Commissioned Equity Research • 19 June 2019 Telecom Equipment and IT Rovio Finland KEY DATA Casual games leader's quest for golden eggs Stock country Finland Bloomberg ROVIO FH Having been around for about ten years, the Angry Birds brand has proved Reuters ROVIO.HE its longevity and Rovio its ability to monetise the entertainment franchise Share price (close) EUR 7.31 through engaging casual mobile games and brand licensing. The solid Free Float Market cap. (bn) EUR 0.58/EUR 0.58 balance sheet and positive cash flow allow the company to pursue growth Website http://www.rovio.com/ objectives through organic and inorganic means. We believe the biggest Next report date 08 Aug 2019 risks for the company relate to rising user acquisition costs, a possible decline of the Angry Birds brand and failure to diversify the game portfolio PERFORMANCE to include new genres. 12 Rovio is still all about Angry Birds which we view as a strength 10 Of Rovio's 22 live mobile games, the top five are based on the Angry Birds 8 (AB) brand. The two top-grossing games in 2018, AB 2 and AB Friends, are 6 slingshot games that were launched in 2015 and 2012, respectively. The success of these games proves Rovio's solid category leadership, capability 4 to monetise its brand, and its ability to run live operations to engage 2 Sep17 Apr18 Nov18 Jun19 gamers and prolong the lifetime of its games. Its brand and slingshot genre leadership create a stable cash-generating core for Rovio. Rovio Source: Thomson Reuters Finland OMX Helsinki All-Share (Rebased) Upside from a flock of upcoming game titles and bolt-on M&A In order to achieve meaningful growth, Rovio aims to diversify its game VALUATION APPROACH portfolio from the casual and AB-themed games through in-house development and bolt-on M&A. Current initiatives include the launch of AB P/E 6.9 10.4 Dream Blast in Q1 2019, the acquisition of strategy game developer PlayRaven in Q4 2018, and incubation of the Hatch mobile game streaming EV/EBIT 6.1 8.5 service. Rovio should launch a new game in H2, after which we expect two new game launches per year. We estimate the new games to have a DCF 7.2 9.4 slightly weaker KPI performance on average than the recently launched AB DCF Monte Carlo Dream Blast, leading to a 7% sales CAGR on a group level during 2018-21E, simulation, 10th- 6.6 9.5 90th percentiles and an EBIT margin of 13% (14% ex-Hatch) in 2021E, from 11% in 2018. 4 6 8 10 12 Source: Nordea estimates DCF and peer multiples suggest valuation range of EUR 6.8-9.4 We derive a DCF valuation range of EUR 7.6-8.7 per share by applying a ESTIMATE CHANGES WACC of 8-12%. We perform a Monte Carlo simulation with game KPIs (MAU, DAU/MAU and ARPDAU) and calculate the 10th-90th percentile Year 2019E 2020E 2021E values to be EUR 6.6-9.5 per share. We also include relative valuation with Sales n.a. n.a. n.a. EBIT (adj) n.a. n.a. n.a. P/E and EV/EBIT multiples derived from relevant Nordic gaming Source: Nordea estimates companies and global mobile gaming companies. The averages of the upper and lower limits for different valuation approaches equal a valuation range of EUR 6.8-9.4. SUMMARY TABLE - KEY FIGURES Nordea Markets - Analysts Sami Sarkamies EURm 2015 2016 2017 2018 2019E 2020E 2021E Senior Analyst Total revenue 142 192 297 281 315 333 347 EBITDA (adj) -6 35 65 48 50 50 51 Veikkopekka Silvasti EBIT (adj) -22 17 36 31 37 40 44 Analyst EBIT (adj) margin -15.2% 8.8% 12.1% 11.1% 11.8% 12.1% 12.7% EPS (adj) -0.24 0.14 0.33 0.30 0.37 0.40 0.44 Ville Tiainen EPS (adj) growth -323.7% 158.8% 130.7% -7.7% 23.6% 8.4% 9.5% Senior Analyst DPS (ord) 0.00 0.06 0.06 0.09 0.11 0.12 0.13 EV/Sales n.a. n.a. 2.2 0.7 1.3 1.2 1.0 EV/EBIT (adj) n.a. n.a. 17.8 5.9 11.4 9.7 8.2 P/E (adj) n.a. n.a. 27.6 12.7 19.6 18.1 16.5 P/BV n.a. n.a. 5.2 1.9 3.2 2.8 2.5 Dividend yield (ord) n.a. n.a. 0.7% 2.4% 1.5% 1.7% 1.8% FCF Yield bef A&D, lease n.a. n.a. 8.2% 14.0% 7.8% 6.7% 6.7% Net debt -10 -10 -88 -120 -158 -188 -218 Net debt/EBITDA 1.5 -0.3 -1.5 -2.5 -3.2 -3.8 -4.2 ROIC after tax -31.6% 18.5% 43.9% 53.6% 91.5% n.m. n.m. Source: Company data and Nordea estimates Marketing material commissioned by Rovio 19 June 2019 Rovio Contents Factors to consider 3 Valuation 7 Estimates 12 Rovio's market 20 Rovio in brief 30 Game portfolio – fewer, bigger and better 38 Business model 44 Risk factors 48 Reported numbers and forecasts 49 Disclaimer and legal disclosures 52 Marketing material commissioned by Rovio 2 19 June 2019 Rovio Factors to consider Rovio is best known for the global Angry Birds brand, which started out as a popular mobile game in 2009, and has since evolved to include various entertainment and consumer products through brand licensing and movies. We believe that the well-recognised Angry Birds brand, the company's leading position within the slingshot games genre, its solid net cash position and its experienced team of developers will drive growth ahead. The main risks, in our view, lie in rising user acquisition costs, potential deterioration of the global Angry Birds brand, failure to diversify into new game genres and potential risks related to bolt-on M&A activity. Angry Birds is a global brand with high recognition We believe Angry Birds is We believe that the strong brand value of Angry Birds benefits the company in two Rovio's "secret sauce", enabling ways. Firstly, the global awareness of the brand improves organic user acquisition in better organic user acquisition the hyper-competitive mobile games market. Given that the cost of acquiring a paying and a profitable product and customer has been steadily rising, all leverage that can generate organic downloads is content licensing business highly valuable. Secondly, a strong brand enables the company to run a profitable product and content licensing business, which also further strengthens the brand awareness. Thus, we view the Angry Birds brand as Rovio's "secret sauce" in terms of discoverability and user acquisition challenges. The upcoming Angry Birds Movie 2 in August and the ten-year Angry Bird anniversary celebrations in December are testimonies to the brand's versatility and longevity. RECOGNITION OF SELECTED "MOBILE-BORN" BRANDS, % RECOGNITION OF SELECTED GLOBAL BRANDS, % 100% 97% 100% 97% 96% 80% 94% 95% 93% 80% 70% 91% 90% 60% 85% 40% 80% 20% 75% 0% 70% Angry Birds Candy Crush saga Clash of Clans Angry Birds Star Wars Frozen Hello Kitty Pokemon Source: Lieberman Research Worldwide, 2017 Source: Lieberman Research Worldwide, 2017 Core portfolio ensures stable cash flow but requires constant refreshment Rovio has a robust portfolio of Rovio's current game portfolio includes 22 titles. However, in line with its "fewer, bigger core games that has proven its and better" logic for the game portfolio, significant resources (developer hours and ability to generate stable gross marketing expenses) are invested in just the top four or five games. As illustrated sales... below, Rovio's game portfolio has delivered relatively stable quarterly gross sales of EUR 60m or above since Q2 2017. However, every game carries a lifetime, and Rovio ...but every game has a lifetime cannot expect to keep on delivering such robust gross sales without launching new and new games need to be games. The portfolio received a much needed boost when Rovio launched AB Dream constantly added to maintain Blast in Q1 2019 and we expect another game to be unveiled before year-end. and grow the business Furthermore, we forecast that Rovio will launch two games per year in 2020 and 2021. Marketing material commissioned by Rovio 3 19 June 2019 Rovio GROSS SALES PER GAME, EURm 80 67 67 66 70 63 65 65 63 60 60 56 14 10 15 15 16 16 14 15 7 50 47 10 3 5 7 4 3 7 3 40 6 4 36 13 7 9 7 7 7 40 10 6 8 29 12 11 11 8 8 7 30 12 8 9 86 12 8 8 9 8 7 20 7 10 8 8 31 35 32 5 8 30 10 6 20 21 18 20 22 12 16 6 9 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 Angry Birds 2 Angry Birds Friends Angry Birds Blast Angry Birds Evolution Angry Birds Match Angry Birds Pop! Angry Birds Dream Blast Other Source: Company data and Nordea estimates AB Dream Blast has been making progress recently Looking at the top grossing rank of all games from the US App Store (App Annie), we conclude that Rovio's top games at present have performed quite stably over the past three months.