Embracer Group

Update

Equity Research 9 March 2020

Embracer Group

Sector: Gaming

Saber Deal Creating Value FAIR VALUE RANGE

BEAR BASE BULL Redeye retains its positive stance on Embracer following another strong quarter, seeing 65.0 130.0 170.0 sales and operating profit all well ahead. Encouragingly, the recent acquisition of Saber Interactive fits excellently, in our view, and we are confident that we will see more value- enhancing deals. We are excited about the year ahead and view the current valuation as EMBRAC.ST VERSUS OMXS30 attractive, as we find the discount compared to peers unjustified. OMXS 30 Embracer Group 120 Stronger than expected 100

80 Embracer Group beat our expectations during Q3, the net sales landed 10% above our projections, and the Operational EBIT was 11% higher. Despite there being no major release 60 40

during the quarter, the Group showed both a strong top-line and profitability. The backlog 20 continued to shine. 0

Saber Interactive joining the ranks

The big news, which was announced in conjunction with the Q3 report, was the acquisition REDEYE RATING of Saber Interactive, the largest deal to date for the Group. Saber is a US-based game developer with five studios, 600 developers, and more than 30m lifetime games sold. The studio has their own IPs, do licensed IPs and do also a have recurring revenue streams 5 from Work-For-Hire/ royalty-based projects. If Saber Interactive had been consolidated 4 4

during 2019, the Operational EBIT for Embracer Group would have increased by roughly 50%, from SEK 1 143m to SEK 1 734m. The total dilution, if all earn-outs are paid amounts to 11% of the capital, the net positive effect in increased earning-power compared to the People Business Financials dilution is rather apparent. Following the acquisition, we have raised our forecast of Operational EBIT for FY21 and FY22 by roughly 25%.

Unwarranted discount to peers KEY STATS When the Saber deal was announced, we made a preliminary assessment of the financials Ticker EMBRAC.ST and raised our Base-case valuation to 130 SEK per share. We now reiterate the valuation Market Nasdaq and our positive stance towards the deal. Based on our FY21 estimate of Operational EBIT, Share Price (SEK) 94.0 Embracer is currently trading at a discounted to peers. Our Base-case implies an EV/Oper.

EBIT multiple of 20x, a level we deem as fair and still somewhat cautious given Embracers Market Cap (MSEK) 28746

track-record of M&A and organic prospects. The pipeline for FY21 looks extremely strong, Net Debt 20E (MSEK) - 974 and we find that the long-term case is substantially strengthened through the latest Free Float 60 % acquisition of Saber Interactive. Exciting times ahead! Avg. daily volume (‘000) 900

KEY FINANCIALS (SEKm) 2017 18/19 FY20E FY21E FY22E FY23E

Net sales 508 5754 5126 7844 9493 10632 ANALYSTS

EBITDA 273 1592 1723 2960 3735 4176 Kristoffer Lindstrom

Oper. EBIT 202 880 955 2010 2573 2924 [email protected] EBIT 188 575 238 736 1299 1701 Tomas Otterbeck EPS (adj.) 1.82017 3.52018 1.12019E 1.62020E 2.72021E 3.62022E [email protected]

EV/Sales 19.9 3.2 5.6 3.7 3.0 2.7 EV/EBITDA 37 11.7 11.6 8.7 7.3 6.9 EV/Op. EBIT 50.0 20.9 30.1 14.3 11.2 9.8 P/E 77 59.9 85.5 58.8 34.8 26.1

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 9 March 2020

On the report

Embracer Group beat our Estimates vs Outcome Embracer Group expectations during FYQ3, the net FY19- FY20- FY20- Diff % sales landed 10% above our MSEK Q3* Q3 Q3E projections, and the Operational EBIT Net sales 1 381 1 509 1 373 10% was 11% higher. Despite there being of which New releases Games 321 291 353 -18% no major release during the quarter, Backlog Games 232 545 440 24% the Group showed both a strong top- Partner Publishing/Film 828 673 580 16% Gross profit 542 762 705 8% line and profitability. We want to EBITDA 326 519 460 13% empathize, yet again, that EBIT and Operational EBIT 194 302 271 11% net profit are of little worth when EBIT 152 91 109 -17%

looking at Embracer because they Revenue growth 441% 9% -1% follow the K3 accounting standard, Gross profit margin 39% 51% 51% they depreciate their acquisitions over EBITDA margin 24% 34% 34% Opr. EBIT margin 14% 20% 20% five years. During Q3 alone there were EBIT margin 11% 6% 8% SEK 211m in acquisition-related Source: Redeye Research *FY19-Q3 w as the fourth quarter of the extended year 19/20, but depreciation, which had not been for easier comparison, w e call it Q3. there if the company followed IFRS accounting (as almost all peers).

The backlog continued to shine and was one of the main reasons that the net sales came in above our forecast. The main driver here is the Metro Franchise but also KCD, Remnant, Satisfactory, Outward, and Wreckfest. As we discussed in our preview comment Metro was “re-released” on Steam on the 15th if February and Lars Wingefors, the CEO, commented at the report presentation that the game had sold about 200k copies on Steam during the first few days of the re-release. The sales return on the finished game asset has been stable in the last few quarters and amounted to 1.4x based on the asset recorded at the start of the quarter. The strong backlog development is an effect of the overall increased quality of the game portfolio with Metro as a shining star.

Embracer: Backlog sales, Finished Games asset & sales return

600 2.5x 555 545 524 500 2.0x

400 386 1.5x

300 259 254

mSEK 232 1.0x 200 salesx return 145 0.5x 100 71 52 51 65

0 0.0x

Backlog Finished Games asset % return on released dev asset -1Q

Source: Redeye Research

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In terms of new releases, we already knew that this would be a slightly quite quarter. The most major ones where Darksiders Genesis, Shenmue III, and Let’s Sing 2020. The new release revenue came in below our expectations by 18%. It’s always tough to gauge new release revenue. There were SEK 146m in completed development, and those generated a sales return of 2.0x, compared to our estimate of SEK 158m in finalized development with a sales return of 2.2x.

Embracer: New release sales, Finalized dev. & Sales return

900 4.0x 781 800 3.5x

700 3.0x 600 2.5x 500 2.0x 400 mSEK 321 291 1.5x 300 246 261 Sales return 190 200 1.0x 98 117 117 100 0.5x 30 15 34 0 0.0x

New releases per quarter Finalized development Sales return New releases to fin. dev.

Source: Redeye Research

All in all, Shenmue could have performed better, but Genesis exceeded both our and likely management expectations. The game sold more copies then Darksiders 3 during the same period last; still, the third installment in the series was a full-priced game. Genesis was released on consoles on the 14th of February; it will be interesting to follow the development.

Partner Publishing and Film (PPF) showed stronger sales then we thought. Due to there being no major release, the business area showed a sales decline compared to last year, but this was already expected. The decline was not as steep as we had thought, mainly thanks to Codemasters Grid but also that the Film segment showed their strongest quarter ever. The high revenue level for Film was mostly thanks to the distribution of the German version of Oscar-winning Parasite. Significant releases in Q4 will be Doom Eternal and Persona 5 Royal Edition.

In terms of gross margin profit, EBITDA, and Operational margin came in exactly as we thought. Strong digital sales drove the high profitability level, large share of own IPs, and less Partner Publishing sales.

As a summary, the report was strong, and the backlog continues to show Embracer Group’s strength. We see a strong Q4 coming with Metro on Steam, Satisfactory Update 3, Metro DLC, Genesis on consoles, and more. The management also commented on Biomutant, we previously thought the game might be released in Q4, but that will not be the case. The game will be launched when it’s ready, the bar for only releasing high-quality is apparent in the management wording, which we obviously think is great. For us, it makes no difference if the cash-flow comes in Q4 or next year, all that matters is the quality of the product that comes to market to maximize the ROI.

3 dsfdsf REDEYE Equity Research Embracer Group 9 March 2020

The fourt leg The company also announced that Amplifier Game Invest would be their fourth leg within the Group, and both during and after the quarter Amplifier had helped set up several new studios. We like the strategy to nurture talent within the Group and have a type of new studio thinking within Amplifier.

Amplifier will for now not be reported as a separate business segment when it comes to financials, as the revenue of the unit currently is minimal. Embracer aims to both acquire external- and nurture internal-talent in that way it seems Amplifier is a great vehicle to do that.

Acquisition of Saber Interactive

In conjunction with the presentation of the Q3 report, Embracer announced the acquisition of Saber Interactive. We strongly advise investors to look into Embracer’s presentation of the deal. Here is the link. Saber Interactive will be the fifth leg within the Group.

Saber Interactive is a US-based game developer with five studios, 600 developers, and more than 30m lifetime games sold. The studio has their own IPs, do licensed IPs and do also a have recurring revenue streams from Work-For-Hire/ royalty-based projects. One of the most well know latest games by Saber is World War Z (WWZ) released on the 16th of April 2019, the game was developed on Saber’s proprietary engine.

4 dsfdsf REDEYE Equity Research Embracer Group 9 March 2020

Saber Interactive revenue & EBIT development

120 105

100 Shift to owned/lic. IPs and success of 80 WWZ 62 60

mUSD 38 40

20 14

0 2018 2019E

Revenue EBIT

Source: Embracer Group

During 2019 (preliminary figures), Saber Interactive produced revenues of USD 105m with an EBIT of USD 62m (59% margin). The up-take from 2018 was significant as they had revenues of SEK 38m during that year, the growth was driven by the shift to owned/licensed IPs and the success of WWZ. Our feeling is that the management expects that 2020 will be in line with 2019 performance, with most sales in H2’20 (calendar). For 2021 however, more of the current development pipeline will be realized.

If Saber Interactive had been consolidated during 2019, the Operational EBIT for Embracer Group would have increased by roughly 50%, from SEK 1 143m to SEK 1 734m. The total dilution, if all earn-outs are paid amounts to 11% of the capital, the net positive effect in increased earning-power compared to the dilution is rather apparent.

5 dsfdsf REDEYE Equity Research Embracer Group 9 March 2020

Attractive pricing with low risk Saber Int. acquisition multiples Embracer is paying USD 150m in an upfront EV EV/EBIT payment, of which USD 100m in cash and USD Up-front 150 2.4x 50m in equity. Also, there is an earn-out of a +earn-out 525 8.5x maximum USD 375m that vested over six years, Source: Embracer Group of which USD 275m in Equity and USD 100m in cash. So, the upfront payment (which is the only one risked if Saber would not hit their future goals) amounts to USD 150m, corresponding to an EV/EBIT multiple of 2.4x (that’s cheap!). If full earn-out is paid, the multiple on 2019’s EBIT amounts to 8.5x (also quite cheap). We feel that the deal structure breaths long-term thinking, a six-year vesting most be some kind of record. The management and owners of Saber clearly state that they see this as a way to help them take the company to the next level. Embracer’s strategy to be a home of talented developers is

Our projections for Saber

Saber will have been consolidated in mid Q1'FY21, so the acquisition will not affect the figures during Q4. In the near-term, the company is releasing SnowRunner on the 28th of April. SnowRunner is the sequel to the popular game MudRunner and is published by Focus Home Interactive. MudRunner (previously Spintires: MudRunner) sold 1 million copies in less than a year. The SnowRunner IP is owned by Saber and will be is an Epic Games Store exclusive for PC.

Saber Interactive Revenue & EBIT projections

140 130 70%

120 60% 105 100 100 50%

80 40%

mUSD 60 30% 38 40 20%

20 10%

0 0% 2018 2019E FY21E FY22E

Revenue EBIT margin

Source: Redeye Reserach

We model a similar revenue level during FY21 for Saber as during 2019. We expected Saber to be consolidated from mid-April. We believe some internal IPs and projects will be moved to Saber and that both Deep Silver and THQ Nordic will primarily be the publishers beyond the year FY22 (most deals for the next two years are already made). We expect the revenues to grow steadily, but that the margins will drop somewhat as there will be less royalty-based income at extremely high margins and an increased staff-count. In the deal presentation Saber states that they have a long-term target of increasing their workforce to 1500 FTEs (630 FTEs today), so the ambition for growth is evident. It’s clear to us that Saber has an extremely cost-efficient development structure, where most of the developers sit in Russia.

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More M&A to come There is still room for more deals for Embracer given the current balance sheet. Especially if the company would increase its leverage. Given Embracer’s track-record of value-adding deals, we believe it’s highly plausible that the company will yet again conduct a direct share issue to load up the “guns” even further.

Q4 projections

For the last quarter of the Financial Year of 2020, we expect that the Group net sales will reach SEK 1216m with an Operational EBIT of SEK 209m. We previously modeled a release of Biomutant in Q4, now we have moved it into FY21. Compared to our previous research update (2nd of Dec.), our estimates for FY21 and FY22 have increased 12% and 16%, respectively, and our Operational EBIT forecast has been raised by about 25%.

Detailed estimates Embracer Group Quarterly projections Yearly projections Period FY20-Q1 FY20-Q2 FY20-Q3 FY20-Q4E FY20E FY21E FY22E Net sales 1142 1260 1509 1216 5126 7844 9493 Of w hich New releases games 117 261 291 172 841 2102 2417 Backlog games 524 555 545 508 2132 2452 3310 Partner Publishing/Film 501 444 673 536 2153 2326 2512 Saber Interactive 0 0 965 1255 Other income 176 244 293 301 1014 1065 1118 CoS -528 -635 -747 -609 -2519 -3315 -3905 Gross profit 614 625 762 606 2607 4529 5588 Other OPEX -178 -192 -231 -219 -820 -1262 -1410 Staff cost -223 -258 -305 -292 -1078 -1412 -1614 EBITDA 389 418 519 397 1723 2920 3682 Depreciation -185 -177 -217 -188 -768 -910 -1109 Op. EBIT 204 241 302 209 955 2010 2573 Amortization -123 -164 -211 -219 -717 -1274 -1274 EBIT 81 77 91 -10 238 736 1299

Gross profit margin 54% 50% 51% 50% 51% 58% 59% EBITDA margin 34% 33% 34% 33% 34% 37% 39% Op. EBIT margin 18% 19% 20% 17% 19% 26% 27% EBIT margin 7% 6% 6% -1% 5% 9% 14% Source: Redeye Research • Games: o New releases. We believe new releases will generate revenues of SEK 172m. We see a thinner release schedule compared to both Q3. The more significant titles that will be released are: Metro Exodus DLC (Sam’s Story), Metro Redux on Switch, Saints Row IV on Switch, Blair Witch, Hunt: Showdown and Monster Energy Supercross 3. At the end of Q3, Embracer had SEK 1.75bn in ongoing development assets, and we expect that 4% of that will be finalized and create a sales return of roughly 1.9x. Last year’s Q4 (reported as Q5) the company released, among others, Satisfactory, DKS 3 DLC, Outward and most notably Metro Exodus, therefore a significant drop in new release revenue is expected. o Backlog: We expect that the backlog will remain strong and have a significant boost from Metro Exodus releasing on Steam and Update 3 for Satisfactory. We project backlog sales of SEK 508. Our assumption implies a 1.2x sales return on the finished and completed games asset that was recorded at Q2 end which stood at SEK 410m. • Partner Publishing: Some of the more notable games that will come to market in Q4 within Partner Publishing are Doom Eternal and Persona 5 Royal Edition. We expect to see relatively healthy volume and project a net sales of SEK 536m during Q4. Profitability: We believe the company will have similar gross margins and cost levels as during Q3. We expect to see an Operational EBIT at about SEK 209m.

REDEYE Equity Research Embracer Group 9 March 2020

Valuation

When the Saber deal was announced, we raised our Base-case valuation to 130 SEK per share. Now after digging into the acquisition further, we reiterate the assessment and our positive stance towards the deal. Based on our estimate of FY21 Operational EBIT, Embracer is currently trading at a discounted to both Nordic and international peers. Our Base-case valuation implies an EV/Oper. EBIT multiple of 20x, a level we deem as fair and still somewhat cautious given Embracers track-record of M&A and organic prospects. The next financial year will be the biggest in the company’s’ history, and we see that the long-term case is substantially strengthened through the latest acquisition of Saber Interactive.

Bear Case 65.0 SEK Base Case 130.0 SEK Bull Case 170.0 SEK Key model assumptions: Key model assumptions: Key model assumptions: CAGR of 5% during forecast period CAGR of 12% during forecast period CAGR of 13% during forecast period Average Op. EBIT margin of 19% Average Op. EBIT margin of 26% Average Op. EBIT margin of 30% Terminal growth 2% Terminal growth 2% Terminal growth 2% Terminal Op. EBIT margin of 27% Terminal Op. EBIT margin of 27% Terminal Op. EBIT margin of 30%

Peer valuation EV/Sales EV/(Op.)EBIT S. CAGR EBIT margin Company EV (MSEK) FY20E FY21E FY20E FY21E 18-21E FY20E FY21E Nordic Gaming Stillfront 14 314 4.3x 3.6x 10.3x 8.9x 31% 42% 40% Paradox Interactive 14 149 8.4x 7.6x 22.6x 20.2x 19% 37% 38% Remedy 1 556 4.5x 3.7x 21.4x 18.1x 9% 21% 21% Funcom 1 316 5.1x 4.4x 37.6x 27.4x 23% 14% 16% EG7 910 1.6x 1.3x 12.0x 7.7x 65% 14% 17% Atari 738 2.3x 2.1x 18.0x 14.4x 25% 13% 14% G5 Entertainment 636 0.5x 0.4x 7.9x 5.9x 11% 6% 7% Starbreeze 524 3.7x 3.6x n.m. n.m. -18% -12% -28% Median 1 113 4.0x 3.6x 18x 14x 21% 14% 16% International Gaming Tencent 4 643 895 8.9x 7.2x 27.9x 24.7x 24% 32% 29% Activision 417 724 6.4x 5.8x 19.2x 15.7x 8% 33% 37% Nintendo 348 777 3.1x 2.9x 12.5x 10.3x 7% 25% 28% EA 258 975 5.2x 5.0x 16.7x 15.9x 8% 31% 31% Take-Two 107 982 3.9x 4.1x 21.0x 21.2x 11% 19% 19% Bandai Namco 98 169 1.5x 1.4x 12.5x 11.3x 7% 12% 12% Ubisoft 90 988 5.8x 3.4x 69.5x 15.6x 13% 8% 22% CD projekt 66 056 59.1x 8.3x 238.9x 11.9x 85% 25% 70% Median 183 479 5.5x 4.5x 20x 16x 9% 25% 28% Peer Group median 92 296 4.8x 4.1x 19x 15x 15% 19% 22% Embracer Group 28 750 3.7x 3.0x 14x 11x 18% 19% 26%

Source: Bloomberg & Redeye Research

REDEYE Equity Research Embracer Group 9 March 2020

Catalysts

More value adding acquisitions

Embracer Group has a strong focus on acquiring IPs, franchises, and companies at low prices. They can do this by utilizing one of the best characteristics of a great investor; patience. Larger acquisitions of well-known IPs could and should enhance the valuation of the company.

AAA titles from Deep Silver and secret project announced

Deep Silver was a part of the Koch Media acquisition. Two studios within Deep Silver is currently developing two AAA titles, one is a new Saints Row game and the other one is unknown, but they will be released in FY21. The announcement of the unknown game would enhance the visibility of the IP portfolio and likely increase the valuation. One of the large development projects from THQ Nordic remains undisclosed. This title has the same type of budget as Darksiders 3 have, which should imply a similar sales potential.

REDEYE Equity Research Embracer Group 9 March 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: 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 Embracer Group 9 March 2020

INCOMEPlease STATEMENT comment 2017 on the18/19 changes FY20E in RatingFY21E factors……FY22E DCF VALUATION CASH FLOW, MSEK Net sales 508 5,754 5,126 7,844 9,493 WACC (%) 9.0 % NPV FCF (2020-2021) 2870 Total operating costs -235 -4,162 -3,403 -4,884 -5,757 NPV FCF (2022-2028) 10837 EBITDA 273 1,592 1,723 2,960 3,735 NPV FCF (2029-) 25867 Depreciation 0 -23 -27 -40 -53 Non-operating assets 2929 Amortization -84 -995 -1,458 -2,184 -2,383 Interest-bearing debt 0 Impairment charges 0 0 0 0 0 Fair value estimate MSEK 42503 EBIT 188 575 238 736 1,299 Assumptions 2020-2026 (%) Share in profits 0 0 0 0 0 Average sales growth 18.1 % Fair value e. per share, SEK 1301 Net financial items -6 -33 -25 -39 -46 EBIT margin 15.5 % Share price, SEK 94 Exchange rate dif. 0 0 0 0 0 Pre-tax profit 182 542 213 697 1,252 PROFITABILITY 2017 18/19 FY20E FY21E FY22E Tax -43 -183 -68 -222 -399 ROE 20% 11% 2% 5% 8% Net earnings 139 359 145 475 853 ROCE 26% 17% 3% 7% 11% ROIC 91% 129% 9% 9% 17% BALANCE SHEET 2017 18/19 FY20E FY21E FY22E EBITDA margin 54% 28% 34% 38% 39% Assets EBIT margin 37% 10% 5% 9% 14% Current assets Net margin 27% 6% 3% 6% 9% Cash in banks 627 2,929 2,674 3,643 4,796 Receivables 90 1,297 1,487 1,569 1,899 DATA PER SHARE 2017 18/19 FY20E FY21E FY22E Inventories 30 323 410 471 570 EPS 1.75 3.50 0.47 1.54 2.77 Other current assets 0 0 0 0 0 EPS adj 1.75 3.50 0.47 1.54 2.77 Current assets 747 4,549 4,571 5,682 7,264 Dividend 0.00 0.00 0.00 0.00 1.11 Fixed assets Net debt -7.89 -28.58 -3.16 -6.96 -10.71 Tangible assets 8 156 229 304 374 Total shares 79.36 102.49 307.70 307.70 307.70 Associated comp. 0 0 0 0 0 Investments 0 0 0 0 0 VALUATION 2017 18/19 FY20E FY21E FY22E Goodwill 24 0 0 0 0 EV 10,087.2 18,594.7 Cap. exp. for dev. 0 1,887 6,370 5,096 3,822 P/E 77.0 59.9 O intangible rights 541 1,820 2,600 3,698 4,746 P/E diluted 77.0 59.9 O non-current assets 0 196 200 200 200 P/Sales 21.1 3.7 Total fixed assets 573 4,059 9,398 9,298 9,143 EV/Sales 19.9 3.2 Deferred tax assets 2 0 0 0 0 EV/EBITDA 37.0 11.7 Total (assets) 1,322 8,608 13,969 14,981 16,407 EV/EBIT 53.6 32.4 Liabilities P/BV 10.0 3.8 Current liabilities SHARE PERFORMANCE GROWTH/YEAR 18/20E Short-term debt 0 0 1,700 1,500 1,500 1 month 0.0 % Net sales 217.8 % Accounts payable 208 2,018 1,538 2,275 2,848 3 month 0.0 % Operating profit adj 12.5 % O current liabilities 0 0 0 0 0 12 month 25.6 % EPS, just -48.1 % Current liabilities 208 2,018 3,238 3,775 4,348 Since start of the year 0.0 % Equity 193.1 % Long-term debt 0 0 0 0 0 SHAREHOLDER STRUCTURE % CAPITAL VOTES O long-term liabilities 0 211 210 210 210 Lars Wingefors 34.6 % 51.1 % Convertibles 0 0 0 0 0 Swedbank Robur Fonder 8.6 % 4.9 % Total Liabilities 208 2,229 3,448 3,985 4,558 Erik Stenberg 7.5 % 11.1 % Deferred tax liab 37 0 0 0 0 Handelsbanken Fonder 6.4 % 3.6 % Provisions 4 667 1,300 1,300 1,300 Första AP-fonden 4.8 % 2.7 % Shareholders' equity 1,073 5,712 9,221 9,696 10,549 Didner & Gerge Fonder 3.5 % 2.0 % Minority interest (BS) 0 0 0 0 0 CMB Holding AB 2.6 % 3.8 % Minority & equity 1,073 5,712 9,221 9,696 10,549 State Street Bank And Trust co 1.6 % 0.9 % Total liab & SE 1,322 8,608 13,969 14,981 16,407 Skandinaviska Enskilda Banken S.A 1.5 % 0.9 % Dan Sten Olsson med familj och stiftelse 1.2 % 0.7 % FREE CASH FLOW 2017 18/19 FY20E FY21E FY22E SHARE INFORMATION Net sales 508 5,754 5,126 7,844 9,493 Total operating costs -235 -4,162 -3,403 -4,884 -5,757 Reuters code EMBRAC.ST Depreciations total -84 -1,018 -1,485 -2,224 -2,437 List EBIT 188 575 238 736 1,299 Share price 241.2 Taxes on EBIT 0 0 0 0 0 Total shares, million 307.7 NOPLAT 188 575 238 736 1,299 Market Cap, MSEK 74218.2 Depreciation 84 1,018 1,485 2,224 2,437 Gross cash flow 273 1,592 1,723 2,960 3,735 MANAGEMENT & BOARD Change in WC 73 310 -757 594 144 CEO Lars Wingefors Gross CAPEX -425 -4,504 -6,824 -2,124 -2,281 CFO Johan Ekstöm Free cash flow -79 -2,601 -5,858 1,430 1,599 IR Chairman Kicki Wallje-Lund CAPITAL STRUCTURE 2017 18/19 FY20E FY21E FY22E Equity ratio 81% 66% 66% 65% 64% FINANCIAL INFORMATION

Debt/equity ratio 0% 0% 18% 15% 14%

Net debt -627 -2,929 -974 -2,143 -3,296

Capital employed 447 2,783 8,247 7,553 7,253

Capital turnover rate 0.4 0.7 0.4 0.5 0.6

ANALYSTS GROWTH 2017 18/19 FY20E FY21E FY22E Redeye AB Kristoffer Lindstrom Mäster Samuelsgatan 42, 10tr Sales growth 68% 1,034% -11% 53% 21% [email protected] 111 57 Stockholm EPS growth (adj) 76% 100% -87% 227% 80%

Tomas Otterbeck [email protected]

REDEYE Equity Research Embracer Group 9 March 2020

Redeye Rating and Background Definitions

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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 9 March 2020

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]

REDEYE Equity Research Embracer Group 9 March 2020

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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.

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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 (2020-03-09) Rating People Business Financials

5p 11 12 4

3p - 4p 93 70 30

0p - 2p 10 32 80

Company N 114 114 114

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CONFLICT OF INTERESTS

Kristoffer. Lindström. owns shares in the company Embracer: Yes Tomas. Otterbeck. owns shares in the company Embracer: Yes Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this.