COMPANY ANALYSIS 31 August 2017 Summary THQ Nordic (THQNO.ST) List: The best is yet to come! Market Cap: 5,294 MSEK The Q2 report beat our projections on all accounts, primarily due Industry: Gaming CEO: Lars Wingefors to solid catalog sales. The pipeline and release schedule for H2 Chairman: Kicki Wallje-Lund 2017 looks extremely promising; we continue to believe that the sales during Q4 will be on par or above the total sales of 2016. The best is yet to come! OMXS 30 THQ Nordic Prior and in conjunction with the game conference Gamescom, 90 THQ Nordic revealed two new upcoming releases; Black Mirror 80 70 and BIOMUTANT. The company also has acquired the fifty men 60 strong development studio Black Forest Games and the smaller 50 40 Pieces Interactive. THQ Nordic continues to expand their game 30 20 portfolio and enhance their capacity to develop first class asset. 10 0 We have made some positive adjustments to our long-term 22-Nov 20-Feb 21-May 19-Aug projections. Our Fair Value estimated is adjusted to 81 (69) SEK per share. We view THQ Nordic as relatively fairly valued, but a quality growth company like this seldom comes at a bargain. Like the “Oracle of Omaha” says; “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Redeye Rating (0 – 10 points) Management Ownership Profit outlook Profitability Financial strength 8.0 points 9.0 points 7.0 points 6.0 points 8.0 points Key Financials 2015 2016 2017E 2018E 2019E Share information Revenue, MSEK 213 302 607 851 1,010 Share price (SEK) 73.5 Growth 0% 42% 101% 40% 19% Number of shares (m) 72.0 EBITDA 105 132 285 401 482 Market Cap (MSEK) 5,294 EBITDA margin 49% 44% 47% 47% 48% Net debt (MSEK) -161 EBIT 67 95 198 286 340 Free float (%) 50 % EBIT margin 31% 31% 33% 34% 34% Daily turnover (’000) 40 Pre-tax earnings 66 93 197 286 340 Net earnings 51 72 153 223 265 Net margin 24% 24% 25% 26% 26% Analysts: Kristoffer Lindstrom 2015 2016 2017E 2018E 2019E [email protected] Dividend/Share 0.00 0.00 0.00 0.00 0.00 2015 2016 2017E 2018E 2019E EPS adj. 0.00 1.00 2.12 3.09 3.68 P/E adj. 0.0 33.0 34.7 23.8 20.0 Tomas Otterbeck EV/S -0.1 7.4 8.5 6.0 5.0 [email protected] EV/EBITDA -0.1 16.9 18.0 12.7 10.4 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] THQ Nordic Redeye Rating: Background and definitions The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation. Company Qualities The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or operating risk) – its chances of surviving and its potential for achieving long-term stable profit growth. We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 – Ownership, 3 – Profit Outlook, 4 – Profitability and 5 – Financial Strength. Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points. The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys. Management Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 – Communication, 4 – Experience, 5 – Leadership and 6 – Integrity. Ownership Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability. Profit Outlook Our Profit Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Profit Outlook are: 1 – Business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 – Competitiveness. Profitability Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating profit margin or EBIT. Financial Strength Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term. The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 – Quick ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary events. Company analysis 2 THQ Nordic Stronger than expected The Q2 report beat our projections on all accounts, primarily due to solid catalog sales. The pipeline and release schedule for H2 2017 looks extremely promising; we continue to believe that the sales during Q4 will be on par or above the total sales of 2016. Estimates vs Outcome THQ Nordic 2016- 2017- 2017E- Diff % MSEK Q2 Q2 Q2 Net sales 53 86 62 37% of which New releases 15 13 of which Catalog 71 49 Gross profit 47 78 54 EBITDA 25 40 26 53% EBIT 16 30 16 91% Revenue growth 40% 62% 19% Gross profit margin 90% 91% 86% EBITDA margin 48% 46% 41% EBIT margin 31% 35% 25% Source: Redeye Research The reported net sales exceeded our estimates by a wide margin, mainly due to robust catalog sales of SEK 71m. The catalog churn compared to Q1 amounted to low 86%. During Q2 THQ Nordic announced that they are working on and will release Darksiders 3 during 2018, which is one of the company’s prime franchises. After the announcement, THQ Nordic conducted some successful promotion activity and experienced a significant upswing in sales of older Darksiders titles, which explains the large deviation to our projections. The strong catalog sales also show the strength of THQ Nordic´s business model with a focus on asset care as new releases and sequels will boost the value of the whole IP. The company also experienced strong sales of This Is the Police and Spellforce – Anniversary Edition during the period. As THQ Nordic has great operational leverage, the result outperformed our estimates to an even larger extent than the sales figures. The gross margin was also on record levels due to a significant share own IP sales and digital sales. Company analysis 3 THQ Nordic THQ Nordic: Sales from new releases (r12m), Catalog sales (r12m) & CAPEX (r12m) 700 300 Forecast 600 250 500 200 407 400 150 300 120 98 Sales Sales mSEK 118 CAPEX mSEK 88 93 100 200 79 75 72 254 252 214 223 218 50 100 180 138 147 156 0 0 2015-Q4 2016-Q1 2016-Q2 2016-Q3 2016-Q4 2017-Q1 2017-Q2 2017E-Q3 2017E-Q4 Catalog sales (r12m) Sales from new releases (r12m) CAPEX (r12m) Source: THQ Nordic & Redeye Research The investments into development continued at a high phase and amounted to SEK 58.6m during the period. The pipeline and release schedule for H2 2017 looks extremely promising. The major part of H2 sales will be during Q4 as the company will release a handful of titles. Gamescom news: BIOMUTANT and Black Mirror Before the Gamescom conference, THQ Nordic revealed to new previously undisclosed projects; BIOMUTANT and Black Mirror. BIOMUTANT – Publishing deal and new IP Biomutant is a new IP where THQ Nordic will be the publisher. The game is developed by Experiment101, a Swedish based game studio consisting of industry veterans from, among others, Just Cause creator Avalanche Studios. The studio is owned by the Goodbye Kansas Entertainment Group and the Head of Studio Stefan Ljungqvist.