Equity Research - 09 August 2021 21:00 CET Embracer Group Reason: Preview of results Plenty to like despite negative sentiment Company sponsored research ABGSC Q1e adj. EBIT SEK 1,137m, -9% vs. consensus Not rated Raising adj. EPS by 1-5% ’21/22e-’23/24e on M&A Raising fair value to SEK 225-350 (225-345) per share Estimate changes (%) 2021e 2022e 2023e Q1’21/22e sales of SEK 3,249m, +57% y-o-y (~19% organic) Sales 7.3% 12.7% 13.9% For Q1’21/22e, we factor in sales of SEK 3,249m (-2.3% vs. FactSet EBIT (rep) -62.5% nm nm consensus), for total y-o-y growth of 57.1%, but organic growth of 19.5% EPS (rep) -49.1% nm nm when adjusting for M&A and FX. We consider this a strong performance Source: ABG Sundal Collier in the 2021 quarter facing the toughest COVID-19-boosted comparables. 09/08/2021 The largest revenue driver in the quarter is Biomutant by our estimate, Share price (SEK) 188.0 where we factor in ~1.4mn copies sold across all platforms. Given the Fair value range (per share) 225-350 economics of the game (internally developed & published on an own IP) this yields net sales of ~SEK 314m with a gross margin of 90.2%. Other IT, Sweden notable drivers include Metro Exodus Enhanced edition on PC and next- EMBRACB.ST/EMBRACB ST gen consoles, and SnowRunner on Steam/Switch. Overall, we estimate that Games will generate 80.9% of sales, driving a strong gross margin MCap (SEKm) 92,344 of 59.8% in the quarter. We estimate adj. EBIT of SEK 1,137m (-9.6% MCap (EURm) 9,064 vs. FactSet consensus), for 59.7% y-o-y growth and a margin of 35.0%. Net debt (EURm) -1,182 Ultimately, we reach adj. EPS of SEK 1.87 in Q1, up 24.5% y-o-y. No. of shares (m) 491 Recent M&A raises adj. EPS by 1-5% ’21/22e-’23/24e Free float (%) 60 Following the recently announced acquisitions (8 in total), we raise our Av. daily volume (k) 4,637 sales estimates by 7-14% for ’21/22e-‘23/24e, where the largest contributor is Crazy Labs, which has been added to the DECA Games Next event Q1 report: 18 Aug segment. After accounting for the dilution of the transactions (upfront + earnouts) ,we raise our adj. EPS estimates by 1-5% for ’21/22e-’23/24e. Performance 300 SOTP fair value range at SEK 225-350 per share 250 We adjust our fair value range to SEK 225-350 per share following our 200 estimate changes. Embracer is currently trading at an f12m EV/adj. EBIT 150 of 15.6x, according to FactSet consensus, which is 18% below the five- 100 year average. This is despite Embracer having its largest new game 50 pipeline ever this fiscal year, with a SEK 2.8-3.3bn development cost 0 18 19 20 21 18 19 20 19 20 21 19 20 21 19 20 21 (recent not M&A included), plenty of M&A headroom even after the latest 18 19 20 Oct Oct Oct Apr Apr Apr Jun Jun Jun Feb Feb Feb Dec Dec Dec Aug Aug Aug Aug acquisitions (~SEK 20bn) and estimated 30% organic growth (ABGSCe) Embracer Group OMX STH PI in a year where most gaming companies are struggling with growth. 1m 3m 12m Analyst(s): [email protected], +46 8 566 286 13 Absolute (%) -15.7 -23.7 26.0 [email protected], +46 8 566 286 37 Source: FactSet SEKm 2019 2020 2021e 2022e 2023e 2021e 2022e 2023e Sales 5,249 9,024 16,900 19,585 21,737 P/E (x) -38.8 -73.1 -251.1 EBITDA 1,821 3,985 7,496 8,992 10,021 P/E adj (x) 17.9 14.7 12.9 EBITDA margin (%) 34.7 44.2 44.4 45.9 46.1 P/BVPS (x) 2.70 2.71 2.72 EBIT adj 1,032 2,912 5,710 6,672 7,566 EV/EBITDA (x) 10.8 8.6 7.3 EBIT adj margin (%) 19.7 32.3 33.8 34.1 34.8 EV/EBIT adj (x) 14.2 11.6 9.6 Pretax profit 408 296 -1,855 -940 -45 EV/sales (x) 4.79 3.94 3.35 EPS rep 0.91 -0.23 -4.84 -2.57 -0.75 ROE adj (%) 16.1 18.5 21.1 EPS adj 3.11 6.38 10.51 12.82 14.58 Dividend yield (%) 0 0 0 FCF yield (%) -1.2 4.5 5.0 Sales growth (%) -8.8 71.9 87.3 15.9 11.0 Lease adj. FCF yld (%) -1.2 4.5 5.0 EPS growth (%) high -125.1 -2,026.5 46.9 70.9 Net IB debt/EBITDA -1.6 -1.8 -2.1 Source: ABG Sundal Collier, Company data Lease adj. ND/EBITDA -0.8 -1.0 -1.2 Please refer to important disclosures at the end of this report This research product is commissioned and paid for by the company covered in this report. As such, this report is deemed to constitute an acceptable minor non-monetary benefit (i.e. not investment research) as defined in MiFID II. Embracer Group Company description Risks Embracer Group acquires, develops and publishes PC and Despite Embracer Group’s broad portfolio, there are risks console games for the global gaming market. Its core associated with larger title releases as they have a business model consists of acquiring established gaming relatively large impact on sales right after launch. brands and gradually improving them. Much of Embracer Moreover, disappointing releases or reviews could dent Group’s soul stems from entrepreneur, founder and CEO end-customer enthusiasm and hurt the company's Lars Wingefors, who at the age of 16 founded Nordic finances, especially during the launch period. Delays in Games, which we today associate with Embracer Group. planned and ongoing gaming projects could adversely The game changer came in 2013 when most of today’s affect the group’s profitability. Acquiring established but brand portfolio was acquired from THQ Inc’s insolvency. At temporarily underperforming gaming brands and gradually the start of 2018, the company acquired Koch Media, which improving them increases the potential risk of performing focuses on game development and gives Embracer Group below market expectations. a larger publishing business. Annual sales and adj. EBIT margin Quarterly sales and adj. EBIT margin 25,000 45.0 7,000 40.0 40.0 6,000 35.0 20,000 35.0 30.0 5,000 30.0 15,000 25.0 25.0 4,000 20.0 20.0 3,000 10,000 15.0 15.0 2,000 10.0 5,000 10.0 1,000 5.0 5.0 0 0.0 0 0.0 2015 2016 2017 2018 2019 2020 Q2'20 Q3'20 Q4'20 Q1'21 2021e 2022e 2023e Q2'21e Q3'21e Q4'21e Q1'22e Sales (LHS) Adj EBIT margin % (RHS) Sales (LHS) Adj EBIT margin % (RHS) Source: ABG Sundal Collier, Company data Source: ABG Sundal Collier, Company data EPS estimate changes, 2021e, SEK EPS estimate changes, 2022e, SEK 2 3 1 2 0 1 -1 0 -2 -1 -3 -4 -2 -5 -3 Jul-21 Jul-21 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 ABGSC FactSet Consensus Mean ABGSC FactSet Consensus Mean Source: ABG Sundal Collier, FactSet Source: ABG Sundal Collier, FactSet Lease adj. net debt and ND/EBITDA 12-month forward-looking P/E 0 0.0 1,000.0 (0.0) -5,000 -0.5 (1,000.0) (2,000.0) -10,000 -1.0 (3,000.0) -15,000 -1.5 (4,000.0) (5,000.0) -20,000 -2.0 (6,000.0) (7,000.0) -25,000 -2.5 (8,000.0) 2014 2015 2016 2017 2018 2019 2020 Nov-16 Nov-17 Nov-18 Nov-19 Nov-20 2021e 2022e 2023e Net IB debt excl. leasing (LHS) Net IB debt/EBITDA lease adj. (RHS) P/E f12m 5y avg Source: ABG Sundal Collier, Company data Source: ABG Sundal Collier, Company data 9 August 2021 ABG Sundal Collier 2 Embracer Group Estimate changes ABGSC estimate changes 21/22e-23/24e, (SEKm) Estimate changes (SEKm) Old forecast New forecast Change Net sales 2021/22e 2022/23e 2023/24e 2021/22e 2022/23e 2023/24e 2021/22e 2022/23e 2023/24e Games THQ Nordic 2,331 2,576 2,828 2,342 2,588 2,842 0.5% 0.5% 0.5% Games Deep Silver 3,666 4,146 4,611 3,839 4,410 4,904 4.7% 6.4% 6.4% Games Coffee Stain 1,002 1,152 1,325 1,018 1,171 1,346 1.6% 1.6% 1.6% Games Saber Interactive 1,761 1,937 2,131 1,697 1,945 2,140 -3.6% 0.4% 0.4% Games DECA Games 643 720 807 1,404 2,360 2,832 118.3% 227.7% 251.1% Games Gearbox 1,594 1,777 1,982 1,569 1,749 1,951 -1.6% -1.6% -1.6% Games Easybrain 1,905 2,134 2,390 1,991 2,230 2,498 4.5% 4.5% 4.5% Games Total 12,902 14,442 16,073 13,860 16,454 18,512 7.4% 13.9% 15.2% % of total 82.0% 83.2% 84.2% 82.0% 84.0% 85.2% 0.1 pp 0.9 pp 0.9 pp Partner Publishing/Film 2,840 2,925 3,013 3,040 3,131 3,225 7.0% 7.0% 7.0% Group 15,742 17,368 19,086 16,900 19,585 21,737 7.4% 12.8% 13.9% COGS -6,141 -6,555 -7,193 -6,704 -7,420 -8,195 9.2% 13.2% 13.9% Gross profit 9,601 10,813 11,893 10,196 12,165 13,543 6.2% 12.5% 13.9% Capitalized costs & other income 2,981 3,284 3,566 3,290 3,877 4,303 10.3% 18.1% 20.7% Operating costs -5,418 -5,905 -6,394 -5,991 -7,051 -7,825 10.6% 19.4% 22.4% EBITDA 7,165 8,193 9,066 7,496 8,992 10,021 4.6% 9.8% 10.5% Depreciation & amortization -8,295 -8,598 -8,441 -9,327 -9,912 -10,046 12.4% 15.3% 19.0% Operational -1,614 -1,981 -2,085 -1,786 -2,320 -2,455 10.7% 17.1% 17.7% Non-operational -6,681 -6,617 -6,356 -7,541 -7,592 -7,591 12.9% 14.7% 19.4% Adj.