Equity Research - 29 June 2020 06:45 CET Bublar Group Reason: Initiating coverage Company sponsored research Consolidating the XR space Not rated M&A driven growth story within XR software Forecast ’22e sales of SEK 330m, 7.0% EBITDA margin SOTP fair value range of SEK 2.8-7.9 per share Share price (SEK) 3.8 26/06/2020 IT, Sweden Riding on the back of strong structural trends in XR BUBL.ST/BUBL SS The Bublar Group is a conglomerate currently consisting of four companies, which is leveraging its proprietary technology within MCap (SEKm) 358 extended reality (XR), augmented reality (AR), motion capture and visual MCap (EURm) 34.1 effects (VFX), with the ambition of becoming the global leader within the Net debt (EURm) -4 space. The group implements an M&A-driven growth strategy, recently adding ~SEK 200m in sales by acquiring the award winning VFX studio No. of shares (m) 94.2 Goodbye Kansas Studios. Bublar’s underlying markets are exhibiting Free float (%) 100.0 rapid growth, following increased adoption of its key technologies and expansion of applicable areas, where for example the XR market is Av. daily volume (k) 15.2 expected to grow at a CAGR of ~65% between 2019 and 2025, according to Mordor Intelligence. Next event Q2 report: 21 Aug Set to reap the rewards of continued software investments Performance We anticipate that Bublar Group will experience accelerated growth in 400 our forecast period. Key drivers are: the commercialization and 350 appropriate packaging of its platforms via Vobling and Sayduck, the 300 imminent release of Otherworld Heroes and Hello Kitty AR: Kawaii World 250 200 from Virtual Brains, and Goodbye Kansas Studios opting to enter more 150 extensive framework agreements with its key customers and leveraging 100 its proprietary software through a licensing model. As such, we estimate 50 that revenue will increase from SEK 144m in ’20e to SEK 330m in ’22e, Jul 18 Jul Jul 19 Jul Jan 18 Jan Jan 19 Jan Jan 20 Jan Mar 18 Mar Mar 19 Mar Mar 20 Mar Nov 17 Nov Sep 18 Sep Nov 18 Nov Sep 19 Sep Nov 19 Nov May 18 May May 19 May May 20 May with an EBITDA margin of 7.0% in ‘22e. We point out that Goodbye Bublar Group OMX STH PI Kansas Studios was included in the group from 1 May 2020. 1m 3m 12m EV/sales 2.2x-0.9x for ’20e-’22e, SOTP SEK 2.8-7.9 per share Absolute (%) -20.2 22.8 -5.0 OMX STH PI (%) 3.3 18.0 5.8 We utilise a sum-of-the-parts valuation in order to determine a fair value Source: FactSet range for Bublar Group, given that the company’s segments differ quite a bit. By discounting our ‘21 sales estimates with a WACC of 12.0%, and applying a range of relevant peer multiples, we find a fair value range of SEK 2.8-7.9 per share. Lead analyst: Jesper Birch-Jensen Simon Granath 2020e 2021e 2022e SEKm 2018 2019 2020e 2021e 2022e P/E (x) -8.3 -20.4 -57.3 Sales 3 17 144 289 330 P/E adj (x) -8.3 -20.4 -57.3 EBITDA -20 -31 -18 12 23 P/BVPS (x) 2.26 2.61 2.81 EBITDA margin (%) -572.3 -182.2 -12.8 4.0 7.1 EV/EBITDA (x) -17.9 27.9 13.3 EBIT adj -25 -46 -45 -18 -7 EV/EBIT adj (x) -7.3 -17.8 -47.8 EBIT adj margin (%) -712.3 -267.8 -31.4 -6.3 -2.0 EV/sales (x) 2.29 1.13 0.94 Pretax profit -25 -46 -45 -18 -7 ROE adj (%) -35.6 -12.4 -4.9 EPS rep -0.61 -0.78 -0.46 -0.19 -0.07 Dividend yield (%) 0 0 0 EPS adj -0.61 -0.78 -0.46 -0.19 -0.07 FCF yield (%) -43.9 1.2 3.9 Sales growth (%) na 392.0 742.8 100.7 14.2 Lease adj. FCF yld (%) -43.9 1.2 3.9 EPS growth (%) -63.3 -26.6 40.6 59.4 64.5 Net IB debt/EBITDA 2.3 -4.1 -2.6 Lease adj. ND/EBITDA 2.3 -4.1 -2.6 Source: ABG Sundal Collier, Company data 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. Bublar Group Opportunities Risks We anticipate that Bublar Group will enjoy accelerated We see financial risk given if Bublar’s internally growth in our forecast period. Key drivers are: the developed games, Otherworld Heroes and Hello Kitty AR: commercialization and appropriate packaging of its Kawaii World, are unsuccessful, Bublar will likely have to platforms via Vobling and Sayduck, the imminent release raise additional funds. Furthermore, there is a of Otherworld Heroes and Hello Kitty AR: Kawaii World competitive risk where larger companies with greater from Virtual Brains, and Goodbye Kansas Studios opting funding could develop their own platforms to compete to enter more extensive framework agreements with its with, for example, Vobling and Sayduck. key customers and leveraging its proprietary software through a licensing model. Sales estimates, 2019-2022e, SEKm EBITDA estimates, 2019-2022e, SEKm 350 30 300 20 250 10 200 0 150 -10 100 -20 50 -30 0 -40 2019 2020e 2021e 2022e 2019 2020e 2021e 2022e Sales Sales Source: ABG Sundal Collier, Company data Source: ABG Sundal Collier, Company data Quarterly sales and adj. EBIT, SEKm Company description The Bublar Group of today is a conglomerate of four 70 0.0 companies that leverage its proprietary technology within 60 -2.0 extended realty (XR), augmented reality (AR), motion 50 -4.0 capture and visual effects (VFX) with the aim of becoming the global leader within the space. The group 40 -6.0 has an M&A-driven growth strategy and it recently added 30 -8.0 ~SEK 200m in sales by acquiring the award winning VFX 20 -10.0 studio Goodbye Kansas Studios. 10 -12.0 0 -14.0 quarterly sales quarterly adj. EBIT Source: ABG Sundal Collier, Company data 29 June 2020 ABG Sundal Collier 2 Bublar Group Contents Summary ...................................................................................................... 4 Bublar Group in a nutshell ............................................................................ 8 Product technology ..................................................................................... 17 Market overview ......................................................................................... 19 Market drivers and trends ........................................................................... 25 Competitive landscape ............................................................................... 31 Estimates and forecasts ............................................................................. 34 Valuation .................................................................................................... 40 Appendix: Management .............................................................................. 42 Appendix: Shareholders ............................................................................. 44 29 June 2020 ABG Sundal Collier 3 Bublar Group Summary The Bublar Group of today is a conglomerate currently consisting of four companies, which is leveraging its proprietary technology within extended realty (XR), augmented reality (AR), motion capture and visual effects (VFX) with the ambition of becoming the global leader within the space. The group implements an M&A driven growth strategy and it recently added ~SEK 200m in sales by acquiring the award winning VFX studio Goodbye Kansas Studios. Although the company is still in the early stages of packaging and commercialising its product offering, we look with favour upon its potential, and through a sum-of-the-parts valuation we find a fair value range of SEK 2.8-7.9 per share. Bublar Group today Bublar Group is a conglomerate composed of four companies: Vobling, Sayduck, Virtual Brains and Goodbye Kansas Studios. The subsidiaries offer extended reality (XR) solutions for enterprises, 3D models and augmented reality (AR) visualisation for e-commerce, location-based AR games towards consumers and advanced visual effects (VFX), motion capture and artwork services for production companies in the movie, TV and gaming industries. Bublar is coming out of an intensive two and a half year period with three acquisitions, taking the headcount from 17 to over 200. The firm offers products and services, within its business segments Work, Shop, Play and Goodbye Kansas Studios, towards businesses and consumers. Bublar has a global presence through its offices in Sweden, Finland, Germany, the UK, the US, Singapore and the Philippines. The company has customers that include Alfa Laval, SAAB, Cargotec, Ubisoft and Volvo Cars. For Bublar, the upcoming releases of Otherworld Heroes and Hello Kitty AR: Kawaii world, the transition towards licensing and recurring revenue in the enterprise segment, leveraging the IP and striving towards operating excellence within Goodbye Kansas, are of utmost importance to propel the company to the next level. Product overview Bublar is active within four segments: Work, Shop and Play focus on extended reality, while Goodbye Kansas Studios offers VFX, motion capture and artwork for the movie, TV and gaming industries. Business Segments Source: ABG Sundal Collier, company data 29 June 2020 ABG Sundal Collier 4 Bublar Group Work (Vobling) creates extended reality applications, services and content for enterprise customers. SJ, SAAB and Cargotec are some of the companies that utilise XR technology from Vobling today. Shop (Sayduck) enables e-commerce to showcase their products in a customer orientated way through 3D models and augmented reality. Shopify and Rimasys are clients of Sayduck. Play (Virtual Brains) develops and publishes location based AR games. Otherworld Heroes and Hello Kitty AR: Kawaii World are two titles currently under development by Virtual Brains. Goodbye Kansas Studios creates trailers and cinematics for the gaming industry as well as providing artwork, VFX and motion capture for movies and games. M&A-driven growth strategy Bublar has an M&A driven growth strategy, having acquired Vobling (Work) in 2018 Sayduck (Shop) in 2019, and Goodbye Kansas Studios in 2020.