Q2’19 operational EBIT +26.9% vs. ABGSCe

We raise op. EBIT estimates by 3.5-1.4% for ’19e-’21e

SOTP scenarios indicate a value of SEK 67-89 per share

Q2 sales of SEK 1,260m alongside op. EBIT margin 19.1%
Embracer reported its Q2’19/20 today, which offered a strong beat compared with FactSet consensus figures. Net sales were SEK 1,260m, +14.5% vs. ABGSCe and +20.7% vs. consensus. Sales were driven by the Games segment, which contributed SEK 816m (74% of game sales were digital and 68% came from sales of back-catalogue games: primarily Metro Exodus and Kingdom Come: Deliverance). Wreckfest on console – released in the quarter – was also a main revenue driver in the THQ Nordic segment. The Partner Publishing segment had no major AAA-releases in the quarter, and its revenues were thus down 50.5% y-o-y at SEK 444m. The large contribution from the Games segment contributed to strong profitability – we estimate that the gross margin for Partner Publishing is around 20%. This yielded a group operational EBIT – which is adjusted for K3 amortisations to ease comparison to IFRS 16 peers – of SEK 241m, +26.9% vs. ABGSCe and +45.8% vs. consensus. Reported EBIT was SEK 76m, for a reported EBIT margin of 6.1%.

Positive estimate revisions, op. EBIT up 3.5-1.4%, ’19e-’21e
Factoring in the strong report today, and in combination with a 13.6% sales increase for Deep Silver in Q3’19/20e where we see strong back catalogue sales and the release of Shenmue III, we raise our sales estimate by 2.3% and our op. EBIT estimate by 3.5% for the current fiscal year. We also increase our D&A assumptions by 3.3-3.1% for the upcoming three fiscal years, which causes negative rep EBIT changes. See p. 4 for further information regarding our estimate changes.

EV/operational EBIT 14.5x-11.5x ’19e-’21e
In establishing a fair value range for Embracer, we utilise three sum-of-the-parts scenarios, which, based on our updated estimates, indicate a fair value range of SEK 67-89 per share. Additionally, at today’s sh
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