Embracer Group
Embracer Group - Pipeline and M&A outlook remain favourable (ABG Sundal Collier)
2020-05-21 20:58
Q4 adj. EBIT +12.3% vs. ABGSCe, +8.4% vs. consensus
Estimate changes on AAA delays & Saber amortisations
SOTP SEK 93-125 per share, 20/21e EV/adj. EBIT 23.8x
Strong Q4 performance, COVID-19 bolsters Games demandEmbracer delivered revenue of SEK 1,340m in Q4, at the top end of the pre-announced range of SEK 1,260-1,350m, for y-o-y growth of -5.9% due to tough comparables from the Metro Exodus full release. The Games segment contributed SEK 904m, thus exceeding the pre-announced range of SEK 810-850m, corresponding to a record 67.5% of revenue. Seventy-eight percent of Games sales were digital, a new record high, bolstered by increasing consumer demand following COVID-19. However, the gross margin of 50.3% was 2.8pp below our estimate, mainly due to a lower gross margin in the Deep Silver segment, as the developers of Metro Exodus receive a greater part of profits through royalties. Adj. EBIT amounted to SEK 286m, +12.3% vs. ABGSCe and +8.4% vs. consensus, for a margin of 21.4%, +1.6pp vs. ABGSCe.
AAA-games delayed, but current FY pipeline remains solid
Management wording in the report suggests that the two AAA-titles – which we suspect are Dead Island 2 and Saints Row V – previously slated for 20/21e have been delayed to 21/22e; thus we now pencil in releases in the next FY. However, looking at the current-year pipeline, management estimates that new games with a total development cost of SEK 1.2-1.4bn will be released, up from ~SEK 0.6bn in 19/20, and the Q1’20/21e pipeline looks particularly strong, see page 6. Lastly, the initial PPA of Saber Interactive suggests that surplus values between SEK 6bn and SEK 6.25bn will be added, mainly attributable to Goodwill by our estimate. This will result in additional quarterly Goodwill amortisations of SEK 300-313m starting April ’20, thus greatly pressuring reported EBIT and net profit due to K3 accounting standards.
Updated SOTP valuation suggests SEK 93-125 per share
We have updated our three separate SOTP valuations, based on
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