Release date: 09 October 2020 Market data as of: 08 October 2020
Media and Games Invest
Germany | Holding companies MCap: EUR95.9m
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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 . MGI has a clear focus on purchasing, integrating, and improving distressed assets to Net financial debt (m) 44.0 41.8 38.1 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. The group acts as a market consolidator with a strong gaming and ad-tech expertise at the management level and a proven M&A strategy that boasts huge synergy potential in its main markets, with its various brands operating in games publishing and digital advertising.
Who is Media and Games Invest? Media and Games Invest plc is a pure-play tech company in the gaming and online advertising industries currently based in Malta with its main operational presence in the US and Germany. As of H1 2020, the group is generating c. 53% of its revenue in North America, c. 35% in Europe, and c. 12% in Asia, South America, and other regions. The company has transformed itself into a synergetic gaming and digital media company by acquiring globally operating tech companies in the gaming and online advertising industries. In its B2C Gaming segment, revenue is predominantly generated by gamigo, a publisher of online MMOs (massively multiplayer online games), browser, mobile, and casual games. Its main revenue streams are in-game purchases, game subscriptions, and advertisement revenues. Currently, MGI’s games comprise more than 600,000 players per day and 5m per month. The segment generates 58% of group revenues, while the top ten MMO games account for roughly 44% (as of H1 2020). In the B2B Media segment, MGI generates revenue through its newly formed core asset Verve Group, a data-first brand performance ad platform that offers various types of online advertising campaigns. The segment’s main revenue streams are agency fees, SAAS fees, and ad commissions. Verve Group brings together the group’s ad-tech companies Verve, PubNative, Applift, ReachHero, Mediakraft, adspree, and Platform 161, offering services in nearly the entire online advertising value chain. The segment generates c. 42% of group revenues (as of H1 2020). What does MGI do? Media and Games Invest plc focuses on market consolidation in the highly fragmented video gaming and digital advertising industries via its “buy-integrate-build-improve” strategy: distressed gaming assets and technological media companies are acquired and integrated into the group’s single platform. Post-merger integration efforts, e.g. technology optimisation, are able to create significant efficiency gains, e.g. cost savings from server infrastructure, yielding margin upside. In addition, the group’s M&A strategy spurs organic growth opportunities in both segments’ operating areas. History of MGI From an operational perspective, the group emerged in 2013 via gamigo, after Remco Westermann acquired 100% of the shares in the online game publisher from Axel Springer. In 2018, the group Media and Games Invest plc emerged via a reverse merger. Westermann acquired a majority stake in the publicly listed Solidare Real Estate Holding plc and was appointed CEO and executive director of the board. gamigo AG was acquired and integrated into the group, which was renamed blockescence plc. All real estate assets were subsequently divested, initially focusing on the implementation of block chain technology in the gaming industry. During the course of the realignment of its investment focus and the restructuring of its commercial activities, the group ultimately decided to pursue gamigo’s buy-and-build strategy going forward and to focus on creating fast-growing companies in the media and games segments through acquisitions and synergy-driven organic growth. In H1 2019, the group was rebranded Media and Games Invest plc and acquired Applift (an international mobile performance agency), PubNative (a supply-side platform for digital advertising space) and ReachHero (an agency for product placement between brands owners and influencers operating online video channels). The acquisitions of Verve Inc. (a marketing provider of programmatic and open market traffic), Platform 161 (a demand-side platform in the field of programmatic advertising), and freenet digital (a provider of mobile and digital entertainment content and services) followed in 2020.
keplercheuvreux.com 6 Media and Games Invest Buy | Target Price: EUR2.30
Chart 7: History of Media and Games Invest Chart 8: MGI at a glance
Source: MGI, Kepler Cheuvreux Source: MGI, Kepler Cheuvreux
History of gamigo Gamigo AG was founded in 2000 as an online gaming magazine for PC client and browser games and evolved into a publisher of MMOGs (massively multiplayer online games) and online browser- based role-playing games. The first purchase of licensing rights for a game dates back to 2001 followed by the launches of Last Chaos and Fiesta Online while expanding into foreign markets, before Axel Springer acquired 100% of gamigo’s shares in 2009. A string of unsuccessful game launches in the following years, in combination with a large customer data leak, lack of focus on games with recurring revenues, and nonalignment of management and shareholders’ interests led to the sale of gamigo to Remco Westermann in 2012. Westermann stopped focusing on risky and longer-term game development and focused on a “buy-and-build” business model. Thereafter, over 25 acquisitions were finalised, strengthening gamigo’s game selection and user acquisition strength. The purchase of Aeria Games GmbH and adspree in 2016 marked an important milestone for the company and added an online media advertising segment. The acquisitions of Mediakraft (2017), Trion Worlds (2018), and WildTangent (2019) followed. From May 2018 onwards, gamigo AG was fully consolidated under Media and Games Invest plc, which acquired the remaining 46% stake in gamigo in 2020 and now holds 99.9%.
Chart 9: History of gamigo AG Chart 10: Gamigo and its games at a glance
Source: MGI, Kepler Cheuvreux Source: MGI, Kepler Cheuvreux
Ownership structure and consolidation As of October 2020, the free float of MGI’s shares amounts to c. 26%, which will increase to 47% in Q1 2021 due to the end of the private placement’s lock-up period. CEO Remco Westermann holds a c. 37% stake through the investment vehicles Sarasvati KG and Bodhivas GmbH, which hold 52.3% of the voting rights of Media and Games Invest plc. MGI holds 99.9% of gamigo AG, predominantly through its investment vehicle Samarion SE. Due to the public listing of its bond,
keplercheuvreux.com 7 Media and Games Invest Buy | Target Price: EUR2.30
gamigo AG reports separate consolidated financial statements, albeit fully consolidated under Media and Games Invest plc.
Chart 11: Abridged corporate consolidation structure as of August 2020
*= Bodhivas GmbH holds 52.3% of voting rights of Media and Games Invest plc; Source: MGI, Kepler Cheuvreux
Segment overview MGI reports under two segments, B2C Gaming via gamigo Group and B2B Media via Verve Group. However, we note that the group’s segment reporting differs from the corporate structure and consolidation overview of its companies. In MGI’s reported B2C Gaming segment, the group acts as an online and mobile games publisher, including technical support, operations, and to a lesser extent, internal development (however it does not develop its own games). Revenues in this segment are predominantly generated through the gaming assets of gamigo, which boasts 25 well-established massive multiplayer online games (MMOGs) and over 5,000 casual games.
Chart 12: MGI from a segment and brand view – B2C via gamigo Group and B2B via Verve Group
Source: MGI
In the B2B Media segment, MGI offers online performance marketing, an influencer marketing agency and platform services, a supply side performance platform in programmatic advertising, and global app performance agency services via the Verve Group. Revenues are therefore generated by the group’s media assets and reported as B2B revenues, although MediaKraft, adspree, and Verve are consolidated under gamigo AG, which also reports a separate B2C and B2B segment performance overview in its own financial statements.
keplercheuvreux.com 8 Media and Games Invest Buy | Target Price: EUR2.30
Chart 13: What MGI’s segments have to offer Chart 14: MGI’s half-year segment performance and acquisitions
Source: MGI, Kepler Cheuvreux Source: MGI, Kepler Cheuvreux
B2C/Gaming segment MGI’s B2C Gaming segment consists predominantly of a portfolio of more than 25 massively multiplayer online games (MMOGs), over 1,500 mobile games, as well as its offering of 5,000+ casual games. As of H1 2020 (FY 2019), the segment generated 58% (51%) of group sales and 84% (81%) of group EBITDA. Gamigo Gamigo is the core asset of the B2C Gaming segment, where MGI is pursuing a “buy-build- integrate-improve” strategy to build critical mass in the digital gaming market via a combination of bolt-on acquisitions and organic growth. It acquires, develops, markets, and publishes PC client, browser, console, and mobile games mainly for the European and North American gaming markets. The core business model consists of acquiring established, often distressed or underperforming franchises and restructuring and integrating them into the gamigo publishing platform. As previously noted, the difference between segment reporting and consolidation overview results from the B2B media companies (adspree, MediaKraft, and Verve) being consolidated under gamigo AG.
Chart 15: Abridged corporate structure and reporting of gamigo AG
Source: MGI, gamigo
In the past six years, gamigo has acquired over 20 gaming assets and companies. With a sales (EBITDA) CAGR 2014-19 of 31% (54%), it currently boasts over 5m monthly active users (MAU). The group is able to leverage its acquired user base with its own infrastructure in addition to being able to acquire new users with its strong position on the media side with its various ad-tech companies. An important growth factor in recent years has been the successful acquisition of
keplercheuvreux.com 9 Media and Games Invest Buy | Target Price: EUR2.30
gaming companies and the expansion of gaming licenses, while the group is also able to generate cost synergies in personnel, IT, marketing, and distribution.
Chart 16: Historical full-year performance and acquisitions of gamigo Chart 17: Gamigo’s quarterly growth
*Adjustments: one-time effects, M&A and financing costs; Source: gamigo Source: gamigo
Gamigo is not active in developing new games’ intellectual property (IP), which is a significant risk due to the high upfront costs and uncertain successful outcome of the game. Either the group purchases the licence from developers excluding the game’s intellectual property rights (IP), or the game company is acquired. The latter enables gamigo to enhance the game with expansions and monetisation models. The group markets its products and services predominantly to gamers in Europe and North America, and to South America and Australia to a lesser extent. In Asia, gamigo offers its games via licensing collaborations. MMOGs are built in a way that allows a large number of players to meet, communicate, and interact with each other in a large gameplay environment, such as online maps and arenas. Players can play these games in online browsers, downloadable PC clients, on consoles such as PlayStation and Xbox, Facebook, Steam, and on mobile end devices (iOS and Android). Advertisements appear across all platforms, and the group generates additional revenues through the distribution on its own gaming portals (www.gamigo.com, www.deutschland-spielt.de).
Chart 18: Gamigo revenue share overview Q2 2020 Chart 19: Gamigo revenue by share H1 2020
Source: gamigo, Kepler Cheuvreux Source: gamigo, Kepler Cheuvreux
keplercheuvreux.com 10 Media and Games Invest Buy | Target Price: EUR2.30
Game types Massive multiplayer online games (MMOGs) The predominant revenue driver of the B2C Gaming segment is gamigo’s game portfolio of more than 25 free-to-play and buy-to-play massive multiplayer online games (MMOGs). These often include several thousand players in a game or in a server environment, interacting with each other and often organised in player communities (so-called “guilds” or “clans”), frequently leading to a strong bond between the users and the game. gamigo’s MMO games are mostly anime, fantasy role-playing, strategy, and shooter games. These MMO games, if well maintained and supported with strategic marketing and a regular improvement of the game’s content, have a lifetime of well over ten years. Most MMOGs are free-to-play, which means users have free access and ultimately do not have to pay anything in order to enjoy the gameplay. Other monetisation models include buy-to-play games, and subscription and advertising-based games. At release, MMOGs usually record a strong user base amid subsequent customer and revenue churn. Continuous support and close coordination with the players in addition to regular new in-game content updates can lead to a smaller but very loyal and paying user base. Users that have been actively playing the game for over five years generate 50% of revenues of many of gamigo’s games, which often have a long lifetime of over ten years. Additionally, MGI is able to optimise marketing and improve the game content to stabilise revenues and generate growth, although a large part of growth is driven by the group’s inorganic consolidation efforts. Casual games Casual games are PC client, browser, and mobile games where user acquisition and monetisation is generated primarily through ads and subscriptions. These games are typically simpler and less intensive games than MMOGs and have a shorter lifespan (puzzles, quizzes, and skill games). MGI offers over 5,000 casual games and with the freenet acquisition over 1,500 mobile games, which is expected to increase mobile revenue to 10% of total gaming revenue in Q4 2020.
Chart 20: Revenue and share of gamigo’s MMOGs Chart 21: Revenue and share of gamigo’s casual and other games
Source: MGI Source: MGI
Acquired gaming companies Since 2013, gamigo has acquired and integrated over 20 game companies into the group’s gaming cluster, including GameSpree GmbH, Infernum Games, Looki Assembly Studios GmbH, INTENIUM GmbH, and Piraya Mobile GmbH (now gamigo Portals GmbH), as well as the licenses and IP for various games. Trion Worlds Trion Worlds, a leading US publisher and developer of online and console MMO games (Rift, Defiance, Trove, ArcheAge, and Atlas Reactor), was acquired by gamigo in October 2018 for a total purchase price of USD9.25m (including possible earn-outs). Under this deal, gamigo acquired the platform and full publishing rights. At announcement, management expected additional revenues of c. EUR16m and EBITDA of EUR1-4m in 2019, given a successful restructuring and integration to enable potential economies of scale and synergies. Trion Worlds showed positive post-merger revenue growth as costs were optimised when integrating the assets into MGI’s platforms. In 2019,
keplercheuvreux.com 11 Media and Games Invest Buy | Target Price: EUR2.30
it generated revenues amounting to c. EUR19-20m (c. 24% of group revenues) and in the first 12 months after the merger, EBITDA of EUR7.2m exceeded the group’s expectations.
Chart 22: Trion Worlds’ revenue of main games (EURm) Chart 23: Aeria Games’ revenue of main games (EURm)
Source: MGI, Trion Worlds Source: MGI, Aeria Games
Aeria Games Aeria Games was acquired in 2016 from ProSiebenSat.1 for EUR32m in shares and EUR4.7m in cash. It is a European games publisher that markets its games in over 40 countries, with a focus on Europe and North America, including Shiya, Last Chaos, Aura Kingdom, and Grand Fantasia. At the time of the acquisition, Aeria Games’s portfolio included two games in the fast-growing mobile segment, including Goal One and Dawn of Gods. WildTangent In April 2019, the group acquired WildTangent Inc., a US game publisher of casual games with a portfolio of 5,000 casual games for PC and mobile devices and strong partnerships with computer and laptop manufacturers. The acquired business of WildTangent was expected to contribute to revenues with a mid-single-digit million US dollar amount in 2019 and to positively contribute to gamigo group EBITDA from the date of acquisition. The total cost of the acquisition was EUR3.571m. Freenet digital As of Q4 2020, Media and Games Invest expanded its exposure to the fast-growing mobile gaming industry with the acquisition of freenet digital GmbH from freenet AG. It was founded in 2000 and distributes over 1,500 mobile games via its own platforms, as well as other products in the digital entertainment sector. The purchase price for freenet digital GmbH, which was completed on 30 September 2020, is in the upper single-digit-millions of euros and was paid in cash. In addition to the acquisition, MGI and freenet AG agreed to cooperate in the media sector in which MGI will support freenet AG in the acquisition of new customers. On an annual basis, the group expects freenet digital to generate additional revenues of EUR13-15m and EBITDA of EUR2-3m. Antonius Fromme, CCE of Freenet AG, will join the board of directors of Media and Games Invest. With this investment, MGI expects to increase its share of mobile gaming revenues from 1% to 10%.
Monetisation models There are three main business models for developers and publishers to generate return on MMOs, namely: 1) free-to-play; 2) buy-to-play; and 3) subscription-based games. All business models have their pros and cons. While there is no right or wrong model, an MMO business model generally depends on the type of game (e.g. sandbox or theme park), the quality of the game, and its dependence on generating a quick return on investment. From a player’s perspective, some players enjoy the “grinding” and the possibility of enhancing the gaming experience with micro transactions, while other gamers enjoy a subscription-based or buy-to-play experience with more visual progress and more attractive gameplay.
keplercheuvreux.com 12 Media and Games Invest Buy | Target Price: EUR2.30
Free-to-play The most popular monetisation model for MMO games is free-to-play (F2P), and it has proven that it can be more profitable than subscription or pay-to-play models, for two reasons: 1) the lack of a pay wall as a barrier to entry for new players who are trying out new games; and 2) free-to-play games are able to attract a more casual gaming audience, where the fee to play a game was often a reason for players not to get into a game. As user acquisition is the key for browser and MMO games, the majority of new games in the market are developed under this monetisation model. From a game design point of view, developers are incentivised to create “game-play barriers” which can be solved through in-game transactions and item shops, e.g. XP boosts, more inventory space, cosmetics that make your avatar/player look better, or in-game rewards that can only be unlocked via keys bought in the cash shop. Free-to-play games therefore generate substantially higher revenues in the short-term than subscription-based games if players want to unlock the full potential of a free-to-play game. In the long-term, the hype for new free-to-play games dies down and they often bleed players while a very small number of “whales”, who continue to play and pay, then often fund the games. In the German gaming market, revenues from in-game purchases in F2P games increased by c. 21% to EUR2.3bn in 2019 after a 28% increase in 2018.
Chart 24: Global free-to-play (F2P) market for PC games, revenue by Chart 25: Global free-to-play (F2P) market for mobile games, revenue
region (USDb) by region (USDb)
Source: SuperData Research (Nielsen) Source: SuperData Research (Nielsen
The recent trend of declining F2P PC games revenue and increasing F2P mobile games revenue is expected to continue in the coming years. According to Nielsen-owned SuperData Research, free- to-play accounted for 80% of dollars spent on digital games in 2019, driven by strong performances from mobile pushing its share of free-to-play revenue to 74%. In the German mobile gaming market, revenues from subscriptions increased by 23% to EUR1.1bn in H1 2020 due to the coronavirus, with one-third of total players playing more often during the lockdown and subsequent period of restrictions. Buy-to-play Unlike in the free-to-play model, players have to spend money upfront in buy-to-play games. Even though this monetisation method is less popular on the market, there are still many successful buy-to-play games. Arche Age Unchained, one of gamigo’s flagship games, is a buy-to-play expansion of the game’s previous free-to-play model, and it has acquired a high number of players who previously left the game, according to gamigo’s management. Typically, publishers and developers require players to purchase an expansion every 1-2 years. Buy-to-play games also tend to have item/cash shops, but the items that players can purchase here generally fall under cosmetic and convenience enhancements rather than fundamental systems surrounding game progression or actual gameplay. However, there are also common paying elements in buy-to-play games such as limiting inventory/storage space or end game cosmetics to sell more detailed and impressive items in the cash shops.
keplercheuvreux.com 13 Media and Games Invest Buy | Target Price: EUR2.30
Buy-to-play games offer a good balance between free-to-play and subscription-based games, as they allow developers to give investors a quick return on investment, while not compromising the integrity of the game too much. Players also do not feel forced to log in every day to get value for their money, and many buy-to-play games have the potential to attract a healthy and long-term playing customer base, as less players will quit due to pay-to-win elements and sometimes frustrating progression systems in free-to-play games. The primary revenue driver of buy-to-play games is expansion packs with new content, but in terms of patches, these games generally do not see new additions to story, balancing, and quality as overly substantial outside of expansions. The buy-to-play model may be the most “fair” business model, but also the most difficult to keep running from a financial point of view. It relies on a certain threshold of players spending money on microtransactions in between new releases and expansions. Subscription This business model has been around the longest in the MMO world. It has become less popular, but there are still successful games using this monetisation method (e.g. WoW, Final Fantasy XIV). Gamigo’s 5000+ casual games are predominantly monetised through subscriptions. This business model allows developers to develop a full game that lacks any issues that players would need to spend money on to fix. The nature of a subscription-based MMO incentivises developers to make a game that is as interesting as possible for as long as possible, to keep players playing in the long- term. However, this is also the most difficult business model to keep players playing the games, as user numbers drop significantly in between new patches after they have already experienced all the available content. In the subscription-based model, players do not have to pay for expansions besides their subscription fee, which is relatively fair from a player’s perspective, provided there is enough content to justify the subscription fee. In terms of game design, RNG progression is added more often to make up for the lack of interesting content, in hopes of keeping users busy chasing optimal stats for as long as possible. In the German gaming market, revenues from subscription- based online games declined from EUR166m in 2017 to EUR113m in 2019. We think successful MMO games are characterised by the right balance between mandatory purchases in order for players to actually play the game to its fullest potential and offering gameplay where players can “grind” to get in-game objects. High budget, triple-A MMOs with very good graphics, combat, and innovative mechanics naturally require a monetisation model where substantial revenues are generated, whereas lower quality, “asset flipped” games with no new content bringing nothing new to the genre must be free-to-play, or players will not try the game. Gamigo does not develop games, but at the same time it generates a high and quick return on investment through restructuring and synergies. Hence, the long-term development of MGI’s gaming strategy is critical, as more gaming market consolidators are mimicking MGI’s “buy, integrate, build and improve” strategy, and we think this will decrease margins in the mid to long- term. The following chart illustrates the pros and cons of the major monetisation models from both a player and investor perspective, as many factors are interlocked and depend on each other.
Chart 26: Pros and cons of the three major monetisation/business models for MMOs
Source: Kepler Cheuvreux
keplercheuvreux.com 14 Media and Games Invest Buy | Target Price: EUR2.30
User acquisition and statistics New customers are acquired either via marketing to the group’s own customer base (e.g. email, cross-selling) and on own portals (e.g. mmogames.com, browsergames.de), or through other advertising measures. MGI’s games are also offered via the B2B advertising and mobile advertising companies of the group. Common KPIs and user statistics in the gaming industry include essential information on costs, revenue, duration, and conversion success of user acquisition. MGI has over 5m monthly active users (MAU) that generate a monthly ARPU between EUR50-80 in its MMO portfolio. A historical comparison of MAU is not meaningful due to the different player scope after the purchase of WildTangent in 2019. As the group depends on a high ratio of paying players, not only customer acquisition but also player retention is essential.
Chart 27: User acquisition and retention statistics for MMO portfolio Chart 28: Gamigo’s MAU and ARPU
Source: MGI Source: gamigo
Despite it being more difficult to generate continuous revenue streams in free-to-play games in the long-term, MGI has been able to generate long-term recurring revenues with free-to-play Gamigo’s recurring games such as Fiesta, Desert Operations, Last Chaos, and Aura Kingdoms, which is the group’s core revenues generate USP. More than 50% of revenues from its core games are generated through players that have predictable cash been playing the game for over five years, which ultimately translates into predictable cash flows, flows from long-term given regular content updates to keep the players interested. With patches and content updates (5+ years) players being offered on a regular basis, games are played for 10+ years. MGI has c. 5m monthly active users in total, which are defined as players logging into their account at least once a month. The following chart shows the share of revenues from long-term players for four of gamigo’s top MMO and casual games.
Chart 29: Recurring revenues from long-term players Chart 30: Customer acquisition in Q2 2020
Source: MGI Source: MGI
keplercheuvreux.com 15 Media and Games Invest Buy | Target Price: EUR2.30
Game ownership and channels Licensed versus owned games MGI’s business model in the gaming segment includes licensing games from game developers and owned games. Of the ten most successful MMO games in gamigo’s portfolio, six are owned by the group. Gamigo has exclusive licensing rights for the remaining four top games. Roughly 52% of revenue in the group’s B2C segment is generated by licensed games, and 48% by owned games. The amortisation and duration of licenses is 3-5 years with the option to extend. According to management, the risk of non-renewal is very low as MGI owns the customer base of the games, and developers would then have to re-gain players. In 2019, the focus on generating revenues from licensed games increased, which aligns with the group’s “buy, integrate, build, and improve” strategy and entails organic growth acceleration, mitigation of development risk for a new game (EUR5-50m for a new game with a 90% failure rate of new games), and lower upfront investment costs. With ArcheAge Unchained, a licensed buy-to-play sequel of the free-to-play MMO, gamigo was able to increase organic revenues by 10% in 2019, as well as re-acquire a large number of previous users who enjoy a subscription and buy-to-play model, rather than a free-to-play monetisation model. However, 25-30% of revenues generated through licensed games is paid as a royalty to the developer, which are booked as operating costs and run through the group’s P&L.
Table 1: Gamigo’s top ten MMO games Game IP Publisher System Release Date Genre % of B2C revenue Monetisation Developer Q2 2020 model Rift Owned Trion Worlds PC 2011 Fantasy 5% Free-to-play gamigo US Defiance Owned Trion Worlds PC, PS, XBOX 2013 Sci-fi 2% Free-to-play gamigo US Trove Owned Trion Worlds PC, PS, XBOX 2014 Fantasy 21% Free-to-play gamigo US Shaiya Owned Aeria Games PC 2007 Fantasy 3% Free-to-play Aeria Games Last Chaos Owned Aeria Games PC 2007 Fantasy n/a Free-to-play gamigo ArcheAge Licensed Trion Worlds PC 2014 Fantasy 5% Free-to-play XL-Games ArcheAge Unchained Licensed Aeria Games PC 2019 Fantasy 18% Buy-to-play XL-Games Aura Kingdom Licensed Aeria Games PC 2013 Fantasy 6% Free-to-play X-Legend Desert Operations Owned Looki PC 2010 Strategy 6% Free-to-play Playzo Fiesta Owned Gamigo PC 2007 Fantasy 8% Free-to-play Ons On Soft Grand Fantasia Licensed Aeria Games PC 2008 Fantasy 5% Free-to-play X-Legend Source: MGI, Kepler Cheuvreux
Game channels Most of gamigo’s MMOGs and casual games are played via the PC client vertical, accounting for c. 78% of Q2 2020 gaming revenue. This is the core area of MGI’s gaming segment, characterised by recurring revenues with player lifetimes above five years and strong social communities. The second largest vertical in terms of revenue is browser games (12%), followed by console (10%) and mobile (1%), which is expected to increase to 10% as of Q4 2020. In the gaming market in general, mobile accounts for the largest share of revenues generated (c. 45% in 2019), and will presumably continue to generate the highest growth levels in the gaming market going forward. gamigo has recently expanded into the mobile gaming sector with the acquisition of freenet digital, which offers more than 1,500 mobile games via its own platforms. The group has also increased its mobile user acquisition capacities with investments in the Media segment (PubNative, Applift) and will further increase its focus on the mobile channel in the coming years.
keplercheuvreux.com 16 Media and Games Invest Buy | Target Price: EUR2.30
Chart 31: MGI’s B2C gaming revenue share by licensed and owned Chart 32: MGI’S B2C gaming revenue share by game channel in Q2
games 2020 (excl. freenet digital acquisition)
Source: MGI Source: MGI
Regarding distribution channels, MGI has a key competitive advantage over other game publishers as it primarily generates revenues on owned distribution companies via its B2B companies. In North America, Europe, and South America, gamigo’s games portfolio primarily generates revenues on its owned distribution channels. In Asia, gamigo offers its games to end- users via coo licence partners and does not market its portfolio of games directly. In Q2 2020, 78% of gaming revenue was generated through owned distribution channels, while 22% was distributed on external channels. In the owned distribution channels, the group pays 8-10% payment costs, which are substantially higher on external distribution channels, reaching 30% for third-party channels such as Steam, XBOX, and PlayStation. The high percentage of owned channels adds further leverage and earnings synergies. The largest markets for MGI’s games are the US, Germany, and France, accounting for c. 80% of gaming revenue. Gaming revenues are also generated to a lesser extent in the UK, Canada, Brazil, Australia, the Netherlands, Spain, and Russia.
Chart 33: MGI’s B2C gaming revenue share in Q2 2020 by distribution Chart 34: MGI’s B2C gaming revenue share in H1 2020 by region channel
Source: MGI Source: MGI
B2B/Media segment MGI has also applied its M&A strategy in the Media segment, where it focuses primarily on user acquisition, user re-engagement, and in-app monetisation. The group has developed an impressive B2B/media platform services portfolio since 2016. These media companies are integrated into MGI’s single-platform infrastructure and systems. The services offered in this segment are predominantly online performance marketing, influencer marketing agency and
keplercheuvreux.com 17 Media and Games Invest Buy | Target Price: EUR2.30
respective platform services, supply-side performance platform in programmatic advertising, and global app performance agency services. MGI operates this segment under the newly established Verve Group.
Chart 36: MGI’s and gamigo’s B2B Media performance and Chart 35: MGI’s B2B Media revenue by type in Q2 2020 acquisitions
Source: MGI *= acquired in H2 2020; Source: MGI, gamigo
Programmatic advertising User-targeting advertising Rather than buying directly from publishers, programmatic advertising is a software-based method to automatically purchase, display, and optimise digital advertising space driven by audience data, enabling more efficient targeting of potential customers. Any format or channel can be accessed programmatically due to programmatic platforms that have built up their ad inventory and databases. Traditional advertising made it difficult for advertisers to access ad inventory, and as a result c. 60% of publisher ad space went unsold. Automation made it much easier to understand and buy ad inventory, which makes it clear who the recipient of the ad is before the personalised ad is actually sold. Through the streamlined process of ordering, setting up, reporting on ads and targeting, more relevant ads can be served more efficiently. How it works Within milliseconds of a user visiting a website or clicking on an application containing the group’s services, the underlying technology results in a transaction for a publisher and conducts an auction in which hundreds of advertisers and tens of thousands of advertiser brands can participate. MGI sends bid requests to all of the appropriate and available advertisers on its platform per ad impression shown. It must perform these transactions end-to-end at speeds often faster than the page or application loads for the user. Access to a large pool of publishers translates to a higher ROI for advertisers, while publishers can maximise their revenue as well. The benefits of programmatic advertising include scaling ability, real-time flexibility, targeting capabilities, and efficiency. Programmatic advertising allows advertisers to reach a large audience by purchasing ad space from any ad inventory available, rather than being limited as they are in traditional advertising. The flexibility of programmatic advertising enables advertisers to make real-time adjustments to ads based on their impressions, and a broad range of targeting criteria can be applied. With superior targeting, advertising budgets are more efficient. Publishers, on the other hand, are able to sell advertising space much more easily while optimising ad sales with automation tools that simplify the search for the right advertiser, which also makes communication easier. Programmatic advertising exists in a wide range of digital channels such as display, mobile, video, and social media. MGI is well positioned in the programmatic value chain MGI’s commercial activities in its B2B Media segment now encompass almost the entire value chain of programmatic advertising, as a result of MGI’s successful M&A strategy and integration efforts, which are expected to yield significant synergies. MGI “reserves” access and ad space,
keplercheuvreux.com 18 Media and Games Invest Buy | Target Price: EUR2.30
which was previously reserved for media agencies with large budgets, in order to bypass expensive middlemen and give smaller brands a chance to compete. The following chart illustrates the various stages of programmatic advertising, and what roles MGI and its subsidiaries play in this process.
Chart 37: How programmatic advertising works and MGI’s consolidation
Source: Kepler Cheuvreux
1. Service layer: The programmatic advertising process begins with advertisers aiming at launching digital campaigns, by contacting programmatic ad agencies or trading desks, such as MGI’s Verve, Applift, or MediaKraft, who focus on a specific part of the planning, handle advertising, and buy advertising inventory. 2. Demand-side technology layer: Ad agencies and trade desks use demand-side platforms (DSP), such as MGI’s ReachHero, and Platform 161, and Verve, to automate the process of buying ad impressions in line with the advertiser’s digital campaign. DSPs bundle the demand of ad buyers and can enrich it with user data. Advertisers can then purchase ad inventory from multiple publishers. The DSP uses the data to match it with the defined target parameters to determine a bidding price for the first impression, which is stored within the SSP or an ad exchange in real-time. This process is referred to as real-time bidding, which often takes no longer than 100 milliseconds. 3. Supply-side technology layer: A targeted audience that lands on the publisher’s website triggers an ad request to the supply-side platform (SSP), such as MGI’s PubNative and TV Smiles, who bundle advertising space and enable publishers to purchase space with the aim of maximising the value it receives from an impression using an auction among its buyers while the DSP is connected. Flexible integration via SDK’s maximises value. 4. Data layer: Aimed at the targeted audience (using location, demographics, user behaviour, online activity, etc.) via data management platforms (DMP). 5. Content layer: After the sale of the impression, it is sent to the publisher’s website, such as MGI’s adspree, or Social light Management, for display to the desired audience.
Acquired media companies Verve Group In January 2020, Verve Group was formed, which reflects MGI’s B2B Media segment and unifies the group’s latest acquisition of Verve, PubNative, Applift, and Platform 161, as well as adspree, MediaKraft, and ReachHero. The newly formed core asset integrates and consolidates all of MGI’s ad tech companies, and is positioned as a data-first brand performance ad platform and offers advertisers products in the field of influencer and social media marketing, banner and video advertising, as well as search engine advertising. The Verve Group boasts a superior global combination of technology, customers, and supply. It works with most of the top Fortune 500 global digital brands and many smaller brands. Verve has patented its location-powered
keplercheuvreux.com 19 Media and Games Invest Buy | Target Price: EUR2.30
programmatic advertising technology and was a pioneer in launching an in-app ad platform. Some of the recent notable achievements of the Verve Group are its first Digital-Out-Of-Home (DOOH) campaign, where the group layered its mobile location-based audiences, as well the first connected TV mobile solution in the US, which will be followed by a similar solution in Germany in 2020. The group recently launched virtual-reality ads within games, which is still a relatively small niche market.
Chart 38: Verve’s innovation in ad-tech and recent campaigns
Source: MGI, Kepler Cheuvreux
Verve In January 2020, the location-based mobile marketing platform Verve based in New York and Carlsbad was acquired for EUR6.5m. Verve is a North American mobile data platform for location- based programmatic video and display marketing, with extensive technology, intellectual property and domain expertise in branded programmatic advertising and location-based analytics and data management. Verve enables its clients to maximise their programmatic advertising revenue via flexible integrations such as SDK, as well as connecting with consumers on their devices in real-time. MGI Group expects additional revenue in the low double-digit million range in 2020, and additional EBITDA in the low single-digit millions of euros. Goodwill amounting to c. EUR4m was identified. According to management, one of the first things the group did after the Verve acquisition was to bring their data services into the MGI cloud, which saved a substantial amount of running costs on a monthly basis. Despite MGI’s Media segment now being operated under the umbrella brand Verve Group, MGI’s management also works with the individual brands externally, despite the companies being integrated into one company with all backends being integrated.
Chart 39: Verve’s clients: Offline brands and verticals Chart 40: Verve’s clients: Online brands and verticals
Source: MGI Source: MGI
keplercheuvreux.com 20 Media and Games Invest Buy | Target Price: EUR2.30
PubNative PubNative, now part of Verve Group, was acquired as part of the AppLift deal in 2019, and MGI holds 89% of shares and voting rights of the fully consolidated subsidiary. PubNative runs a supply side platform (SSP) that supports application publishers in selling their advertising space in their applications via bidding mechanisms. As a mobile publisher platform and programmatic ad exchange, it provides advanced advertising monetisation solutions for mobile app developers and publishers. PubNative enables its clients to maximise their programmatic advertising revenue via flexible integrations (API, SDK, JavaScript) with its proprietary cross-format optimisation technology and mobile in-app bidding solution. In May 2020, PubNative became one of BIGO Ad’s top Tier 1 demand partners, one of the largest ad platforms providing and integrating global mobile marketing solutions into a video and audio calling app imo with global monthly active users of 211m, and short video creation platform Likee with global monthly active users of 131m. PubNative’s advanced monetisation technology allowed for successful A/B testing campaigns on different prices for different brands. BIGO Ad’s benefited from PubNative’s strong EU presence and connection to Verve and Applift, allowing the partnership to increase BIGO’s ad revenue and CPM for its apps.
Chart 41: Flexible ad integration methods Chart 42: Support for all major ad formats
Source: PubNative Source: PubNative
AppLift AppLift GmbH was acquired in June 2019 for c. EUR6m, paid in cash and promissory notes. In the context of this deal, net working capital amounting to c. -EUR8m was part of the share deal, as well as EUR3.4m in cash. Goodwill amounting to EUR10.5m was identified for the purpose of purchase price allocation. Applift is a global mobile performance advertising agency offering app support fur publishers and advertisers through branding, customer acquisition, and mobile monetisation. Applift supports various mobile advertising formats (Static images/banners, Native, Videos, GIF, Product Feed, and Playables) in order to effectively increase reach and acquire users through brand awareness, higher interaction and engagement, as well as product placement. The company employs a workforce of over 50 people in Berlin and Seoul and serves clients in more than 120 countries. In 2019, 32% of revenue in the Media segment was generated through performance marketing, equivalent to c. EUR13m. The AppLift and PubNative deal was a crucial and fundamental acquisition for MGI to pursue its strategy of increasing market share in the media business and strengthening its user acquisition for the gaming segment. The group obtained the ability to utilise its own advertising assets in the gaming business, with which MGI plans to increase revenues from both the Media and Gaming segment.
keplercheuvreux.com 21 Media and Games Invest Buy | Target Price: EUR2.30
Chart 43: Mobile advertising journey of AppLift
Source: AppLift
Mediakraft Mediakraft Networks GmbH is a group of companies that primarily specialise in online video, social marketing and influencer marketing in Germany, Poland, and Turkey, with strong market positions. As an advertising agency, Mediakraft now focuses primarily on influencer and social media marketing and branded video campaigns. It was acquired by gamigo in 2017 for EUR9m in cash. Mediakraft was founded in 2011 as a multi-channel network and advanced to one of the leading German online TV channel groups. While actively managing YouTubers, it reached over 600m monthly viewers at the time of the acquisition. Its main business consists of user acquisition through the production of branded content, supporting specialised YouTube stars and other niche-market social media influencers with the design and implementation of influencer campaigns, and managing YouTube channels for companies. In 2019, MediaKraft expanded to the growing platform TikTok and collaborated with Funk to create Move2, which has gained nationwide attention and currently counts c. 150,000 followers.
Chart 44: Mediakraft’s Move2 on TikTok Chart 45: Online video, social and influencer marketing media
Source: Mediakraft Source: Mediakraft
Adspree Adspree Media GmbH was acquired by gamigo in 2016 as part of the Aeria Games acquisition from ProsiebenSat.1 and was included in the purchase price of EUR36m. Both acquisitions were major milestones for MGI, as the former paved the way (along with Mediakraft) for the group’s commercial business activities in the offering of its B2B solutions in the Media segment. Adspree is a 360-degree online marketing agency active in the fields of user acquisition and game marketing. It combines its own exclusive in-game inventory and that of advertising partners to help publishers market, advertise and monetise their games. Adspree uses search engine
keplercheuvreux.com 22 Media and Games Invest Buy | Target Price: EUR2.30
optimisation (SEO), search engine advertising (SEA), Facebook marketing, programmatic/real- time media buying, real-time advertising, influencer and affiliate marketing as well as TV advertising. Adspree also has a large number of own game portals to address players with SEO- oriented content and SEA-based portals. The fully consolidated subsidiary has over 212 advertisers, ten years of search engine experience, and 541 partners including portals and media networks.
Chart 46: Adspree’s commercial activity and offered solutions
Source: Adspree
ReachHero In February 2019, 67% of ReachHero GmbH was acquired for EUR3.9m, and the remaining minority in 2020. ReachHero is a one-stop influencer marketing agency that offers product placement opportunities to connect brand owners and advertisers with influencers and social media channels. It operates a highly automated online platform that enables brand owners to set up social marketing campaigns, book registered influencers, and analyses the impact of the respective marketing activities, whether through self-service with the influencers marketplace and database, or as a full-service agency. ReachHero recently started offering an SaaS package to its customers. The consolidated subsidiary has over 70,000 registered influencers with more than 750m subscribers and 1.3bn views per month on YouTube. On 13 July 2020, MGI acquired the remaining 33% of ReachHero for an undisclosed amount, and now holds 100% of the influencer agency business and digital SaaS influencer platform. A buyout of the minority interest of Mediakraft Turkey is also close to completion.
Chart 47: ReachHero’s solution for advertisers Chart 48: ReachHero’s solutions for influencers
Source: ReachHero Source: ReachHero
keplercheuvreux.com 23 Media and Games Invest Buy | Target Price: EUR2.30
Platform 161 On 13 July 2020, MGI announced that it had acquired 100% of the shares of Platform 161 Holding BV for an undisclosed purchase price. MGI expects an increase of revenues and EBITDA amounting to EUR10m and EUR1m, respectively (on a 12-month basis). Platform 161 is a leading demand-side platform (DSP) in the field of programmatic advertising and specialises in the customised and automated purchase of advertising space and advertising inventory. With its fully open and programmable algorithm, the automated decision-making logic continually evolves for greater accuracy and effectiveness. The company’s services include real-time advertising with data-supported, automated, and customised buying and selling and bidding for digital advertising spaces. Platform 161 is another strategic acquisition that expands the group's technological expertise, product portfolio, customer base and sales organisation in the digital media sector, and opens up new markets.
Chart 49: Platform 161 programmatic advertising offer
Source: Platform 161
MGI’s strategy: Buy, integrate, build, and improve Media and Games Invest follows an aggressive external growth strategy with increased focus on organic growth since 2018. Its “buy, integrate, build, and improve” M&A strategy in both the media and gaming segments differs from most holding companies in that it does not aim to generate returns with the sale of an asset after it is purchased and restructured. MGI’s approach enables management to leverage its M&A expertise by purchasing distressed assets that harbour significant cost synergies through scale effects and technology optimisation. This strategy not only generates margin upside but also spurs organic growth opportunities in both operating segments. According to management, its post-merger integration efforts normally generate ROI within 24 months, including the purchase price, the burn rate, and investment in new products. The majority of the acquisitions are successful after two years, with a success rate of c. 85-90%, having completed over 30 acquisitions. MGI acquires either loss-making entities or profitable targets at a price below 6x EV/EBITDA, with annual revenues of EUR5-30m. The B2C Gaming segment is relatively fragmented, with a few large players and a large number of small and medium-sized players. Over 3,000 games are introduced to the market every month, with a limited number of platforms where games are distributed. Many smaller companies therefore focus on niche markets, often developing only one successful game, but also often lack scale and operating efficiencies due to the high upfront and fixed costs (developing costs, IT infrastructure). This creates M&A opportunities and paves the way for market consolidators such as MGI, who are able to leverage distressed companies with its existing infrastructure. The highly fragmented gaming market is currently seeing high levels of M&A and is focused on consolidation and scale. Just a few companies in the gaming industry pursue an M&A strategy, with Embracer and Stillfront being the most prominent. However, they do not tend to purchase distressed assets like gamigo does, but rather profitable games that can be operated on a stand-alone basis. Since August 2020,
keplercheuvreux.com 24 Media and Games Invest Buy | Target Price: EUR2.30
Embracer has announced nine acquisitions of gaming assets (Deca Games, 4A Games, New World Interactive, Pow Wow Entertainment, Vermila Studios, Rare Earth Games, Palindrome Interactive, Sola Media, and Vertigo Games). Stillfront also recently acquired Nanobit, while other notable acquisitions include Goodgame Studios, KIXEYE Inc., Storm8, and Candywriter. The B2B media segment is also very fragmented, with a large number of companies emerging on a yearly basis and a few players with large market share. MGI has gained a strong position in programmatic advertising, as it has acquired companies along the entire value chain.
Chart 50: MGI’s “Buy, integrate, build, and improve” strategy
Source: MGI, Kepler Cheuvreux
Buy: MGI purchases distressed, underperforming companies at generally lower prices that have come under cost pressure due to a lack of scale and high overhead costs. The acquired targets should complement MGI’s current portfolio with a good customer or product base, or a games portfolio, and potentially benefit from technological optimisation and scale effects. With standardised M&A and post-merger integration frameworks, MGI has acquired and integrated over 30 companies (20+ in Gaming). There are many buying opportunities in both segments’ markets, and management is currently planning 3-5 acquisitions per year. In line with MGI’s view, in August 2020 Embracer confirmed in its corporate presentation that M&A prospects continue to look favourable, as it is involved in more negotiations than ever with potential targets. Integrate: After companies are acquired, MGI restructures the assets and integrates them into a single cloud to realise cost synergies. The group is able to efficiently unlock potential synergies by leveraging overhead costs for technology costs, personnel, IT, infrastructure as well as for sales and marketing. In the B2C Gaming segment, Trion Worlds’ monthly running costs have been cut by -60% after 12 months. Trion was running on high fixed costs, high personnel costs, and capital-intensive investments. In MGI’s post-merger restructuring efforts, all assets were moved into the cloud within a few week, enabling significant cost savings, turning fixed costs into variable costs, and reducing the risk of physical servers and potential downtime. In the B2B Media segment, MGI is able to cut infrastructure costs by c. 30%, while Verve’s costs have decreased by over -50% in the first few months after acquisition.
keplercheuvreux.com 25 Media and Games Invest Buy | Target Price: EUR2.30
Chart 51: Trion Worlds’ post-merger technology optimisation, Chart 52: Verve post-merger technology optimisation, monthly
monthly running costs (EUR ‘000) running costs (EUR ‘000)
-57%
Source: MGI Source: MGI
Build and Improve: next to its M&A strategy, MGI has increasingly also focused on organic growth in the past two years. In Gaming, organic growth is generated by increasing the number of actively paying players through: 1) game (re) launches; 2) user acquisition; 3) in-game updates with new content/sequels; 4) improving the games with bug fixes and active community management; and 5) internationalisation. With a focus on new licensed games and in-house sequels, gamigo regularly releases substantial content updates to keep the players engaged in and entertained by its top games. On top of the EUR8.5m purchase price, MGI invested over EUR3.4m in Trion Worlds for new content, sequels, advertising, internationalisation and the integration into gamigo. The group also optimised monetisation and community management. As of H1 2020, Trion Worlds generated EUR24m in revenue on an LTM basis with 24% organic growth. In Q2 2020, gamigo (MGI) increased its revenue by 38% YOY (35% QOQ), largely from organic growth, due to the number of new and active players, which increased significantly as a result of the stay-at-home measures. Important improvement measures include scaling the technologies that provide the group with more cost control and technology efficiency. When MGI purchases game assets, the servers and data centres are often physically and geographically located either in the US or Europe. Physical data centres often entail high fixed costs, high personnel costs, and capital-intensive investments. In addition, these gaming companies often have inflexible and expensive contracts, as c. 30-40% of revenue is generally used for server costs. MGI integrates all purchased assets into the cloud and is therefore able to unlock cost synergies.
Synergies between Media and Gaming are both top-line and earnings drivers MGI requires expertise in the field of online marketing and user acquisition for its gaming segment. Several media companies have been acquired, giving the group in-house media and advertising capabilities to leverage its services to external parties, increase user acquisition for its own games, and generating a second stream of substantial revenues and earnings. MGI’s sectors are highly synergetic. The group’s Gaming segment benefits from higher user acquisition rates and in-game item sales, and the Media segment benefits from higher in-game ad revenue. Specifically, the group is able to generate synergies predominantly through two factors.
keplercheuvreux.com 26 Media and Games Invest Buy | Target Price: EUR2.30
Chart 53: What MGI’s segments can offer each other
Source: MGI, Kepler Cheuvreux
Value chain optimisation: Through the acquisition of its media companies, MGI is also able to create synergies and generate higher margins though value chain optimisation. Specifically, it has high user acquisition advantages for its games through its media companies, higher item sales, and the group can sell more ads in its own games, leading to both higher top-line and bottom-line expansion. In addition, MGI enjoys scale advantages with ad-buying and higher prices per ads.
Chart 54: MGI’s synergetic sectors… Chart 55: …leading to higher efficiency, more data and faster growth
Source: MGI, Kepler Cheuvreux Source: MGI, Kepler Cheuvreux
User acquisition plays a major role in MGI’s commercial activities, and through its synergies, it is able to reduce costs significantly. In the group’s Gaming sub-segment Hyper Casual Games, acquiring a user amounts to c. EUR0.15 CPI (costs per install) without any advertising capacities. CPI is a common pricing model used in mobile user acquisition campaigns and is specific for mobile apps only. However, through MGI’s media companies, costs for user acquisition are c. 33% lower, amounting to c. EUR0.10 CPI (equivalent to the margin on the Media side). If MGI sells the ads itself, ad income can double from EUR2 costs per mille (CPM, or costs per thousand) to EUR4 CPM, as illustrated in the example below, where MGI is ultimately able to increase its efficiency by 200%. Hence, Hyper Casual Games also benefit from the Media and Gaming synergies, as revenue from these games are relatively low due to the lack of in-game micro transactions and item shops. The group is able to amortise its user acquisition costs after 90 days with its B2B companies.
keplercheuvreux.com 27 Media and Games Invest Buy | Target Price: EUR2.30
Chart 56: Hyper Casual Games value chain synergies (CPI = costs per install; CPM = costs per mille)
Source: MGI, Kepler Cheuvreux
Data optimisation: Data is the new oil of the digital economy. MGI integrates customer data from all acquisitions into one company-wide database and manages the data in compliance with the EU General Data Protection Regulation (GDPR) and US regulation (CCPA). The group benefits from the increase in data coming from its media companies, with which it is able to optimise its advertising targeting and increase volume and monetisation. More data for MGI increases the bid for ads that reach the targeted group, enriches the basic data with further detailed information, and enables higher efficiency and sound analysis. The group is also able to improve efficiency with the combination of in-house and external data.
Chart 57: Data optimisation synergies
Source: MGI, Kepler Cheuvreux
Overall, MGI Group is able to unlock huge potential synergies through the post-merger integration and restructuring of its companies. The following table shows a summary of the two segments’ various restructuring and post-merger integration efforts, which lead to faster turnarounds and margin upside.
keplercheuvreux.com 28 Media and Games Invest Buy | Target Price: EUR2.30
Table 2: MGI’s post-merger synergy realisation and restructuring Integration synergies Gaming Integration synergies Media Joint customer base enables upselling and increased lifetime cycle Customer acquisition increases ad efficiency Customer acquisition increases ad efficiency Data-centre integration in one company-wide cloud Integration of back-ends into one company-wide back-end Technology integration into one corporate tech stack Centralised customer support and customer management Inter-company supply development through joint operations Inter-company exchange of expertise Cost synergies through less overheads Source: MGI, Kepler Cheuvreux
keplercheuvreux.com 29 Media and Games Invest Buy | Target Price: EUR2.30
High growth potential in both of MGI’s segments
2020 is a landmark year for the gaming industry. It has been shaped by the COVID-19 pandemic, which has led to gaming becoming an even more important pillar of entertainment and social connection. The second half of 2020 will also see a mega event, for which the industry and gamers have been waiting for nearly a decade: both Sony and Microsoft will release the next generation of PlayStation and Xbox consoles, paving the way for a new era of gaming.
Gaming market The gaming market is relatively fragmented and driven by hits with high growth (some making billions of euros in revenues), but also by failures. The global lockdown measures have accelerated the gaming industry in 2020, leading to a surge in growth this year. The industry is overtaking social media, as younger generations are leaving the latter behind for the interactive experiences of gaming, which has become inherently a social experience. The WHO even officially promoted video games as a recommended social activity during the pandemic. Games are becoming fully-fledged and functional social networks, thus large social networks such as Facebook and TikTok are increasingly investing in the growing games market. Mobile gaming is a major growth pillar, and it is continuing to expand its reach around the world as smartphone usage increases in emerging markets. By the end of 2020, it is estimated that more than 92m new users from emerging markets will have entered the mobile gaming ecosystem. Outlook and growth We believe future growth in the gaming market will be twofold. On the one side, gaming will increasingly shift towards “on-the-go” due to increasing global smartphone penetration. Hypercasual mobile games will be a key contributor to the continuing growth, due to the games’ easy accessibility, straightforward and simple gameplay, app-based monetisation and lower or even no waiting time. In this category, Chinese game companies are the market leaders identifying new revenue streams after the nine-month licencing freeze in 2018. Other growth drivers of the hypercasual but also overall gaming market is the subscription-based monetisation model, as its flexibility is offering more value and has the potential to redefine the relationship between developers, publishers, and gamers. Cloud-based gaming services, such as the previously launched Google Stadia, are lowering upfront costs for hardware, which is the main entry barrier to PC and console gaming. In addition, increasing and prioritising user engagement is inevitable for gaming companies irrespective of the device.
Chart 58: Global gaming revenue forecast (USDbn) Chart 59: Global player forecast (billions)
Source: Newzoo Global Games Market Report, 2020 Source: Newzoo Global Games Market Report 2020
keplercheuvreux.com 30 Media and Games Invest Buy | Target Price: EUR2.30
The global games market is expected to generate revenues amounting to USD159bn in 2020, a 9.9% YOY increase, which is also driven by the surge in growth through the COVID-19 lockdown measures, and accounts for the launch of Sony and Microsoft’s next-generation consoles at the end of this year. By the end of 2020, there will be 2.7bn players worldwide, an increase of c. 135m from 2019. Asia-Pacific accounts for 1.4bn gamers, the majority coming from China. From 2018-23, the market is expected to grow at a CAGR of 7.7% crossing the 200bn user mark by the end of 2023.
Chart 60: 2020 global games market per segment Chart 61: 2020 global games market, YOY revenue growth
2020 Total
USD159.3 bn +9.3% YOY
Source: Newzoo Global Games Market Report, April 2020 Source: Newzoo Global Games Market Report, April 2020
All segments but browser PC games are expected to see an increase in 2020 driven predominantly by COVID-19 lockdown measures, with smartphone games seeing the biggest growth YOY (+15.8%). It will continue to be the largest segment, as it has lower entry barriers, has not suffered from the shutdown of PC cafés in some markets, and game development is less complex than console or PC games. Engagement of mobile gaming is expected to increase more than revenues, as it is not a simple task to convert mobile gamers into actual paying users. In 2020, there will be 2.6bn mobile players, of which 38% will be paying users. Console games, whose peak was in 2018, is seeing less growth due to the anticipated launch of the new consoles this year. Browser games are seeing a decline in growth as many gamers from this segment have transitioned to mobile gaming.
Chart 62: 2020 global games market by country Chart 63: 2020 global games market, YOY revenue growth by country
2020 Total USD159.3 bn +9.3% YOY
Source: Newzoo Global Games Market Report, April 2020 Source: Newzoo Global Games Market Report, April 2020
All regions will increase revenues from gaming in 2020, with Asia-Pacific accounting for the largest share (49%). North America is the second largest market, followed by Europe, with 25% and 19%
keplercheuvreux.com 31 Media and Games Invest Buy | Target Price: EUR2.30
market share respectively. Europe is the slowest growing games market, as it is (together with North America) a very mature gaming market, hence the lower growth rates compared to emerging markets. MGI is a platform operator and publisher, enabling the group to market and distribute its games on its own ecosystem, similar to how Tencent pursues distribution on WeChat. This is the only way to bypass the large gatekeepers of mobile gaming, Apple and Google (iOS and Google Play), who take 30% of all app sales and in-app purchases. We see a number of trends that will continue to shape the games market in the coming years, of which some have been identified in previous years and others recently emerged with the COVID- 19 pandemic. Besides the trends illustrated in the chart above, we think the following will play a major role in the future development of the gaming market: live-service games, casual games and monetisation convergence, increasing user engagement, consumers becoming creators, virtual reality, and augmented reality.
Chart 64: Mobile game revenues per app store, 2017-19 Chart 65: Global games market trends in 2020 and beyond
USD68.5b USD62.2b USD56.3b
Source: Kepler Cheuvreux Source: Kepler Cheuvreux
Game publishing market The highly competitive global gaming market is relatively fragmented overall, with a few large players dominating the industry by devices and segments, and numerous smaller participants. In 2019, the top ten public gaming companies accounted for 70% of global market share by revenues. The largest player is Tencent, followed by Sony, Apple, Microsoft, and Google. Sony and Microsoft are able to leverage their strong positions with subscription-based monetisation delivery services (PS Plus, Xbox Live) enabling access to the respective online gaming functions.
Table 3: Top-ten public gaming companies by revenues Rank Company Country 2019 revenues YOY growth % (USDbn) 1 Tencent CN 20,545 10% 2 Sony JP 13,133 -8% 3 Apple US 10,832 14% 4 Microsoft US 9,273 -4% 5 Google US 7,350 13% 6 NetEase CN 6,759 16% 7 Activision Blizzard US 5,841 -15% 8 EA US 5,388 2% 9 Nintendo JP 4,954 13% 10 Bandai Namco Entertainment JP 2,968 2% … Total 124,464 5.3% Source: Newzoo, April 2020
Gamigo’s direct competitors Besides the few billion-dollar companies listed above, there are numerous smaller online games publishing companies that have significant market share. MGI’s peer group therefore includes
keplercheuvreux.com 32 Media and Games Invest Buy | Target Price: EUR2.30
companies that are smaller than the AAA game developers but among the larger companies in terms of revenue, including companies such as Bigpoint, Gameforge, Travian, Stillfront, Embracer, Wooga, Daybreak Game Studios, Innogames, IDC Games, and Wargaming.
Digital advertising market The digital advertising market consists of a very large and growing number of players, channels, and apps, with hundreds of new companies being founded every year. A few large players such as Google and Facebook make up more than half of global digital ad revenue share. The remaining market share is defined as the “open internet”. With MGI’s open-garden approach, the group operates openly with most of the global ad-tech ecosystems. In recent years, the market has been experiencing consolidation, as players are focusing more on scale effects, with many M&A targets still available for MGI. Growth is driven by technological change and optimisation. Currently, the industry is experiencing important economy of scale effects as fixed costs in technology and organisation are spread over larger volumes of ad impressions. MGI must gain scale quickly in the media segment, as larger players are able to utilise their cost advantage, relationships, and capacities to drive down pricing (revenue share) and take share from smaller players through pricing, bundled deals, and a broader offering.
Chart 67: Market share of the ten largest global digital ad sellers in Chart 66: The digital advertising market 2019
Source: MGI, Kepler Cheuvreux Source: eMarketer, 2019
The market generally consists of various segments to deliver ads in various formats: search advertising, social media advertising, banner advertising, video advertising, classifieds, connected TV (CTV) and digital-out-of-home (DOOH).
Chart 68: Global digital ad spending by segment
Source: Kepler Cheuvreux
keplercheuvreux.com 33 Media and Games Invest Buy | Target Price: EUR2.30
Search engine advertising (SEA) includes keyword advertising and sponsored links. It is not as technology-driven as the other segments in digital advertising. However, advancements in targeting and individualised ads will continue to drive growth. Social media advertising consists of ad spending generated by social and business networks, appearing in the form of sponsored posts within the advertisers’ content, or in newsfeeds. The integration of e-commerce and payment solutions within social networks is expected to be a main growth driver, e.g. the Chinese messaging app WeChat with its integrated “Buy buttons”, P2P payments, and better localisation, ultimately increasing user engagement and conversion while enabling advanced targeting. Virtual and augmented reality (VR, AR) may also play a role in the medium-term future. Banner advertising consists of banners, rich media ads, and videos as substitutes for banners on websites and apps. Programmatic advertising plays a larger role as it becomes more advanced and customisable to individual users. Mobile-only location-based advertising as well as more complex advertising is expected to accelerate growth, given that it already generates higher revenue per user on mobile devices. However, we do see downside risks regarding ad blockers, which can currently only be bypassed through higher quality advertisements.
Chart 69: COVID-19 adjusted banner advertising spending in US by Chart 70: Global spending on digital banner advertising in 2020E device (lhs, USDm) and average spending per user (rhs, USD)
Source: Statista Digital Advertising report 2020, Kepler Cheuvreux Source: Statista Digital Advertising report 2020, Kepler Cheuvreux
Video advertising encompasses advertisement formats within web or app-based video players, pre-roll, mid-roll, and post-roll video ads, as well as text and image-based overlays. Major trends such as increasing bandwidth (5G) and processing power are expected to accelerate growth in the coming years, as well as formats such as live broadcasting, 360° panorama, and VR videos enhancing the advertising environment’s attractiveness. Advancements in individualised targeting will also have positive effects on revenue per user. Online classified is defined as the display of classified ads or listings of specific verticals, which are paid in fees, such as the real estate or job search markets. This sector is still the smallest of the online advertising segments with varying differences depending on the region. The European market is more saturated than the US market, and high e-commerce growth in China is driving the classifieds market. Connected TV (CTV) is ad-supported video streaming and has become increasingly important due to the sharp rise of steaming viewership. Digital-out-of-home is advertising shown in public areas like billboards, trains, and buses on digital displays. In 2019, the total market value of the global online digital advertising market comprising all sub- segments amounted to c. USD336bn, and is expected to increase by a CAGR of 6.5% until 2024 to c. USD461bn. Data from eMarketer from June 2020 indicates even higher growth levels at a CAGR of 10.1% to USD526bn in 2024. The largest online digital advertising sub-segment in 2019 was search engine advertising, with revenues amounting to USD145bn worldwide and accounting for c. 43% of the market in 2019, followed by social media advertising (28% of market share), banner advertising (16%), video advertising (8%), and classifieds (6%).
keplercheuvreux.com 34 Media and Games Invest Buy | Target Price: EUR2.30
Chart 71: COVID-19 adjusted global revenue forecast of digital ads Chart 72: Higher growth indicated by other data providers (USDbn) (USDbn)
Source: Statista Digital Market Outlook, eMarketer Source: Zenith, 2019
Regarding spending on digital advertising by industry, services & other, retail, financial services, automotive, FMCG, and pharma & healthcare were the leading sectors in 2019 for digital advertising. In Germany, the automotive industry had a larger role than in other countries, while in the US retail was the largest spender.
Chart 73: Market share of digital advertising spending by industry and Chart 74: COVID-19 adjusted estimated development of digital
country in 2019 advertising spending by country
Source: Statista Digital Market Outlook 2020, Kepler Cheuvreux Source: Statista Digital Market Outlook 2020, Kepler Cheuvreux
Regarding the various regions, the US was the largest market in 2019, accounting for more than one-third of the global digital advertising spending. Europe and China accounted for 19.9% and 21.3% of the global market share, respectively. The digital advertising market is expected to grow at higher rates than the gaming market, and China is expected to experience the highest growth levels at a CAGR of 7.5% until 2024. There is also an expected sustainable trend towards more mobile, as the future development of digital advertising will continue to shift from desktop to mobile, with a potential increase of 10pps in market share from 2019 to 2024. Revenues from search ads in the US on mobile devices is expected to increase at a CAGR of 10.4% in 2019-24, while ad search on desktop devices is expected to grow at a CAGR of 4.6%.
keplercheuvreux.com 35 Media and Games Invest Buy | Target Price: EUR2.30
Chart 75: Search ad revenue in the US 2017-23, by device (USDm) Chart 76: Global digital ad spending by device
Source: Statista Digital Market Outlook, November 2019, Kepler Cheuvreux Source: Digital Market Outlook 2020, Kepler Cheuvreux
In Germany, almost every second advertising euro in 2019 was spent online via programmatic advertising. In the US, which is also a major market for MGI, over 80% of all digital ads are expected to be purchased via automated channels this year, while 80-90% of all mobile displays are expected to be transacted programmatically. Overall, revenue from programmatic advertising is expected to increase to USD147bn in 2021, of which the US will be a major growth driver. Within programmatic digital display ad-spending trends, programmatic direct is expected to grow at higher growth rates than real-time bidding.
Chart 77: Global programmatic advertising expected to grow… Chart 78: …driven by US market spending
Source: Zenith, 2019 Source: eMarketer, 2019
COVID-19 impact While the COVID-19 pandemic led to a surge in growth in the global gaming market, the lockdown and restrictions implemented by governments worldwide led to a decline in advertising for both traditional and online channels. Global growth estimates for digital advertising for 2020 are expected to be negatively impacted by c. -5%, with banner advertising seeing the strongest impact. The number of M&A opportunities is expected to increase as a result of the coronavirus, as more deals are coming in.
keplercheuvreux.com 36 Media and Games Invest Buy | Target Price: EUR2.30
Chart 79: COVID-19 adjusted global digital ads sales forecast 2020 Chart 80: Pre-COVID-19 vs. post-COVID-19 2020 sales forecast change
(EURm) by segment, in %
Source: Statista Digital Market Outlook 2020 Source: Statista Digital Market Outlook 2020
The global lockdown measures have led to strong growth for the group’s gaming activities. In the example of gamigo’s Fiesta game, the stay-at-home measures led to an increase of 127% YOY in revenues, 27% YOY in player activity, and 141% YOY in new players in the month of May 2020. MGI was able to maintain high revenue growth and player engagement after the lockdown measures in July 2020 as revenues increased by 105% YOY, with 26% more player activity, and 50% more new players. Management is confident that the boost in newly acquired users will also translate into a sustainable increase in the number of long-term active players. In the long term, the surge in usage might trigger an increase in future users who previously were not playing games. Games are “sticky” products, so the search for entertainment during isolation might trigger long-term usage of gaming products.
Chart 81: Fiesta revenues during and after COVID-19 lockdown Chart 82: Fiesta player activity during and after COVID-19 lockdown (EURm)
Source: MGI Source: MGI
Q2 2020 results MGI increased Q2 (H1) 2020 sales at the group level by 97% (98%) YOY to EUR30m (EUR56.6m).The high sales growth is mainly driven by organic growth in the gaming segment due to a significant increase in new players (up to 75%), and active players (31%). This player growth is mainly driven by the stay-at-home restrictions implemented in various countries in Q2 as well as the release of two extensive game expansions. MGI’s EBITDA margin decreased to 21% in Q2 2020 due to a mix effect of the revenue increase in the lower-margin B2B segment as well as higher marketing costs aimed at accelerating organic growth in the gaming segment. Gamigo increased revenues by 36%
keplercheuvreux.com 37 Media and Games Invest Buy | Target Price: EUR2.30
YOY in Q2 2020, and the EBITDA margin remained flat after the acquisition of Verve in the previous quarter.
Chart 83: MGI group results Q2 YOY Chart 84: Gamigo Q2 YOY
Source: MGI Source: MGI
The B2C Gaming segment increased revenues by 44% YOY in H1 2020. In Q2, the B2C EBITDA margin decreased to 28% due to higher marketing spending on new player acquisitions for MGI’s games. Management expects a strong long-term impact from the current organic growth of new users turning into long-term players. The B2B Media segment increased revenues from EUR6m to EUR24m in H1 YOY fuelled by the acquisition of Verve, ReachHero, Applift, PubNative, and TVSmiles. In Q2, revenues decreased by -11% QOQ due to less marketing spending by advertisers during the COVID-19 pandemic. However, the EBITDA margin increased in Q2 2020 despite H1 2020 being at lower levels than H1 2019. Q3 is seeing strong organic growth with margin expansion.
Chart 85: B2C and B2B segments H1 YOY Chart 86: B2C and B2B Media H1 2020
Source: MGI Source: MGI
Capital increase and dual listing On 30 September 2020, MGI successfully carried out a private placement of shares to Swedish and international institutional investors, raising c. SEK250m (EUR28.5m). A price of EUR1.14 per share was determined (-10% discount to two-day VWAP). The share capital (and number of outstanding shares) will increase by EUR25m to EUR117.1m, leading to a 21% share dilution. The gross proceeds will be used to further finance new acquisitions of franchises, game publishers, and development studios or other assets that complement the operations, and to invest in the organic development of the company. MGI has agreed not to issue an M&A-related share increase for the lock-up period of 180 days. The private placement was heavily oversubscribed and generated strong interest from Swedish and international investors.
keplercheuvreux.com 38 Media and Games Invest Buy | Target Price: EUR2.30
Chart 87: Shareholder structure as of 6 October 2020 Chart 88: Free float should increase to 47%
Source: MGI Source: MGI
After being listed in the Scale Segment of the Frankfurt Stock Exchange since July 2020, MGI’s application for a secondary listing of its shares on the Nasdaq First North Premier Growth Market in Stockholm was approved, and the shares commenced trading under the ticker symbol “M8G” on 6 October 2020.The Nordic region is a competitive and more mature video-gaming market home to peers such as Stillfront and Embracer. The sector is showing stable growth and Sweden is continuing to gain market share globally. Gaming companies are becoming increasingly popular for Nordic investors. Global games such Minecraft, Angry Birds, and Battlefield were developed by Nordic companies EA Dice, Rovio, and Mojang.
Chart 89: Nordic gaming peers
Source: MGI, Kepler Cheuvreux
keplercheuvreux.com 39 Media and Games Invest Buy | Target Price: EUR2.30
Deconstructing the forecasts
With strong underlying market growth in online gaming and digital advertising in combination with potential commercial synergies, we expect Media and Games Invest to deliver solid organic growth over the next few years. Growth is likely to be further fuelled by acquisitions, which provides upside potential to our estimates as we only include announced acquisitions in our numbers. The company made several key investments in 9M 2020 including: 1) Verve; 2) Platform 161; 3) Freenet digital; 4) the remaining minority interest in gamigo; and 5) the remaining minority interest in ReachHero. The fragmented gaming and digital advertising markets in combination with the group’s full acquisition pipeline should allow MGI to continue its current growth trajectory. We also expect further game content updates for MGI’S top games in H2 2020 and beyond.
Financial targets MGI is now guiding for FY 2020 sales of EUR115-125m and EBITDA of EUR20-23m excluding the recent freenet digital GmbH acquisition, which is expected to generate revenues of c. EUR13-15m and EBITDA of EUR2-3m on a 12-month basis. In the medium term, the group generally aims to continue its YOY double-digit revenue growth through organic growth and acquisitions.
Table 4: MGI’s medium-term financial targets Revenue CAGR EBITDA margin EBIT margin Net debt/EBITDA Medium-term targets 25-30% 25-30% 15-20% 2-3x Current (H1 2020) 33%* 21% 9% *= Revenue CAGR 2016-20E; Source: Kepler Cheuvreux
Group P&L MGI acquires both loss-making entities and profitable targets. Hence, it is more difficult to predict what revenue can actually be retained, whereas the restructuring costs can be estimated more accurately by the company. We estimate overall top-line growth of 44% in 2020E, with much of the growth owing to the acquisitions of Verve, Platform 161, and freenet digital. Further fuelled by the global pandemic, organic growth is expected to amount 12% and 11% in 2021E and 2022E, respectively. We see more upside potential given the group’s increasing user-acquisition capacities, continuous investments in existing games, new game launches, and synergies from the media segment’s value chain optimisation. In our conservative approach, we do not include MGI’s planned 2-5 acquisitions per year in our forecasts, which should fuel overall growth in the coming years and are expected to be partially financed by raising additional equity and debt. Regarding earnings, we expect the integration of the media companies to gradually drive the group EBITDA margin to above 20% in the medium term (terminal EBITDA margin: 23.5%), while 2020-23E EBITDA margins in the gaming segment should remain at 25-28% due to increased investment and marketing costs for user acquisition and in-game content.
Table 5: KECH KPI and growth estimates for MGI (EURm) 2018 2019 2020E 2021E 2022E CAGR 2020-22E Revenue 32.6 83.9 120.5 135.0 149.8 11% Organic growth 5% 10% 12% 11% Total growth 8% 157% 44% >11% >12% EBITDA 8.6 15.5 22.7 26.8 31.6 18% EBITDA margin 26.5% 18.5% 18.8% 19.9% 21.1% EBIT 2.3 5.0 8.3 12.1 16.4 41% EBIT margin 7.1% 6.0% 6.9% 9.0% 11.0% Source: Kepler Cheuvreux
In the medium term, MGI’s synergies between the two segments should generate organic growth opportunities. The Gaming segment can benefit from the Media segment’s increased marketing reach and acquire more active users that generate future in-game revenues and subscription
keplercheuvreux.com 40 Media and Games Invest Buy | Target Price: EUR2.30
revenues. The Media segment, on the other hand, can benefit from internal quality control and guaranteed media buying.
Segment overview In the B2B Media segment, we expect revenues between EUR50-52m (27-32% YOY) for FY 2020 fuelled by an organic top-line increase in H2, as Q3 is operating at higher revenue levels than it was before COVID-19. In the medium term, organic growth should be fuelled by MGI’s critical mass in the field of mobile advertising through its acquisitions of Verve, Applift, and PubNative, enabling a higher reach in the marketing of mobile content. Consolidation effects (the global distribution of the group’s unified product and service offering under Verve Group) and segment synergies (more efficient user acquisition through media purchasing at scale) should generate organic growth opportunities. On the bottom line, we expect stronger acquisition effects leading to dynamic margin expansion starting in 2021E in light of the group’s integration and cost-cutting measures. The EBITDA margin in Q2 2020 was 9% as the segment is still undergoing integration. After the full integration, we expect long-term EBITDA margins of 15-20%. In the B2C Gaming segment, we expect revenues between EUR69-71m (55-60% YOY) for FY 2020. Growth in 2020 is expected to be fuelled by the freenet digital acquisition, as well as by the increase in player activity in H1 and beyond. The segment should continue to benefit from stay- at-home policies in H2 2020 and Q1 2021. Q1 and Q4 are traditionally the stronger quarters. Given continuous in-game downloadable content and game relaunches, which increase organic growth, we expect 10-15% organic growth in the coming years. In the medium term, the group should benefit from its position in the Media segment and user acquisition capacity, especially in the context of upcoming game relaunches and updates. Regarding earnings, we expect the higher gaming margins to come under slight pressure and remain at 25-28% in the medium term given management’s increasing focus on organic growth through in-game updates in order to increase player retention and revenue per user, while user acquisition will require higher marketing costs as well. Marketing costs in the B2C gaming portfolio amounted to EUR2m in 2019.
Table 6: Summary of estimates by segment (EURm) 2019 2020E 2021E 2022E B2C Gaming Sales 43 70 79 87 EBITDA margin % 29.3% 26.0% 26.6% 27.3% B2B Media Sales 41 51 56 63 EBITDA margin % 7.2% 9.0% 10.5% 12.4% Group Sales 84 121 135 150 Group EBITDA margin 18.5% 18.8% 19.9% 21.1% Source: Kepler Cheuvreux
Cost structure Purchased services/cost of materials includes IT infrastructure and technology costs, some Gross margin to marketing costs, as well as royalty costs to developers for licensing agreements (25-30% of game benefit most from revenues as royalty) and online payment processing costs. We believe the group’s gross margin efficiency gains should benefit the most from the consolidation effects, cost synergies, and efficiency gains, as technology costs from acquired companies can be optimised significantly (by up to 50%). Hence, gross margin should progressively expand in the coming years with the full integration of this year’s acquisitions.
Table 7: Gross profit estimates for MGI 2019 2020E 2021E 2022E Revenue 83.9 120.5 135.0 149.8 Activated items 10.2 12.0 12.0 12.0 CoGS 45.8 61.5 66.1 70.4 Gross profit 48.3 71.0 80.8 91.4 Gross profit margin % 57.5% 59.0% 59.9% 61.0% Source: MGI, Kepler Cheuvreux
keplercheuvreux.com 41 Media and Games Invest Buy | Target Price: EUR2.30
Personnel expenses are expected to increase overall owing to the acquisitions, although consolidation effects should result from these. Additional sales efforts may be required for the unified and global distribution of the group’s various services offered in the Media segment. Personnel expenses are therefore expected to increase to c. EUR40m in 2020. Going forward, slight cost synergies should ease the costs, but since we do not include future acquisitions in our forecasts, we expect personnel expenses to remain relatively stable (32-33% of sales) in the medium term. Other operating expenses include IT services, rental, audit, and accounting costs, as well as M&A- related legal and consulting costs, and typically make up 10-15% of sales, depending on the group’s M&A activity. Given the absence of future acquisitions in our forecasts and no corresponding M&A expenses, we remain conservative and assume c. 10-11% of sales for 2020- 22E. Other operating income often includes income from acquisitions, as the group acquires its distressed assets at typically low prices, which then triggers a “lucky buy” profit. D&A and own work capitalised should continue its upward trend. We assume MGI will continue to capitalise costs for its own platform to drive organic growth with new game content and in- game purchases. Accordingly, own work capitalised should amount to c. EUR10-15m in 2020-22E and be expensed through D&A in the future. PPA should amount to c. EUR4m in 2020E. Financial result and tax: The bottom line should increase in the coming years when MGI services debt from its bonds and term loans. Although debt has increased after a term loan was drawn in Q1 2020, given the continuation of its solid business operations, we expect the company to refinance itself at lower interest rates than the current c. 7%. The weighted average effective interest rates for the group’s bonds, loans from banks, and other loans, varied between 2.5-10% in 2019. MGI’s foreign net income is subject to various tax rates from 12.3-35%. In Malta, no separate corporate income tax system exists and all companies are subject to a nominal income tax rate of 35%. The group is also represented in Germany and Switzerland, where companies are subject to corporate tax of 32.3% and 12.3%, respectively. Due to the group’s global operations, we assume a corporate tax rate of 30%, although the individual subsidiaries pay income taxes in their respective country of operation.
Balance sheet and cash flow On the asset side, MGI’s balance sheet predominantly consists of intangible assets due to the nature of its business in both the Media and Gaming segment, including intellectual property of games, licensing agreements, websites, and capitalised software and technology. Hence, as of H1 2020, intangible assets including goodwill amounted to EUR254.5m (78% of the balance sheet). After the buyout of minorities and the transfer of ownership interest in gamigo AG, 47% of the balance sheet is financed with equity. Accumulated goodwill amounts to c. 46% of total assets and increased in the first six months of 2020 by c. EUR4.7m to EUR152m after the acquisition of Verve. Given a continuation of management’s successful M&A track record and gamigo’s positive operational development, we see limited risk of potential impairment losses.
Chart 90: Expected development of balance sheet I Chart 91: Expected development of balance sheet II
Source: MGI, Kepler Cheuvreux Source: MGI, Kepler Cheuvreux
keplercheuvreux.com 42 Media and Games Invest Buy | Target Price: EUR2.30
On the liabilities side, MGI is financed through a mix of bonds and loans. In 2017, a credit loan from UniCredit was issued with a total volume of EUR17.5m. In 2018, gamigo issued a senior secured bond loan of EUR32m, within a total framework of EUR50m, which matures in October 2022 (ISIN SE0011614445, floating interest rate of EURIBOR 3 months +7.75% a year). In 2019, two tap issues over par of the latter bond amounting to EUR18m were issued. MGI issued an additional bond with a total framework of EUR15m that matures in October 2024 (ISIN DE000A2R4KF3, interest rate 7%). In H1 2020, the latter was increased by EUR8.3m to EUR23.9m. The bond has a total volume of EUR25m. Free funds are predominantly being used for M&A. In 2019, two debt financing deals were closed with a volume of EUR13m, including a term loan with UniCredit that was drawn in H1 2020. The current outstanding volume is EUR7.5m. MGI (via PubNative) also has a working capital credit line of up to EUR3m. Regarding the equity position, MGI acquired almost 99% of gamigo in 2020, leading to an increase in equity capital and a subsequent decrease in non-controlling interest as of H1 2020. With the private placement and capital increases in 2019-20, the share capital increased further to EUR117.1m as of Q3 2020. As of the group’s H1 2020 financial statements, the acquisition of the minority interest in gamigo in March 2020 led to a transfer of ownership interest in gamigo AG, as well as a change in scope of consolidation of capital reserves, which we account for in our 2020E share capital estimate.
Chart 92: Intangibles (EURm, lhs) and goodwill/equity ratios (rhs) Chart 93: Historical share capital development
Source: MGI, Kepler Cheuvreux Source: MGI, Kepler Cheuvreux
Working capital and capital expenditure Due to the nature of the business, the group does not carry any capital-intensive inventory on its balance sheet. MGI is well positioned in regards to customers’ payment conditions. As of FY 2019, trade payables (EUR20.3m) were slightly above trade receivables (EUR17m), leading to negative trade working capital. We believe the gap should decrease in the coming years with trade receivables increasing slightly more on an absolute basis, leading a zero trade working capital in 2022E. We therefore expect MGI to run at a normalised WC/sales ratio below 1% throughout our forecast period. Our capex estimates include investments in tangible and intangibles assets (e.g. current games and licences/IPs, publishing rights). However, we do not account for future acquisitions. Maintenance capex should amount to c. EUR4m in 2020E and stay relatively stable.
keplercheuvreux.com 43 Media and Games Invest Buy | Target Price: EUR2.30
Chart 94: Trade working capital approaching zero (EURm) Chart 95: Expected capital investment development (EURm)
Source: Kepler Cheuvreux Source: Kepler Cheuvreux
Deleveraging in an organic growth scenario As we do not include any future M&A in our estimates, we assume leverage will decrease going forward, driven by the group’s strong FCF before financing, which should be positive by 2021E. Management has communicated that it will continue to pursue its aggressive M&A strategy. At c. 2x leverage in 2020E, there is further room for expansion.
Chart 96: Further deleverage expected… Chart 97: …Through positive FCF generation by 2021E
Source: Kepler Cheuvreux Source: Kepler Cheuvreux
keplercheuvreux.com 44 Media and Games Invest Buy | Target Price: EUR2.30
Valuation, target price, and risks
We initiate coverage on Media and Games Invest with a Buy rating and obtain a EUR2.3 TP using a DCF valuation approach.
DCF valuation We have used a WACC of 9.75% in our DCF model, which is based on a cost of equity of 10.4% (a risk-free rate of 0.5% and risk premium of 9%). The beta applied is 1.1x. Since we do not include future acquisitions in our estimates, we assume that the company’s long-term debt ratio will be at or below 10%, as MGI should be able to service its debt, without further acquisitions, by 2022E. Our pre-tax cost of debt assumption of 6% reflects the coupon payments of its two bonds, currently at 7-7.75%. Our DCF model is built on the assumption that MGI will generate medium- term double-digit organic growth followed by a gradual decline to 4.5% in the terminal year with 3% perpetual growth. The EBITDA margin should gradually increase to 20-25%, as targeted by MGI (DCF terminal EBITDA margin: 23.5%). Based on these assumptions, our DCF model yields a fair value of EUR2.3 per share. The table below illustrates our DCF summary and key assumptions, as well as sensitivities regarding WACC and terminal growth.
Table 8: DCF summary 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E TVE Sales 83.9 120.5 135.0 149.8 167.8 185.8 203.8 221.4 238.6 255.3 271.2 286.4 300.8 314.4 Growth 157.2% 43.6% 12.0% 11.0% 12.0% 10.8% 9.7% 8.7% 7.8% 7.0% 6.3% 5.6% 5.0% 4.5% EBITDA 15.5 22.7 26.8 31.5 36.8 41.1 45.6 50.2 54.9 59.8 64.8 69.9 75.1 73.8 EBITDA margin 18.5% 18.8% 19.9% 21.1% 21.9% 22.1% 22.4% 22.7% 23.0% 23.4% 23.9% 24.4% 25.0% 23.5% EBIT 5.0 8.3 12.1 16.4 20.6 24.0 27.7 31.6 35.8 40.3 45.0 49.9 55.1 53.4 EBIT margin 6.0% 6.9% 9.0% 11.0% 12.3% 12.9% 13.6% 14.3% 15.0% 15.8% 16.6% 17.4% 18.3% 17.0% Normative tax rate 265% 33% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% NOPAT -28.8 1.8 5.0 7.9 14.4 16.8 19.4 22.1 25.1 28.2 31.5 34.9 38.6 37.4 D&A 10.5 14.4 14.7 15.1 16.2 17.1 17.9 18.6 19.1 19.5 19.8 20.0 20.0 20.4 % of sales 12.6% 12.0% 10.9% 10.1% 9.6% 9.2% 8.8% 8.4% 8.0% 7.6% 7.3% 7.0% 6.7% 6.5% Change in WC 15.3 0.9 0.5 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.2 -0.2 Capex -12.6 -27.0 -15.0 -16.0 -18.0 -18.7 -19.2 -19.6 -19.9 -20.1 -20.2 -20.1 -20.0 -20.4 % of sales -10.2% -18.9% -7.9% -7.7% -8.1% -7.7% -7.2% -6.8% -6.5% -6.1% -5.8% -5.5% -5.2% -5.1% Lease payments -1.9 -1.9 -1.9 -1.9 -1.9 -1.9 -1.9 -1.9 -1.9 -2.0 -2.0 -2.0 -2.0 0.0 Free cash flow -17.4 -11.7 3.3 4.8 10.4 13.0 15.9 18.9 22.0 25.4 28.9 32.5 36.3 37.4 Annualisation factor 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 Discounted FCF -21.0 -12.9 3.3 4.4 8.6 9.9 10.9 11.8 12.6 13.2 13.7 14.1 14.3 199.0
Sum of PV forecast 113.6 2016-19 2020-22E 2023-31E Terminal PV of Terminal value 199.0 Sales growth 29% 11% 7.6% 3.0% EV 312.7 EBITDA margin 18.9% 19.9% 23.2% 23.5% (-) Net debt 41.8 (-) Minorities 3.0 Equity Value 267.9 # of shares 117.1 Fair value/share (EUR) 2.3 Upside/downside 73% Source: Kepler Cheuvreux
We derive our TP by dividing MGI’s fair value by 117.1m shares, consisting of:
70.02m shares (as of H1 2020).
18.2m newly issued shares for the residual stake in gamigo.
3.9m new shares from the Applift deal.
25m shares from the private placement.
keplercheuvreux.com 45 Media and Games Invest Buy | Target Price: EUR2.30
Table 9: Perpetuity approach Unlevered FCF in last forecast period (t) 36.3 FCF t+1 37.4 Perpetuity growth (g) 3.0% Terminal value 553,9 % of Terminal value 177% PV of TV 199.0 PV of stage 1 cash flows 113.6 Enterprise value 312.7 Implied TV exit EBITDA multiple 7.50x Source: Kepler Cheuvreux
Table 10: Sensitivity to our target price Terminal growth 2.25% 2.50% 2.75% 3.00% 3.25% 3.50% 3.75% 8.25% 2.9 3.0 3.1 3.2 3.4 3.5 3.7 8.75% 2.6 2.7 2.8 2.9 3.0 3.1 3.2
9.25% 2.3 2.4 2.5 2.5 2.6 2.7 2.8 9.75% 2.1 2.2 2.2 2.3 2.4 2.4 2.5
WACC 10.25% 1.9 2.0 2.0 2.1 2.1 2.2 2.3 10.75% 1.7 1.8 1.8 1.9 1.9 2.0 2.0 11.25% 1.6 1.6 1.7 1.7 1.7 1.8 1.8 Source: Kepler Cheuvreux
Upside potential from future acquisitions As we expect Media and Games Invest to continue to execute its M&A strategy, we also analyse the resulting upside potential; however, we do not include it in our TP. MGI targets acquisitions with an EV/sales ratio of 1.5x and EV/EBITDA below 6x for profitable companies. Leverage is expected to drop to c. 2x by the end of 2020E, and the group’s medium-term target of 2-3x net debt/EBITDA leaves some room for additional debt and equity financing. If the company increases its 2020E (and 2021E) net debt/EBITDA to 3x, we think MGI potentially would have the capacity to acquire EUR24m (2021E: EUR42m) in assets with additional debt that could add 14-16% (22-26%) to EBITDA and sales, respectively, depending on the multiple range of 5.5-6.5x EV/EBITDA. In the tables below we show the upside potential from additional acquisitions assuming an EBITDA margin of c. 20% for profitable target acquisitions in the gaming sector.
Table 11: Upside potential to EBITDA 2020E with current acquisition capacity EV/EBITDA EBIDTA target margin = 20% 5.5x 6x 6.5x 2.0x 1% 1% 1% Net debt/EBITDA 2.5x 9% 8% 7% 3.0x 16% 15% 14% Source: Kepler Cheuvreux
Table 12: Upside potential to EBITDA 2021E with current acquisition capacity EV/EBITDA EBIDTA target margin = 20% 5.5x 6x 6.5x 2.0x 8% 7% 7% Net debt/EBITDA 2.5x 17% 16% 15% 3.0x 26% 24% 22% Source: Kepler Cheuvreux
Upside potential from a multiple-based valuation approach We derive our TP using a DCF valuation approach. A historical multiple-based approach is not meaningful for MGI, as the core business has only been listed since 2018 and therefore consensus data is only available from late 2019 and onwards. A peer multiple-based valuation is also less meaningful, as MGI’s business strategy consisting of a mix between gaming (58% of group sales) and media (42% of group sales) is relatively unique. Most peers in the gaming segment have been trading on significantly higher multiples since the trough of the pandemic at the beginning of
keplercheuvreux.com 46 Media and Games Invest Buy | Target Price: EUR2.30
March 2020. MGI’s share price increased by 32% while its peers’ increased by 126% over the same period. We view Nordic and eastern European gaming companies, mobile-focused companies, and small and medium-sized gaming developers and publishers as the best comparables with a historical valuation level of 10-14x EV/EBITDA. MGI’s peers in the gaming sector benefited from the COVID-19-driven re-rating to +2SD currently. A multiple-based approach using the average of MGI’s gaming peers’ +12M EV/EBITDA of 13.1x would result in a fair value of EUR2.5, slightly above our TP, where the stock would be trading at 12.1x +12M EV/EBITDA. In our view, the closest peer to MGI is Stillfront due to its focus on F2P games and similar acquisition strategy. Stillfront is currently trading at a significant premium to MGI at a +12m 16.1 EV/EBITDA (+12m 18.8x EV/EBIT). MGI’s EV/EBIT is adjusted for PPA effects, amounting to c. EUR4m in 2019, while it is unclear if peers’ consensus EV/EBIT is also adjusted. The company plans to decrease PPA in the future, which would impact EV/EBIT multiples and lead to a re-rating.
Table 13: Peer group comparison (highlighted companies included in Kepler Cheuvreux coverage) Market Sales EBITDA EV/EBITDA EV/EBIT P/E EBIT margin % cap CAGR % CAGR % (EURm) 2020-22E 2020-22E 2021E 2022E +12M 2021E 2022E +12M 2021E 2022E +12M 2020E 2021E 2022E Embracer 6,205 25% 11% 16.7 14.2 15.3 109.7 54.0 71.5 39.2 32.2 35.3 4% 7% 12% 11 Bit Studios SA 244 63% 93% 38.5 6.6 33.9 126.6 n/a 89.4 46.5 9.3 40.7 29% 12% n/a G5 Entertainment 330 11% 11% 10.6 9.4 10.8 20.8 17.9 21.0 22.7 18.7 23.3 11% 10% 11% Paradox Interactive 3,044 12% 15% 24.3 22.7 25.4 37.0 35.5 38.9 48.2 44.6 50.3 37% 40% 39% Remedy Entertainment 398 17% 26% 24.2 18.9 25.4 n/a 22.5 n/a 44.0 29.3 43.9 28% n/a 31% Rovio Entertainment 485 3% -12% 8.1 8.6 7.7 10.1 10.6 9.5 15.4 16.3 14.8 17% 13% 12% Glu Mobile 1,137 10% 30% 13.9 10.9 15.3 23.7 15.7 27.8 18.3 12.8 19.2 3% 8% 11% Stillfront Group AB 3,679 22% 26% 14.9 12.4 16.1 17.7* 14.8* 18.9* 24.9 21.7 26.6 30% 32% 32% Ten Square Games 895 20% 24% 14.5 12.5 15.4 14.7 12.6 15.6 17.1 14.8 17.9 34% 36% 36% Playway SA 797 30% 36% 17.6 15.6 19.5 21.4 17.8 22.8 25.4 22.5 27.3 66% 60% 63% MAG Interactive 57 9% 69% 11.0 8.9 10.8 60.6 26.2 53.6 152.0 44.7 122.7 -9% 3% 7% Enad Global 7 350 25% 69% 20.0 17.1 23.2 47.9 36.4 67.2 53.9 34.2 94.3 -2% 8% 10% Sumo Group PLC 412 26% 31% 16.9 14.5 18.3 22.3 18.5 24.1 27.6 23.5 29.7 18% 19% 20%
Average peer group 21% 34% 17.8 13.2 18.2 42.7 23.6 38.4 41.2 25.0 42.0 20% 21% 24% MGI 156 12% 18% 7.5 6.3 7.1 12.5* 10.6* 13.1* 39.4 22.7 60.5 7% 9% 11% *op. EBIT adjusted for PPA; Source: Reuters, Bloomberg, Kepler Cheuvreux
Chart 98: Gaming peers +12M EV/EBITDA two-year historical average Chart 99: Historical +12M EBIT multiple of peers at 18x
Data as of 06 Oct 2020; Source: Kepler Cheuvreux Source: Bloomberg, Kepler Cheuvreux
keplercheuvreux.com 47 Media and Games Invest Buy | Target Price: EUR2.30
Chart 100: MGI’s share price since reverse listing in May 2018 Chart 101: MGI’s share price vs. peers since the COVID-19 outbreak
Source: Reuters Source: Reuters
Risks We appreciate MGI’s business strategy, which consists of the acquisition of distressed assets coupled with increasing operating leverage through integration, cost-cutting and synergies. However, we would like to flag some potential risks regarding the investment case.
Business strategy: MGI’s investment case depends on the continued success of the company’s M&A strategy, which hinges on the availability of targets in the market as well as on management’s ability to acquire suitable targets.
Dependence on management: MGI’s business strategy and execution are dependent on CEO Remco Westermann. However, as he is a majority shareholder we see the risk of his departure as low.
Dependence on third-party development: MGI’s business strategy includes the acquisition of game licences and publishing rights developed by third parties. New games therefore depend on the availability of suitable licences in the market.
Scaling up quickly enough: MGI’s technology must scale its platform to manage a substantial increase in the number of advertisers, device users, advertising transactions, and processed data. The group’s success and investment case depends on the success of the scaling in the media sector and subsequent earnings expansion in the medium- to long term.
Competition in both segments is characterised by constant change and intense competition (highly fragmented market including large players and a large number of small and medium- sized publishers and developers).
Dependency on certain games in gaming segment: The success of the group depends on the success of the top ten games in its portfolio, of which currently four (44% of MMO revenues in H1 2020) depend on external developers.
Share dilution: Investors should expect further capital increases raised through debt and equity in the medium-term, as the group’s M&A and growth strategy needs further financing until critical mass is reached.
Low visibility on performance of individual subsidiaries: MGI does not disclose results of its acquired subsidiaries.
Legislative action or regulatory crackdown regarding data-driven performance marketing or the monetisation of F2P games.
keplercheuvreux.com 48 Media and Games Invest Buy | Target Price: EUR2.30
Appendices
Management and board of directors Board of directors Remco Westermann, CEO and chairman of the board, has a strong track and expertise in the gaming industry. He has been running gamigo since 2012 and is the main shareholder of MGI, which leads to a close alignment of investors’ interest and management, especially regarding the group’s M&A strategy.
Chart 102: MGI’s Board of directors
Source: MGI
Management MGI’s top management consists of a well-balanced mix between innovative and experienced members that are able to leverage their expertise from well-known companies in gaming and various other industries.
Chart 103: MGI’s top management
Source: MGI
keplercheuvreux.com 49 Media and Games Invest Buy | Target Price: EUR2.30
Geographical setup of MGI The group serves gamers and customers with more than 20 local offices worldwide on four different continents.
Chart 104: Geographical setup of MGI and its subsidiaries, gamers, and customers
Source: MGI, Kepler Cheuvreux
keplercheuvreux.com 50 Media and Games Invest Buy | Target Price: EUR2.30
Valuation table Market data as of: 08 October 2020
FY to 31/12 (EUR) 12/13 12/14 12/15 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E
Per share data (EUR) EPS adjusted 0.76 -4.73 -2.16 0.01 0.00 0.01 0.03 0.06 % Change -chg +chg +chg -chg +chg 176.9% 73.8% EPS adjusted and fully diluted 0.76 -4.73 -2.16 0.01 0.00 0.01 0.03 0.06 % Change -chg +chg +chg -chg +chg 176.9% 73.8% EPS reported 0.76 -4.73 -2.16 0.07 0.00 0.01 0.03 0.06 % Change -chg +chg +chg -chg +chg 176.9% 73.8% EPS Consensus Cash flow per share 2.37 3.64 1.70 0.50 0.36 0.13 0.15 0.17 Book value per share 7.26 16.53 11.62 1.12 1.40 1.53 1.56 1.62 DPS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Number of shares, YE (m) 0.0 0.0 0.0 0.0 0.0 59.9 70.0 117.2 117.2 117.2 Nbr of shares, fully diluted, YE (m) 0.0 0.0 1.3 1.9 2.3 59.9 70.0 117.1 117.1 117.1
Share price Latest price / year end 0.1 0.1 0.1 1.2 1.1 1.1 1.1 1.4 1.4 1.4 52 week high 0.2 0.1 0.3 2.4 1.2 1.6 1.4 1.4 52 week low 0.1 0.0 0.1 0.1 0.8 1.1 1.0 1.0 Average price (Year) 0.1 0.0 0.1 1.0 1.1 1.3 1.2 1.4 1.4 1.4
Enterprise value (EURm) Market capitalisation 0.0 0.0 0.0 0.0 0.0 76.3 95.9 160.5 160.5 160.5 Net financial debt 0.0 0.0 14.8 24.4 26.1 37.1 43.8 44.0 41.8 38.1 Pension provisions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IFRS 16 debt 0.0 0.0 0.0 0.0 0.0 1.0 2.3 2.3 2.3 2.3 Market value of minorities 0.0 0.0 -0.7 0.8 -0.2 18.6 31.5 2.0 3.0 2.5 MV of equity affiliates (net of tax) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Enterprise value 0.0 0.0 14.1 25.1 25.9 133.1 173.6 208.9 207.6 203.4
Valuation P/E adjusted 0.1 na na 117.4 na 112.9 40.8 23.5 P/E adjusted and fully diluted 0.1 na na 117.4 na 112.9 40.8 23.5 P/E consensus
P/BV 0.0 0.1 0.1 1.1 1.0 0.9 0.9 0.8 P/CF 0.0 0.3 0.6 2.6 3.8 10.8 9.3 8.1 Dividend yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% FCF yield (%) na na na na na 52.0% 37.8% -7.6% 1.3% 2.2%
ROE (%) na na 20.9% -44.3% -17.0% 1.4% -0.4% 1.0% 2.2% 3.7% ROIC (%) na 0.0% -53.7% -11.0% 2.4% 4.8% 7.5% 9.8% 11.4%
EV/Sales na na 0.65 0.64 0.62 4.08 2.07 1.73 1.54 1.36 EV/EBITDA adj. na na 3.3 3.6 2.5 15.4 11.2 9.2 7.7 6.4 EV/EBIT adj. na na na na na 57.2 22.3 17.0 12.8 10.9 EV/NOPAT na na na na na 72.3 28.2 21.5 16.2 13.8 EV/IC na na 2.5 1.0 1.1 1.0 1.4 1.6 1.6 1.6 ROIC/WACC na 0.0 na na 0.2 0.5 0.8 1.0 1.2 EV/IC over ROIC/WACC na na na na 4.2 2.8 2.1 1.6 1.3
keplercheuvreux.com 51 Media and Games Invest Buy | Target Price: EUR2.30
Income statement
FY to 31/12 (EUR) 12/13 12/14 12/15 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E
Sales 0.0 0.0 21.6 39.0 42.1 32.6 83.9 120.5 135.0 149.8 Gross profit 0.0 0.0 12.4 23.8 29.4 22.7 48.3 71.0 80.8 91.4 EBITDA reported 0.0 0.0 4.3 2.6 7.0 8.6 15.5 22.7 26.8 31.5 EBITDA adjusted 0.0 0.0 4.3 6.9 10.5 8.6 15.5 22.7 26.8 31.6 Depreciation and amortisation 0.0 0.0 -4.7 -12.7 -10.4 -6.3 -10.5 -14.4 -14.7 -15.1 Goodwill impairment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other financial result and associates 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 EBIT reported 0.0 0.0 -0.4 -10.1 -3.4 2.3 5.0 8.3 12.1 16.4 EBIT adjusted 0.0 0.0 0.0 -10.1 -3.4 2.3 7.8 12.3 16.2 18.7 Net financial items 0.0 0.0 -1.0 -1.9 -2.3 -1.6 -5.8 -6.0 -6.4 -6.5 Associates 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Earnings before tax 0.0 0.0 -1.4 -12.0 -5.7 0.7 -0.8 2.3 5.8 9.9 Tax 0.0 0.0 2.3 2.9 0.7 0.9 2.0 -0.7 -1.7 -3.0 Net profit from continuing op. 0.0 0.0 0.9 -9.1 -5.0 1.6 1.3 1.5 4.0 6.9 Net profit from disc. activities 0.0 0.0 0.0 0.0 0.0 3.7 0.0 0.0 0.0 0.0 Net profit before minorities 0.0 0.0 0.9 -9.1 -5.0 5.3 1.3 1.5 4.0 6.9 Minorities 0.0 0.0 0.0 0.0 0.0 -0.9 -1.6 -0.1 -0.1 -0.1 Net profit reported 0.0 0.0 1.0 -9.1 -5.0 4.3 -0.3 1.4 3.9 6.8 Adjustments 0.0 0.0 0.0 0.0 0.0 -3.7 0.0 0.0 0.0 0.0 Net profit adjusted 0.0 0.0 1.0 -9.1 -5.0 0.7 -0.3 1.4 3.9 6.8
Sales % Change +chg 80.1% 8.0% -22.5% 157.2% 43.6% 12.0% 11.0% EBITDA reported % Change +chg -38.4% 166.9% 22.9% 79.8% 45.9% 18.3% 17.6% EBITDA adjusted % Change +chg 60.5% 52.2% -17.7% 79.8% 45.9% 18.3% 17.6% EBIT reported % Change -chg -chg +chg +chg 114.7% 65.6% 46.6% 35.6% EBIT adjusted % Change -chg +chg +chg 235.1% 57.4% 32.1% 15.4% Earnings before tax % Change -chg -chg +chg +chg -chg +chg 155.8% 72.0% Net profit from cont. op. % Change +chg -chg +chg +chg -20.8% 21.4% 165.3% 72.0% Net profit reported % Change +chg -chg +chg +chg -chg +chg 176.9% 73.8% Net profit adjusted % Change +chg -chg +chg +chg -chg +chg 176.9% 73.8%
Gross profit margin (%) na na 57.3% 61.1% 70.0% 69.6% 57.5% 59.0% 59.9% 61.0% EBITDA margin (%) na na 19.9% 17.7% 25.0% 26.5% 18.5% 18.8% 19.9% 21.1% EBIT margin (%) na na 0.0% -25.9% -8.0% 7.1% 9.3% 10.2% 12.0% 12.5% Net profit margin (%) na na 4.5% -23.4% -11.8% 2.0% -0.4% 1.2% 2.9% 4.6% Tax rate (%) 168.7% 24.3% 11.9% -20.5% 265.1% 32.5% 30.0% 30.0% Payout ratio (%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
EPS reported (EUR) 0.76 -4.73 -2.16 0.07 0.00 0.01 0.03 0.06 EPS adjusted (EUR) 0.76 -4.73 -2.16 0.01 0.00 0.01 0.03 0.06 EPS adj and fully diluted (EUR) 0.76 -4.73 -2.16 0.01 0.00 0.01 0.03 0.06 DPS (EUR) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
EPS reported % Change -chg +chg +chg -chg +chg 176.9% 73.8% EPS adjusted % Change -chg +chg +chg -chg +chg 176.9% 73.8% EPS adj and fully diluted % Change -chg +chg +chg -chg +chg 176.9% 73.8% DPS % Change
Consensus Sales (EURm) Consensus EBITDA (EURm) Consensus EBIT (EURm) Consensus EPS (EUR) Consensus DPS (EUR)
keplercheuvreux.com 52 Media and Games Invest Buy | Target Price: EUR2.30
Cash flow statement Market data as of: 08 October 2020
FY to 31/12 (EUR) 12/13 12/14 12/15 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E
Net profit before minorities 0.0 0.0 0.9 -9.1 -5.0 5.3 1.3 1.5 4.0 6.9 Depreciation and amortisation 0.0 0.0 4.7 12.7 10.4 6.3 10.5 14.4 14.7 15.1 Goodwill impairment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Change in working capital 0.0 0.0 -2.6 3.4 -1.5 18.8 15.3 0.9 0.5 -0.3 Others 0.0 0.0 0.0 0.0 0.0 -0.5 -1.9 -2.0 -2.0 -2.0 Levered post tax CF before capex 0.0 0.0 3.0 7.0 3.9 29.9 25.2 14.8 17.2 19.7 % Change +chg 132.6% -44.1% 662.7% -15.7% -41.2% 16.2% 14.3%
Capex 0.0 0.0 1.2 7.4 7.3 10.7 12.6 -27.0 -15.0 -16.0
Free cash flow 0.0 0.0 4.2 14.4 11.2 40.6 37.8 -12.2 2.2 3.7 % Change +chg 241.0% -21.9% 261.6% -6.8% -chg +chg 66.0%
Acquisitions 0.0 0.0 0.0 0.0 0.0 -3.9 -6.2 0.0 0.0 0.0 Divestments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Dividend paid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Share buy back 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Capital increases 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 -19.0 -23.9 -13.0 -47.7 -38.3 12.0 0.0 0.0
Change in net financial debt 0.0 0.0 14.8 9.5 1.7 11.0 6.7 0.2 -2.2 -3.7 Change in cash and cash equiv. 0.0 0.0 0.9 1.9 -1.8 3.4 28.5 15.6 2.2 3.7
Attributable FCF 0.0 0.0 4.3 14.3 11.2 39.7 36.3 -12.3 2.1 3.6
Cash flow per share (EUR) 2.37 3.64 1.70 0.50 0.36 0.13 0.15 0.17 % Change 53.4% -53.4% -70.6% -27.9% -64.9% 16.2% 14.3%
FCF per share (EUR) 3.34 7.43 4.86 0.66 0.52 -0.10 0.02 0.03 % Change 122.5% -34.6% -86.4% -21.9% -chg +chg 69.1%
Capex / Sales (%) na na -5.5% -18.9% -17.4% -32.7% -15.0% 22.4% 11.1% 10.7% Capex / D&A (%) na na -25.6% -57.8% -70.3% -169.1% -119.5% 187.5% 102.0% 106.0%
Cash flow / Sales (%) na na 13.9% 18.0% 9.3% 91.7% 30.1% 12.3% 12.8% 13.1% FCF / Sales (%) na na 19.5% 36.9% 26.7% na 45.1% -10.1% 1.7% 2.5%
FCF Yield (%) na na na na na 52.0% 37.8% -7.6% 1.3% 2.2% Unlevered FCF Yield (%) 22.6% 62.8% 51.4% 31.4% 15.3% -3.9% 3.3% 4.1%
keplercheuvreux.com 53 Media and Games Invest Buy | Target Price: EUR2.30
Balance sheet
FY to 31/12 (EUR) 12/13 12/14 12/15 12/16 12/17 12/18 12/19E 12/20E 12/21E 12/22E
Cash and cash equivalents 0.0 0.0 0.9 2.8 1.0 4.4 33.0 48.6 50.8 54.5 Inventories 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Accounts receivable 0.0 0.0 3.4 4.9 4.9 5.4 17.0 29.1 34.0 39.4 Other current assets 0.0 0.0 0.7 0.7 1.6 6.3 5.4 7.8 9.1 10.7 Current assets 0.0 0.0 5.0 8.3 7.5 16.2 55.4 85.4 93.9 104.6
Tangible assets 0.0 0.0 0.3 2.3 1.7 4.2 3.5 3.7 2.8 1.8 Goodwill 0.0 0.0 7.7 28.9 28.9 133.8 147.3 155.0 155.0 155.0 Other Intangible assets 0.0 0.0 12.8 22.2 18.6 70.4 85.9 92.6 95.8 99.8 Financial assets 0.0 0.0 0.7 3.6 3.0 5.5 9.1 9.1 9.1 9.1 Other non-current assets 0.0 0.0 6.2 7.5 7.1 6.4 11.2 14.9 16.3 17.6 Non-current assets 0.0 0.0 27.6 64.5 59.3 220.1 257.0 275.3 279.0 283.3
Short term debt 0.0 0.0 2.4 12.3 12.4 3.6 5.4 5.4 5.4 5.4 Accounts payable 0.0 0.0 3.5 6.8 7.2 9.4 20.3 30.4 34.8 39.4 Other short term liabilities 0.0 0.0 2.9 6.0 5.6 11.4 27.5 33.5 36.1 38.4 Current liabilities 0.0 0.0 8.8 25.1 25.1 24.3 53.1 69.2 76.2 83.1
Long term debt 0.0 0.0 13.3 14.9 14.7 38.0 71.4 87.2 87.2 87.2 Pension provisions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 IFRS16 Debt 0.0 0.0 0.0 0.0 0.0 1.0 2.3 2.3 2.3 2.3 Other long term provisions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other long term liabilities 0.0 0.0 1.3 1.0 0.2 14.4 17.0 19.8 21.1 22.2 Non-current liabilities 0.0 0.0 14.6 15.9 14.9 53.4 90.8 109.4 110.6 111.7
Shareholders' equity 0.0 0.0 9.2 31.9 26.8 67.2 98.1 179.3 183.2 190.0 Minority interests 0.0 0.0 0.0 0.0 -0.1 91.3 70.5 2.8 2.9 3.0 Total equity 0.0 0.0 9.2 31.9 26.7 158.5 168.6 182.1 186.1 193.1
Balance sheet total 0.0 0.0 32.5 72.9 66.8 236.3 312.4 360.7 372.9 387.9 % Change +chg 123.9% -8.3% 253.8% 32.2% 15.4% 3.4% 4.0%
Book value per share (EUR) 7.26 16.53 11.62 1.12 1.40 1.53 1.56 1.62 % Change 127.5% -29.7% -90.3% 24.7% 9.3% 2.2% 3.7%
Net financial debt 0.0 0.0 14.8 24.4 26.1 37.1 43.8 44.0 41.8 38.1 IFRS16 Debt 0.0 0.0 0.0 0.0 0.0 1.0 2.3 2.3 2.3 2.3 Pension provisions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net debt 0.0 0.0 14.8 24.4 26.1 38.1 46.1 46.3 44.1 40.4
Net fi. debt (+IFRS16) / EBITDA (x) na na 3.4 3.5 2.5 4.4 3.0 2.0 1.6 1.3
Trade working capital 0.0 0.0 -0.1 -1.9 -2.3 -3.9 -3.2 -1.3 -0.7 0.0 Net working capital 0.0 0.0 -2.3 -7.2 -6.3 -9.1 -25.3 -27.1 -27.7 -27.7 NWC/Sales na na -10.5% -18.6% -14.9% -27.8% -30.2% -22.5% -20.5% -18.5% Inventories/sales na na 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Invested capital 0.0 0.0 5.7 24.0 24.4 128.9 125.5 131.6 130.1 129.1
Net fin. debt / FCF (x) na na 3.5 1.7 2.3 0.9 1.2 -3.6 18.7 10.3
Gearing (%) na na 160.8% 76.4% 97.6% 23.4% 26.0% 24.2% 22.4% 19.7% Goodwill / Equity (%) na na 84.1% 90.6% 108.2% 84.4% 87.4% 85.1% 83.3% 80.3%
keplercheuvreux.com 54 Media and Games Invest Buy | Target Price: EUR2.30
Research ratings and important disclosures
The term "KEPLER CHEUVREUX" shall, unless the context otherwise requires, mean each of KEPLER CHEUVREUX and its affiliates, subsidiaries and related companies (see “Regulators” table below). The investment recommendation(s) referred to in this report was (were) completed on 08/10/2020 19:31 (GMT) and was first disseminated on 09/10/2020 5:04 (GMT). Unless otherwise stated, all prices are aligned with the “Market Data date” on the front page of this report. Disclosure checklist - Potential conflict of interests Company Name ISIN Disclosure Media and Games Invest MT0000580101 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 0 0 KEPLER CHEUVREUX and Swedbank AB have entered into a Co-operation Agreement to form a strategic alliance in connection with certain services including services connected to investment banking transactions. Swedbank provides investment banking services to this issuer in return for which Swedbank AB has received a consideration or a promise of consideration. Separately& through the Co-operation Agreement with Swedbank AB for services provided by KEPLER CHEUVREUX in connection with such activities& KEPLER CHEUVREUX has also a received consideration or a promise of a consideration in accordance with the general terms of the Co-operation Agreement Stillfront Group SE0007704788 Swedbank AB holds or owns or controls 5% or more of the issued share capital of KEPLER CHEUVREUX. Swedbank AB provides investment banking services to this issuer in return for which Swedbank AB has received a consideration or a promise of consideration A representative of Swedbank AB serves on the board of directors of KEPLER CHEUVREUX Swedbank in cooperation with Kepler Cheuvreux is acting as Joint Bookrunner of the c. SEK 1.3 bn share issue of Stillfront Group AB (21/01/2020) Swedbank& in cooperation with Kepler Cheuvreux& acted as Joint Bookrunner of the c. SEK 1 bn directed share issue of Stillfront Group AB (16/06/2020)
Organizational and administrative arrangements to avoid and prevent conflicts of interests KEPLER CHEUVREUX promotes and disseminates independent investment research and have implemented written procedures designed to identify and manage potential conflicts of interest that arise in connection with its research business, which are available upon request. The KEPLER CHEUVREUX research analysts and other staff involved in issuing and disseminating research reports operate independently of KEPLER CHEUVREUX Investment Banking business. Information barriers and procedures are in place between the research analysts and staff involved in securities trading for the account of KEPLER CHEUVREUX or clients to ensure that price sensitive information is handled according to applicable laws and regulations. It is Kepler Cheuvreux’ policy not to disclose the rating to the issuer before publication and dissemination. Nevertheless, this document, in whole or in part, and with the exclusion of ratings, target prices and any other information that could lead to determine its valuation, may have been provided to the issuer prior to publication and dissemination, solely with the aim of verifying factual accuracy. Please refer to www.keplercheuvreux.com for further information relating to research and conflict of interest management. Analyst disclosures The functional job title of the person(s) responsible for the recommendations contained in this report is Equity/Credit Research Analyst unless otherwise stated on the cover. Name of the Research Analyst(s): Sven Sauer Regulation AC - Analyst Certification: Each Equity/Credit Research Analyst(s) listed on the front-page of this report, principally responsible for the preparation and content of all or any identified portion of this research report hereby certifies that, with respect to each issuer or security or any identified portion of the report with respect to an issuer or security that the equity research analyst covers in this research report, all of the views expressed in this research report accurately reflect their personal views about those issuer(s) or securities. Each Equity/Credit Research Analyst(s) also certifies that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) expressed by that equity research analyst in this research report. Each Equity/Credit Research Analyst certifies that he is acting independently and impartially from KEPLER CHEUVREUX shareholders, directors and is not affected by any current or potential conflict of interest that may arise from any KEPLER CHEUVREUX activities. Analyst Compensation: The research analyst(s) primarily responsible for the preparation of the content of the research report attest that no part of the analyst’s(s’) compensation was, is or will be, directly or indirectly, related to the specific recommendations expressed by the research analyst(s) in the research report. The research analyst’s(s’) compensation is, however, determined by the overall economic performance of KEPLER CHEUVREUX. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of KEPLER CHEUVREUX, which is a non-US affiliate and parent company of Kepler Capital Markets, Inc. a SEC registered and FINRA member broker-dealer. Equity/Credit Research Analysts employed by KEPLER CHEUVREUX, are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of Kepler Capital Markets, Inc. and may not be subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Research ratings Rating ratio Kepler Cheuvreux Q2 2020 Rating Breakdown A B Buy 49% 48% Hold 35% 34% Reduce 13% 10% Not Rated/Under Review/Accept Offer 3% 8% Total 100% 100%
Source: Kepler Cheuvreux A: % of all research recommendations B: % of issuers to which material services of investment firms are supplied 12 months rating history The below table shows the history of recommendations and target prices changes issued by KEPLER CHEUVREUX research department (Equity and Credit) over a 12 months period.
keplercheuvreux.com 55 Media and Games Invest Buy | Target Price: EUR2.30
Company Name Date Business Line Rating Target Price Closing Price Stillfront Group (SEK) 19/12/2019 08:15 Equity Research Hold 375.00 360.00 05/03/2020 08:58 Equity Research Buy 520.00 460.00 28/04/2020 07:01 Equity Research Buy 640.00 592.00 07/05/2020 07:29 Equity Research Buy 670.00 605.00 12/06/2020 08:15 Equity Research Buy 750.00 702.00 Stillfront Group () 22/06/2020 08:46 Equity Research Restricted Stillfront Group (SEK) 21/07/2020 09:37 Equity Research Buy 750.00 864.00 23/07/2020 08:28 Equity Research Buy 930.00 834.00 13/08/2020 08:12 Equity Research Buy 960.00 830.00 21/09/2020 08:29 Equity Research Buy 1150.00 1108.00
Credit research does not issue target prices. Left intentionally blank. Please refer to the following link https://research.keplercheuvreux.com/app/disclosure for a full list of investment recommendations issued over the last 12 months by the author(s) and contributor(s) of this report on any financial instruments. Equity research Rating system KEPLER CHEUVREUX equity research ratings and target prices are issued in absolute terms, not relative to any given benchmark. A rating on a stock is set after assessing the twelve months expected upside or downside of the stock derived from the analyst’s fair value (target price) and in the light of the risk profile of the company. Ratings are defined as follows: Buy: The minimum expected upside is 10% over next 12 months (the minimum required upside could be higher in light of the company’s risk profile). Hold: The expected upside is below 10% (the expected upside could be higher in light of the company’s risk profile). Reduce: There is an expected downside. Accept offer: In the context of a total or partial take-over bid, squeeze-out or similar share purchase proposals, the offer price is considered to be fairly valuing the shares. Reject offer: In the context of a total or partial take-over bid, squeeze-out or similar share purchase proposals, the offered price is considered to be undervaluing the shares. Under review: An event occurred with an expected significant impact on our target price and we cannot issue a recommendation before having processed that new information and/or without a new share price reference. Not rated: The stock is not covered. Restricted: A recommendation, target price and/or financial forecast is not disclosed further to compliance and/or other regulatory considerations. Due to share prices volatility, ratings and target prices may occasionally and temporarily be inconsistent with the above definition. Valuation methodology and risks Unless otherwise stated in this report, target prices and investment recommendations are determined based on fundamental research methodologies and relies on commonly used valuation methodologies such as Discounted Cash Flow (DCF), valuation multiples comparison with history and peers, Dividend Discount Model (DDM). Valuation methodologies and models can be highly dependent on macroeconomic factors (such as the price of commodities, exchange rates and interest rates) as well as other external factors including taxation, regulation and geopolitical changes (such as tax policy changes, strikes or war). In addition, investors’ confidence and market sentiment can affect the valuation of companies. The valuation is also based on expectations that might change rapidly and without notice, depending on developments specific to individual industries. Whichever valuation method is used there is a significant risk that the target price will not be achieved within the expected timeframe. Unless otherwise stated, models used are proprietary. Additional information about the proprietary models used in this report is accessible on request. KEPLER CHEUVREUX’ equity research policy is to update research rating when it deems appropriate in the light of new findings, markets development and any relevant information that can impact the analyst’s view and opinion. Regulators Location Regulator Abbreviation KEPLER CHEUVREUX S.A - France Autorité des Marchés Financiers AMF KEPLER CHEUVREUX, Madrid branch Comisión Nacional del Mercado de Valores CNMV KEPLER CHEUVREUX, Frankfurt branch Bundesanstalt für Finanzdienstleistungsaufsicht BaFin KEPLER CHEUVREUX, Milan branch Commissione Nazionale per le Società e la Borsa CONSOB KEPLER CHEUVREUX, Amsterdam branch Autoriteit Financiële Markten AFM KEPLER CHEUVREUX (Switzerland) SA, Zurich branch Swiss Financial Market Supervisory Authority FINMA KEPLER CAPITAL MARKETS, Inc. Financial Industry Regulatory Authority FINRA KEPLER CHEUVREUX, London branch Financial Conduct Authority FCA KEPLER CHEUVREUX, Vienna branch Austrian Financial Services Authority FMA KEPLER CHEUVREUX, Stockholm branch Finansinspektionen FI KEPLER CHEUVREUX Oslo branch Finanstilsynet NFSA KEPLER CHEUVREUX, Bruxelles branch Autorité des Services et Marchés Financiers FSMA
KEPLER CHEUVREUX is authorised and regulated by both Autorité de Contrôle Prudentiel and Autorité des Marchés Financiers.
keplercheuvreux.com 56 Media and Games Invest Buy | Target Price: EUR2.30
Legal and disclosure information
Other disclosures This product is not for distribution to retail clients. MIFID 2 WARNING: We remind you that pursuant to MiFID 2, it is your responsibility, as a recipient of this research document, to determine whether or not your firm is impacted by the provisions of the Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (“MiFID 2”) regarding the unbundling of research and execution (the “MiFID 2 Research Rules”). For any request on the provision of research documents, please send an email to [email protected]. The information contained in this publication was obtained from various publicly available sources believed to be reliable, but has not been independently verified by KEPLER CHEUVREUX. KEPLER CHEUVREUX does not warrant the completeness or accuracy of such information and does not accept any liability with respect to the accuracy or completeness of such information, except to the extent required by applicable law. This publication is a brief summary and does not purport to contain all available information on the subjects covered. Further information may be available on request. This publication is for information purposes only and shall not be construed as an offer or solicitation for the subscription or purchase or sale of any securities, or as an invitation, inducement or intermediation for the sale, subscription or purchase of any securities, or for engaging in any other transaction. Any opinions, projections, forecasts or estimates in this report are those of the author only, who has acted with a high degree of expertise. They reflect only the current views of the author at the date of this report and are subject to change without notice. KEPLER CHEUVREUX has no obligation to update, modify or amend this publication or to otherwise notify a reader or recipient of this publication in the event that any matter, opinion, projection, forecast or estimate contained herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. The analysis, opinions, projections, forecasts and estimates expressed in this report were in no way affected or influenced by the issuer. The author of this publication benefits financially from the overall success of KEPLER CHEUVREUX. The investments referred to in this publication may not be suitable for all recipients. Recipients are urged to base their investment decisions upon their own appropriate investigations that they deem necessary. Any loss or other consequence arising from the use of the material contained in this publication shall be the sole and exclusive responsibility of the investor and KEPLER CHEUVREUX accepts no liability for any such loss or consequence. In the event of any doubt about any investment, recipients should contact their own investment, legal and/or tax advisers to seek advice regarding the appropriateness of investing. Some of the investments mentioned in this publication may not be readily liquid investments. Consequently it may be difficult to sell or realise such investments. The past is not necessarily a guide to future performance of an investment. The value of investments and the income derived from them may fall as well as rise and investors may not get back the amount invested. Some investments discussed in this publication may have a high level of volatility. High volatility investments may experience sudden and large falls in their value which may cause losses. International investing includes risks related to political and economic uncertainties of foreign countries, as well as currency risk. To the extent permitted by applicable law, no liability whatsoever is accepted for any direct or consequential loss, damages, costs or prejudices whatsoever arising from the use of this publication or its contents.
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keplercheuvreux.com 57 Media and Games Invest Buy | Target Price: EUR2.30
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Holding companies Research Team
Sven Sauer Main author Andre Mulder Kris Kippers [email protected] [email protected] [email protected] +49 69 7 56 96 131 +31 20 563 2380 +32 11 49 14 62
Sven Sauer is an equity research analyst specialising in European small & mid-cap Daniele Ridolfi Marco Baccaglio stocks. He joined Kepler Cheuvreux’s Small [email protected] [email protected] Caps Research team in July 2019 after +39 02 8550 7219 +39 02 80 62 83 20 assisting the German research department as an intern since 2018. Previously, Sven David Cerdan Matthias Maenhaut gained internship experience in M&A [email protected] [email protected] advisory, on the equity buy-side and on the +33 1 70 81 57 43 +32 11 49 14 61 sell-side. He holds a M.Sc. degree in Management from Edinburgh Napier University, a M.Sc. degree in Finance from Hjalmar Ahlberg International School of Management and a [email protected] B.A. degree in International Business +46 8 723 51 79 Management from University of Applied Management Studies.
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