i) better than expected sale of DLC2 to DPS PLN 0.00 0.00 0.00 0.00 No. of shares (eop) m 2.2 2.2 2.2 2.2 Frostpunk boosting our sales expectations for upcoming DLCs, Source: Company, DM BOŚ SA estimates (ii) delaying the debut of Project 8 to 4Q22 (from 4Q21), and (iii) including two more games (up to total three) in the publishing Stock performance segment pipeline.
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