Sales beat of 23% but no drop-through to EBIT

Lowered gross margin assumptions cause EBIT revisions

Trades at a premium to peers

Deep Silver back catalogue drives sales beat
Net sales for the group came in at SEK 837m (+23% vs. ABGSCe) driven by strong sales figures from Deep Silver, especially the back catalogue. THQ Nordic also showed good net sales of SEK 145m (+32% vs. ABGSCe). Partner Publishing/Film disappointed with net sales of SEK 354m (-14% vs. ABGSCe) even though we lowered our expectations prior to the report. The sales beat did not drop through to EBIT (-26% vs. ABGSCe) as D&A was significantly higher than anticipated. Releases from Q1 affected D&A to a greater extent than we had assumed.

Change of financial year makes estimates hard to read
THQ Nordic has changed its financial year, going from a calendar year to a fiscal year ending 31 March. This means that the current fiscal year will contain five quarters, as Q1’19 will also be included. Estimates will therefore not be comparable but the main change is lowered gross margin assumptions throughout. The Games segment had a high proportion of group sales in the quarter, yet the gross margin was 0.5pp below our estimates. We believe this deviation would have been higher in a quarter where the segment Partner Publishing/Film contributed to net sales to a larger extent. Therefore, we lower our gross margin assumptions.

EV/EBIT valuation indicates a premium
Based on our estimates, THQ Nordic currently trades at 18.7x EV/EBIT for 2020e. This indicates a 40% premium to our peer group of game developers and a 30% premium to key peers. A reason for this might be that the company completed a directed new share issue in June and currently holds SEK 1.5bn in cash earmarked for acquisitions. Given CEO Lars Wingefors’ acquisition history, the market is likely optimistic about the money at hand.