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THQ Nordic Fast Comment Equity Research - 14 August 2019 07:09 CET THQ Nordic Fast comment Shows strength despite limited new releases Company-sponsored research: Not rated Sales of SEK 1,142m, +12.0% vs. ABGSCe… Share price (SEK) 13/08/2019 222.4 …Operational EBIT of SEK 206m, +17.1% vs. ABGSCe Technology Hardware & Equipment, Sweden Two new acquisitions strengthen games segment THQNb.ST/THQNb.ST Estimate beat driven by back catalog and digital sales MCap (SEKm) 20,906 THQ reported its Q1’19/20 figures today, which beat our estimates for MCap (EURm) 1,955.3 what was set up to become a somewhat weak quarter. Sales came in at Net debt (EURm) -212 SEK 1,142m, which was 12.0% above our estimate of SEK 1,020m. driven by strong back catalog sales (82%), where Metro Exodus No. of shares (m) 94.0 continued to perform well as Deep Silver saw sales of SEK 373m, Free float (%) 48.2 +24.3% vs ABGSCe. Coffee Stain Studios also showed another strong Av. daily volume (k) 493.6 quarter with sales of SEK 83m, as was mainly expected, with sales being driven by the promotion of Satisfactory by Epic Games Store. THQ also offered an earnings beat, where higher than usual digital sales contributed (71% of total net sales). EBITDA came in at SEK 389m, beating our estimate of SEK 299m by 30.3%. Operational EBIT, was SEK 206m, beating our estimate of SEK 176m by 17.1%. All in all the estimate beats show that THQ can rely on its back catalog to transition strongly through quarters with no new major releases. Acquisition of Italian racing game developer In conjunction with the report, THQ announced that it has entered into an agreement to acquire the Milan based racing game developer Milestone, which has developed and published successful titles such as MotoGP, MXGP, RIDE and Monster Energy Supercross. The upfront payment equals EUR 44.9m on a cash and debt free basis, where additional future earn-outs are dependent on profitability targets. Milestone will strengthen THQ’s games segment, with well known racing brands that have sold over 8 mn copies since 2013 according to management, and we note that Milestone has achieved an average Metacritic score of 67. Acquisition of Darksiders developer THQ also entered into an agreement to acquire Gunfire Games, which has been a long-term developing partner of THQ Nordic, and thus represent a natural acquisition target in our opinion. Gunfire Games has developed the one of THQ’s main franchises: Darksiders. The purchase price has not been disclosed, but THQ expects to recoup its investment over the course of 3-4 years as current development projects are released. Lead analyst: Jesper Birch-Jensen Stefan Knutsson Please refer to important disclosures at the end of this report This research product is commissioned and paid for by the company covered in this report. As such, this report is deemed to constitute an acceptable minor non-monetary benefit (i.e. not investment research) as defined in MiFID II. THQ Nordic Q1’19/20 deviations, (SEKm) Deviation to estimates (SEKm) Actual Actual ABGSC Deviation Consensus, (mean) Deviation Net sales Q2'18 Q1'19/20 Q1'19/20e SEKm % Q1'19/20e SEKm % Games - THQ Nordic 145.5 185.0 200.0 -15.0 -7.5% 176.0 9.0 5.1% Games - Deep Silver 338.2 373.0 300.0 73.0 24.3% 355.0 18.0 5.1% Games - Coffee Stain 0.0 83.0 100.0 -17.0 -17.0% 84.0 -1.0 -1.2% Games Total 483.7 641.0 600.0 41.0 6.8% 602.0 39.0 6.5% Partner Publishing/Film 353.8 501.0 420.0 81.0 19.3% 453.0 48.0 10.6% Group 837.5 1142.0 1020.0 122.0 12.0% 1053.0 89.0 8.5% COGS -465.9 -528.0 -527.4 -0.6 Gross profit 371.5 614.0 492.6 121.4 24.6% 557.2 56.8 10.2% Operating costs -287.2 -400.6 -377.4 -23.2 EBITDA 84.2 389.4 298.8 90.6 30.3% 350.0 39.4 11.3% Depreciation & amortization -154.4 -308.3 -243.1 -65.2 Operational EBIT 66.9 205.5 175.5 30.0 17.1% 187.0 18.5 9.9% EBIT -70.2 81.1 55.7 25.4 45.5% 51.0 30.1 59.0% Net financials -3.9 2.0 -4.1 6.1 Taxes -15.2 -30.5 -13.4 -17.1 Net profit -89.2 52.6 38.2 14.4 37.6% Net sales growth y-o-y Q2'18 Q1'19/20 Q1'19/20e Percentage point Q1'19/20e Percentage point Games - THQ Nordic 70.0% 27.1% 37.5% -10.3 pp 21.0% 6.2 pp Games - Deep Silver 90.0% 10.3% -11.3% 21.6 pp 5.0% 5.3 pp Games - Coffee Stain n.a. n.a. n.a. n.a. Games Total 70.0% 32.5% 24.0% 8.5 pp 24.5% 8.1 pp Partner Publishing/Film -42.6% 41.6% 18.7% 22.9 pp 28.0% 13.6 pp Group* 70.0% 36.4% 21.8% 14.6 pp 25.7% 10.6 pp Margins Q2'18 Q1'19/20 Q1'19/20e Percentage point Q1'19/20e Percentage point Gross margin 44.4% 53.8% 48.3% 5.5 pp 52.9% 0.8 pp EBITDA margin 24.7% 34.1% 29.3% 4.8 pp 33.2% 0.9 pp Operational EBIT margin 8.0% 18.0% 17.2% 0.8 pp 17.8% 0.2 pp EBIT margin 6.3% 7.1% 5.5% 1.6 pp 4.8% 2.3 pp Source: ABG Sundal Collier, company data SEKm 2017 2018 2019e 2020e 2021e Sales 508 5,754 5,300 5,750 6,160 Sales growth (%) 68.1 1,033.7 -7.9 8.5 7.1 EBITDA 273 1,593 1,695 1,965 2,207 EBITDA margin (%) 53.7 27.7 32.0 34.2 35.8 EBIT adj 188 575 603 792 927 EBIT adj margin (%) 37.1 10.0 11.4 13.8 15.1 Pretax profit 182 545 582 769 896 EPS rep 1.76 4.22 4.58 6.05 7.06 EPS growth (%) 75.8 140.4 8.5 32.1 16.6 EPS adj 1.76 4.22 4.58 6.05 7.06 DPS 0 0 0 0 0 EV/EBITDA (x) 21.1 7.3 11.1 9.5 8.4 EV/EBIT adj (x) 30.6 20.1 31.3 23.7 20.0 P/E (x) 45.1 34.2 48.6 36.8 31.5 P/E adj (x) 45.1 34.2 48.6 36.8 31.5 EV/sales (x) 11.4 2.0 3.6 3.3 3.0 FCF yield (%) -3.3 -15.8 0.1 0.6 0.9 Dividend yield (%) 0 0 0 0 0 Net IB debt/EBITDA -1.9 -1.4 -1.3 -1.2 -1.2 Source: ABG Sundal Collier, Company data 14 August 2019 ABG Sundal Collier 2 THQ Nordic Analyst certification I/We, Jesper Birch-Jensen, Stefan Knutsson, the author(s) of this report, certify that not withstanding the existence of any such potential conflicts of interests referred to below, the views expressed in this report accurately reflect my/our personal view about the companies and securities covered in this report. Analyst valuation methods ABG Sundal Collier analysts may publish valuation ranges for stocks covered under Company Sponsored Research. These valuation ranges rely on various valuation methods. One of the most frequently used methods is the valuation of a company by calculation of that company's discounted cash flow (DCF). Another valuation method is the analysis of a company's return on capital employed relative to its cost of capital. Finally, the analysts may analyse various valuation multiples (e.g. the P/E multiples and the EV/EBITDA multiples) relative to global industry peers. In special cases, particularly for property companies and investment companies, the ratio of price to net asset value is considered. Valuation ranges may be changed when earnings and cash flow forecasts are changed. They may also be changed when the underlying value of a company's assets changes (in the cases of investment companies, property companies or insurance companies) or when factors impacting the required rate of return change. Important Company Specific Disclosure The following disclosures relate to the relationship between ABG Sundal Collier and its affiliates and the companies covered by ABG Sundal Collier referred to in this research report. Unless disclosed in this section, ABG Sundal Collier has no required regulatory disclosures to make in relation to an ownership position for the analyst(s) and members of the analyst's household, ownership by ABG Sundal Collier, ownership in ABG Sundal Collier by the company(ies) to whom the report(s) refer(s) to, market making, managed or co-managed public offerings, compensation for provision of certain services, directorship of the analyst, or a member of the analyst's household, or in relation to any contractual obligations to the issuance of this research report. ABG Sundal Collier is not aware of any other actual, material conflicts of interest of the analyst or ABG Sundal Collier of which the analyst knows or has reason to know at the time of the publication of this report. Production of report: 14/08/2019 07:09 CET.
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