Release date: 09 October 2020 Market data as of: 08 October 2020 Media and Games Invest Germany | Holding companies MCap: EUR95.9m This report is intended for [email protected]. Unauthorized distribution prohibited. Buy (Not Rated) Level Up Target Price: EUR2.30 (none) Current Price: EUR1.37 What’s it all about? Up/downside: 67.9% We initiate coverage with a Buy on Media and Games Invest plc (MGI), a buy-and- Change in TP: none build market consolidator in online video gaming and digital advertising. Digital Change in Adj. EPS: none 19E/NM+ 20E entertainment has emerged as a COVID-19 safe haven. We see significant upside to MGI’s current share price assuming a successful continuation of management’s M&A strategy, and with consolidation benefits in its media segment yielding margin expansion. Gaming has reached a new era; we invite investors to reassess its attractiveness with MGI shares, which offer a profitable gaming portfolio with a Sven Sauer proven M&A strategy and beneficial market dynamics, complemented by an Equity Research Analyst attractive digital advertising portfolio and significant inter-segment synergy +49 69 7 56 96 131 potential. [email protected] Holding companies research team Biographies at the end of this document Kepler Cheuvreux and the issuer have agreed that Kepler Cheuvreux will produce and disseminate investment research on the said issuer as a service to the issuer. IMPORTANT. Please refer to keplercheuvreux.com\disclaimer for keplercheuvreux.com This research is the product of Kepler Cheuvreux, which is authorized and “Important disclosures” and analyst certification(s). regulated by the Autorité des Marchés Financiers in France. Media and Games Invest Buy | Target Price: EUR2.30 360 in 1 minute Change in Sales: none 19E/none 20E Change in Adj EBIT: NM+ 19E/NM+ 20E Key findings Bloomberg: M8G GR Reuters: M8G.DE Media and Games Invest has emerged as a global market consolidator in online Free float 47.7% . Avg. daily volume (EURm) 0.3 video gaming and digital advertising driven by an acquisition-focused growth YTD abs performance 22.3% strategy yielding significant cost and commercial synergies. 52-week high/low (EUR) 1.43/0.98 . CEO Westermann took over MGI’s main asset gamigo in 2013 and subsequently FY to 31/12 (EUR) 12/20E 12/21E 12/22E expanded the gaming publisher’s buy-and-build M&A strategy into the media Sales (m) 120.5 135.0 149.8 segment, now pursuing 3-5 acquisitions per year. Since 2018, an increasing focus on EBITDA adj (m) 22.7 26.8 31.6 EBIT adj (m) 12.3 16.2 18.7 organic growth has complemented MGI’s aggressive M&A strategy. Net profit adj (m) 1.4 3.9 6.8 Net financial debt (m) 44.0 41.8 38.1 . MGI has a clear focus on purchasing, integrating, and improving distressed assets to FCF (m) -12.2 2.2 3.7 increase operational leverage through shared technology and build critical mass. EPS adj. and ful. dil. 0.01 0.03 0.06 With this strategy, management has generated a sales (EBITDA) CAGR 2016-20E of Consensus EPS na na na 33% (36%) via gamigo and MGI. Net dividend 0.00 0.00 0.00 . We view digital entertainment and gaming as a safe haven, and in general, as FY to 31/12 12/20E 12/21E 12/22E resilient to the economic after-effects the pandemic might cause. The strongest P/E adj and ful. dil. 112.9 40.8 23.5 EV/EBITDA 9.2 7.7 6.4 growth in the global gaming market (CAGR 2020-23: 8%) is expected to be fuelled by EV/EBIT 17.0 12.8 10.9 mobile gaming, where MGI has recently increased its position. The stock did not FCF yield -7.6% 1.3% 2.2% participate in the gaming segment’s COVID-19-driven re-rating. However, the surge Dividend yield 0.0% 0.0% 0.0% in usage due to the pandemic might trigger more future users who previously were ND(F+IFRS16)/EBITDA 2.0 1.6 1.3 Gearing 24.2% 22.4% 19.7% not playing games. Games are “sticky” products, so the search for entertainment ROIC 7.5% 9.8% 11.4% during the pandemic could trigger an increase of long-term usage of gaming EV/IC 1.6 1.6 1.6 products. There is scope for continued strong growth ahead. Both segments are focused on consolidation and scale. With solid underlying growth in the gaming market, commercial and cost synergy opportunities, increasing user-acquisition capacities, and further tailwinds from COVID-19 as well as upside from future acquisitions, we are positive about MGI’s growth opportunities and believe the market is underappreciating it. Research Framework Investment case Valuation methodology .MGI is a gaming and digital advertising market consolidator .The outcome of our DCF model (WACC: 9.75%, TG: 3%) with a buy-and-build M&A strategy. It restructures and yields a TP of EUR2.3. At our target price, Media and Games integrates distressed assets with its single-platform model Invest would trade at 12.1x +12M EV/EBITDA. to scale the business, yielding double-digit growth and .In our estimates, we do not include growth from future margin expansion through a significant optimisation of acquisitions, which could generate further upside to our operating costs. TP. .We expect MGI to continue its value-accretive M&A strategy Risks to our rating with additional capital while benefiting from underlying .Unsuccessful M&A and raising further funds for growth in mobile gaming and its user acquisition acquisitions, as well as not scaling up quickly enough to capacities. reach critical mass. .Solid organic growth and M&A, growing markets focused .Lack of a sustainable number of target opportunities in the on consolidation and scale, and relatively low capital medium term and availability and quality of external market awareness round up MGI's strong upside potential, developer resources. which we believe is underappreciated by the market. .Regulatory crackdown regarding data-driven performance Catalysts marketing or monetisation of F2P games. .Diversification of institutional ownership. .Increasing scale and reaching critical mass. .Relocation of HQ. keplercheuvreux.com 2 Media and Games Invest Buy | Target Price: EUR2.30 Company description Management Media and Games Invest plc (MGI) is a holding company based in Malta pursuing a Remco Westermann, CEO Paul Echt, CFO "Buy, integrate, build, and improve" M&A strategy in the media and gaming industries. Its main assets currently comprise of globally operating tech companies Key shareholders in the gaming and digital/online advertising industries. Bodhivas GmbH (Remco Westermann) 36.88% Private placement (Lock up until 03/21) 21.40% Early investors (Lock up until 02/22) 15.42% Current free float 26.30% Key data charts Price performances Sales split by region Sales split by division FCF Sales and EBITDA margin FCF and Capex to sales Price performancesSales split by regionSales split by divisionFCFSales and EBITDA marginFCF and Capex to sales SWOT analysis Strengths Weaknesses .Diverse game portfolio with a loyal and long-term paying .Business model depends on further capital to reach critical user base. mass. .Strong M&A track record, coupled with deep expertise in .Limited free float and trading volume. tech and gaming. .Complex corporate structure. .Management's shareholdings. .Limited visibility on individual subsidiaries' performance. .User-acquisition capacities in gaming. Opportunities Threats .Strong synergy creation and consolidation benefits. .Limited availability of new game licences/third-party .Rapidly changing technology landscape. development. .Fragmented and growing M&A market focused on .Increasing number of unsuccessful M&A. consolidation and scale. .Scaling up to reach critical mass is not achieved fast .Reaching critical mass. enough. .Legislative action: data-driven marketing or monetisation of F2P games. keplercheuvreux.com 3 Media and Games Invest Buy | Target Price: EUR2.30 Investment case in six charts Chart 1: Gamigo’s integration into MGI and an aggressive M&A strategy… Chart 2: ...have driven EBITDA margin expansion Source: MGI, Kepler Cheuvreux Source: MGI, Kepler Cheuvreux Chart 3: Global digital ad spending CAGR of 12% should spur growth in Chart 4: …amid an already solidly growing global gaming market MGI’s Media segment… benefitting significantly from COVID-19 (revenue CAGR 2020-23E: 8%) Source: eMarketer Source: Newzoo Chart 5: Gaming peers trading at high multiples since COVID-19 Chart 6: MGI’s gaming peers re-rating since COVID-19 trough Source: Kepler Cheuvreux Source: Kepler Cheuvreux Media and Games Invest Buy | Target Price: EUR2.30 Contents 360 in 1 minute 2 Investment case in six charts 4 Global media and gaming powerhouse 6 Who is Media and Games Invest? 6 B2C/Gaming segment 9 Game types 11 Acquired gaming companies 11 Monetisation models 12 User acquisition and statistics 15 Game ownership and channels 16 B2B/Media segment 17 Programmatic advertising 18 Acquired media companies 19 MGI’s strategy: Buy, integrate, build, and improve 24 Synergies between Media and Gaming are both top-line and earnings drivers 26 High growth potential in both of MGI’s segments 30 Gaming market 30 Game publishing market 32 Digital advertising market 33 COVID-19 impact 36 Q2 2020 results 37 Capital increase and dual listing 38 Deconstructing the forecasts 40 Financial targets 40 Group P&L 40 Segment overview 41 Balance sheet and cash flow 42 Valuation, target price, and risks 45 DCF valuation 45 Upside potential from future acquisitions 46 Upside potential from a multiple-based valuation approach 46 Risks 48 Appendices 49 Management and board of directors 49 Geographical setup of MGI 50 Valuation table 51 Income statement 52 Cash flow statement 53 Balance sheet 54 Research ratings and important disclosures 55 Legal and disclosure information 57 Media and Games Invest Buy | Target Price: EUR2.30 Global media and gaming powerhouse Media and Games Invest plc (MGI) is a fast-growing digital media and gaming global powerhouse.