Equity Research - 18 August 2021 20:51 CET Embracer Group Reason: Post-results comment Beat in challenging quarter, outlook intact Company sponsored research Q1 adj. EBIT SEK 1,217m, +12% vs. ABG, +5% vs. cons. Not rated We raise adj. EBIT by 5-6% for ‘21/22e-‘23/24e EV/adj. EBIT of ~15x ‘21/22e, ~21% below 5-year avg. Estimate changes (%) 2021e 2022e 2023e Games grow ~10% organically in a challenging quarter Sales 2.2% 3.0% 3.0% Embracer reported Q1 sales of SEK 3,427m, +6% vs. ABGSCe and +3% EBIT (rep) 21.9% -10.8% 1,541.7% vs. Infront consensus for a total y-o-y growth of 65.6%. Sales were EPS (rep) 20.0% -9.2% 103.3% driven by the Games business area, which generated 84.6% of group Source: ABG Sundal Collier sales, a new record, and grew ~10% organically in a challenging quarter. 18/08/2021 Adj. EBIT was SEK 1,271m, +12% vs. ABGSCe and +5% vs. cons. Adj. Share price (SEK) 190.0 EPS was SEK 2.30 per share, growing 53.7% y-o-y. Fair value range (per share) 230-355 Quarterly back catalogue of SEK +2bn will drive margins IT, Sweden We raise our adj. EBIT estimates by 5-6% for 21/22e-23/24e, EMBRACB.ST/EMBRACB ST respectively. This is driven both by the Q1 beat as well as by our increasing our gross margin assumptions. The gross margin will fluctuate MCap (SEKm) 94,515 depending on the performance of the “low-margin” Partner Publishing MCap (EURm) 9,240 segment, but following the consolidation of Gearbox, Easybrain and Net debt (EURm) -1,088 Aspyr, Embracer now has a quarterly back catalogue that appears to generate SEK +2bn with a high percentage of digital and owned titles No. of shares (m) 497 sales, leading to a strong gross margin. This is partly offset by an Free float (%) 64 increase in opex, e.g. Easybrain’s heavy UA investments, but still has a Av. daily volume (k) 4,591 net positive effect on adj. EBIT. In terms of Q2’21/22e, Embracer is facing tough comparables from 2020 while at the same time having a Next event Q2 report: 17 Nov small new game pipeline (SEK 225-275m dev. cost). We think this could lead to slightly negative growth in Q2 (we are at around ~9%), but this Performance ramps up to +40% in Q3 and even more in Q4 (see page 7). We also 300 think Gamescom (25-27 August) could feature a reveal of the AAA titles 250 slated for release in Q4. 200 150 EV/adj. EBIT below historical levels despite strong outlook 100 Embracer is now trading at a ‘21/22e EV/adj. EBIT of 14x on our 50 estimates, which is ~25% below the five-year historical average, 0 18 19 20 18 19 20 19 20 21 19 20 21 19 20 21 according to FactSet. This is despite Embracer having a new game 18 19 20 Oct Oct Oct Apr Apr Apr Jun Jun Jun Feb Feb Feb Dec Dec Dec Aug Aug Aug pipeline with a SEK ~3bn development cost (~4x more than last year) Embracer Group OMX STH PI which we think will drive ~30% organic growth in a year where peers are 1m 3m 12m struggling for growth and there is plenty of M&A headroom (SEK +20bn). Absolute (%) -15.3 -16.3 21.1 We also raise our SOTP fair value range to 230-355 per share. Source: FactSet Analyst(s): [email protected], +46 8 566 286 13 [email protected], +46 8 566 286 37 SEKm 2019 2020 2021e 2022e 2023e 2021e 2022e 2023e Sales 5,249 9,024 17,263 20,169 22,391 P/E (x) -49.1 -67.6 7,608.5 EBITDA 1,821 3,985 7,737 9,393 10,505 P/E adj (x) 17.1 14.2 12.4 EBITDA margin (%) 34.7 44.2 44.8 46.6 46.9 P/BVPS (x) 2.62 2.63 2.64 EBIT adj 1,032 2,912 6,019 7,073 8,050 EV/EBITDA (x) 10.9 8.6 7.3 EBIT adj margin (%) 19.7 32.3 34.9 35.1 35.9 EV/EBIT adj (x) 14.0 11.4 9.6 Pretax profit 408 296 -1,346 -1,039 339 EV/sales (x) 4.87 4.01 3.44 EPS rep 0.91 -0.23 -3.87 -2.81 0.02 ROE adj (%) 16.7 18.6 21.4 EPS adj 3.11 6.38 11.10 13.39 15.36 Dividend yield (%) 0 0 0 FCF yield (%) -2.1 4.2 4.8 Sales growth (%) -8.8 71.9 91.3 16.8 11.0 Lease adj. FCF yld (%) -2.1 4.2 4.8 EPS growth (%) high -125.1 -1,601.1 27.5 100.9 Net IB debt/EBITDA -1.4 -1.5 -1.8 Source: ABG Sundal Collier, Company data Lease adj. ND/EBITDA -0.7 -0.8 -1.0 Analyst(s): [email protected], +46 8 566 286 13 [email protected],Please refer to important+46 8 566 286 disclosures37 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 Q2'21 2021e 2022e 2023e 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-21 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Aug-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 0 0.0 -2,000 -4,000 -0.5 -6,000 -8,000 -1.0 -10,000 -12,000 -1.5 -14,000 -16,000 -2.0 -18,000 -20,000 -2.5 2014 2015 2016 2017 2018 2019 2020 2021e 2022e 2023e Net IB debt excl. leasing (LHS) Net IB debt/EBITDA lease adj. (RHS) Source: ABG Sundal Collier, Company data 18 August 2021 ABG Sundal Collier 2 Embracer Group Deviations Q1’21/22 Deviations Q1’21/22 vs. ABGSCe vs. Infront consensus Deviation to estimates (SEKm) Actual Actual ABGSC Deviation Consensus Deviation Net sales Q1'20/21 Q1'21/22 Q1'21/22e SEKm % Q1'21/22e SEKm % Games - THQ Nordic 488 669 636 32.7 5.1% 684 -15 -2.2% Games - Deep Silver 613 638 521 116.6 22.4% 516 122 23.6% Games - Coffee Stain 173 191 224 -33.3 -14.9% 253 -62 -24.6% Games - Saber Interactive 349 305 308 -3.1 -1.0% 384 -79 -20.6% Games - DECA Games 146 175 -29.4 -16.8% 170 -24 -14.4% Games - Gearbox 437 311 126.0 40.5% 336 101 30.1% Games - Easybrain 576 453 123.4 27.2% 453 123 27.2% Games Total 1,622 2,961 2,628 332.9 12.7% 2,796 165 5.9% Partner Publishing/Film 447 466 621 -155.3 -25.0% 550 -84 -15.3% Group 2,069 3,427 3,249 177.6 5.5% 3,324 103 3.1% COGS -760 -813 -1,305 492.0 - Gross profit 1,309 2,614 1,944 669.6 34.4% 2,191 423 19.3% Operating costs -656 -1,639 -1,122 -517.2 - EBITDA 965 1,532 1,466 66.7 4.6% 1,541 -9 -0.6% Depreciation & amortization -746 -2,057 -2,214 157.5 - Adj.