An emerging European games publisher

CI Games 4 October 2021 Initiation
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CI Games

An emerging European games publisher

Initiation of coverage

Video games

4 October 2021

Price

PLN1.49

Market cap

PLN272m

Net cash (PLNm) as at 30 June 2021

15.2

Shares in issue

182.9m

Free float

62.4%

Code

CIG

Primary exchange

Warsaw Stock Exchange

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.8)

(2.1)

(0.4)

Rel (local)

(10.2)

(5.4)

(27.5)

52-week high/low

PLN1.79

PLN1.08

Business description

Founded in 2002, CI Games is a Warsaw-based developer and publisher of AA+/AAA multi-platform video games for a global audience. It has specialised in first person shooter and action-driven titles, and owns IP including the SGW and LotF franchises.

Next events

Q321 update

22 November 2021

FY21 results

February 2022

Analysts

Richard Williamson

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

CI Games is a research client of Edison Investment Research Limited

CI Games is a global video games developer and publisher that focuses on premium AA+/AAA multi-platform games, with two main franchises: a first-person shooter, Sniper: Ghost Warrior (SGW); and a soulslike fantasy action role-playing game, Lords of the Fallen (LotF). With SGWC2 launched in H121, no major new games are expected in FY22, before LotF2 and the next iteration of the SGW franchise launch in 2023, as CI Games’ revenue base builds. Following a similar strategy to Remedy Entertainment and Frontier Developments, the company then expects to launch one major title every 12–18 months, incrementally broadening its portfolio. CI Games also owns a third-party publishing arm, United Label, expected to launch two to four smaller titles per year. CI Games’ current valuation takes no account of the potential for success in FY23, which could justify a c 5x increase in the share price. In August, CI Games announced a review of its strategic options, to include identification of a potential strategic investor.

Year end

Revenue
(PLNm)

EBITDA
(PLNm)

PBT*
(PLNm)

EPS*
(PLN)

DPS
(PLN)

P/E
(x)

12/19

47.5

21.6

2.0

(0.01)

0.00

N/A

12/20

46.0

28.9

9.2

0.05

0.00

29.8

12/21e

93.7

62.4

38.2

0.17

0.00

8.8

12/22e

55.7

33.5

13.8

0.06

0.00

24.8

12/23e

256.7

132.1

111.5

0.49

0.00

3.0

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Long-term track record, ambitious growth plans

CI Games has a 20-year track record under its founder and CEO, Marek Tymiński, with two established franchises, SGW (12.5m units sold) and LotF (over 3m units sold). To become a major publisher, CI Games intends to build out its existing franchises, launching a major title every 12–18 months from 2024. Based on our assumptions, we estimate year-on-year revenue growth of 104% in FY21, with a revenue CAGR of 77% from FY20–23. We forecast FY21e EBITDA of PLN62.4m (67% margin), rising to PLN132.1m (51% margin) in FY23, a 66% CAGR FY20–23.

Investment case centred around LotF2

With SGWC2, the group’s key FY21 title, already released and performing well, our FY21/22 forecasts are substantially underpinned. No major releases are planned for FY22, leaving the successful launch of LotF2 in FY23 as the major focus for investors. Timely delivery of a high-quality title is critical to the investment case.

Valuation: Material discount to European peers

As a domestically held stock, with a mixed history of execution, CI Games trades on 4.0x FY21e EV/EBITDA and a P/E of 8.9x and 1.9x FY23e EV/EBITDA and an FY23e P/E of 3.1x. This compares to the peer group on an FY23e EV/EBITDA of 13.1x and a P/E of 23.4x. If CI Games can successfully launch the next SGW game and LotF2 in FY23 (selling 1.5m and 2.5m digital units) to establish a broad-based portfolio, then both our DCF analysis and peer multiples indicate that there is the potential for almost 5x upside as a reward for early investors in this growth story.

Investment summary

An emerging, IP-owning European developer and publisher

CI Games is an experienced game developer and publisher, with headquarters in Poland, but serving a global player base from offices in Spain, Romania, the UK and the United States. With a 20-year track record, CI Games has established two franchises, SGW, which has sold over 12.5m units across multiple iterations, and LotF, which has sold in excess of 3m units. These games have established a loyal and committed player-base in the first-person shooter (FPS) and soulslike role-playing game (RPG) segments, which CI Games is seeking to build on with future games. In 2018, CI Games also launched its own indie games publisher, United Label.

Strategy: Building a portfolio of high-quality titles

In August 2021, CI Games announced a review of its strategic options, to include identification of a potential strategic investor, advised by Drake Star Securities.

Over the next five years, CI Games wants to establish itself as one of Europe’s major games developers and publishers, building on its soulslike, RPG and FPS expertise. It is following a path similar to Frontier Developments (AIM: FDEV) and Remedy Entertainment (HEX: REMEDY), building out its existing franchises, but also launching new games (based on owned as well as licensed IP) on a more regular basis. Currently, with two teams, new titles are launched every c 24 months, but from 2023 this should reduce to 18–24 months, with the intention of launching a major title every 12–18 months from 2024 based on a third team working alongside CI Games Warsaw and Hexworks.

CI Games’ latest title, Sniper: Ghost Warrior Contracts 2 (SGWC2), was launched in June 2021 to strong reviews, and has had very promising initial sales, with 560,000 units sold in the two months to 31 August 2021. This successful launch, together with ongoing digital sales and monetisation of the title, largely underpins the group’s results for FY21/22, leaving the successful launch of LotF2 in FY23 as the critical element of the investment case. We also assume that the next iteration of the SGW franchise will launch in FY23, but as the sixth iteration in an established franchise, we perceive the risk for this title to be significantly lower than for LotF2.

Strategy 2.0: Lessons learned from 2017 crunch

Management stripped the business back to its core and rebuilt its strategy following previous development challenges, which came to a head in 2017, with a disappointing reception to the release of SGW3 and the termination of a third-party contract to co-develop LotF2. Management is seeking to de-risk the development process and re-engineer CI Games to produce high-quality titles, to time and to budget.

Strengthening in-house development – in order to deliver its vision, management put in place an experienced senior development team, with strengthened processes and controls.

Refreshing the development team – the development team was scaled back to 30 people in 2018. Capacity has been steadily rebuilt, with the team now standing at over 120 developers.

Partnering Polish with European talent – development capacity remains constrained in Poland, with strong demand raising salaries. As a result, CI Games has partnered its Warsaw-based team with teams across Europe, notably in Spain, Romania and the UK.

Increased budgets – in order to improve game quality, team sizes and budgets have had to increase, alongside tighter management of the development process.

External game engine – LotF2 is being developed on the Unreal game engine (and we expect the next instalment of the SGW franchise will be as well), significantly saving development time and allowing the teams to focus on distinctive gameplay.

The success of CI Games’ revised strategy will be judged by user reviews (as an indicator of end-user demand), Metacritic scores (as an indicator of quality) and ultimately in terms of units sold, delivering effective monetisation over the cycle.

Title release schedule: LotF2 remains the lynchpin

With SGWC2 released in H121 (and on PS5 in Q321), we do not expect the next major release (LotF2) until H123, meaning that we expect FY22 to be a ‘lull year’ with a y-o-y fall in revenues. Given an approximate 18- to 24-month development time between iterations of the SGW franchise, we also expect the next instalment in FY23, though likely H223. We assume that CI Games would like to run a third development team in parallel with the existing two teams (although the company has not confirmed this), meaning that we would expect a new IP to be launched in FY24 with major game releases following every 12–18 months thereafter.

To these release assumptions, we add a low level of revenue from United Label (a 78.4% held subsidiary), building over time as more niche titles are released, as well as CI Games’ back catalogue, principally from prior releases from the SGW franchise.

Financials

Ostensibly, with a solid performance from SGWC2 in FY21, investors are being asked to look ahead to FY23 and beyond in order to ascribe anything like full value to CI Games’ shares. Our forecasts are built on the gating assumption that LotF2 and the next iteration of the SGW franchise are both launched in FY23 and achieve moderate to good sales figures, of 2.5m and 1.5m digital units, respectively. Thereafter, we assume games are launched every 12–18 months, offering a broad and increasingly stable future revenue profile.

CI Games delivers strong margins in years with a major new title release (FY21, FY23), but is also profitable in years between releases (FY20, FY22), despite lower revenues. As with other Polish-based publishers, EBITDA margins for the forecast period (c 50–65%) are expected to remain above European peers (c 35–40%) through cost-effective development expertise and good process controls. For FY21, we estimate revenues of PLN93.7m, 104% y-o-y growth over FY20 (PLN46.0m), almost doubling H121 revenues, with EBITDA of PLN62.4m (a 66.5% margin). In FY22, we expect no major new releases and, as such, forecast a 41% fall in revenues to PLN55.7m, with EBITDA of PLN33.5m (a 60.2% margin). In our base case for FY23, we assume digital unit sales of 1.5m for the next iteration of the SGW franchise and 2.5m for LotF2, leading to revenues of PLN256.7m with EBITDA of PLN132.1m (51.5% margin).

Games market: 8% global growth FY21–24

Buoyed by exceptional demand for games during lockdown and boosted by the start of a new console transition, the global games industry showed year-on-year growth of over 20% in FY20 (Newzoo). Market growth is expected to pause in FY21 (1.1% fall year-on-year), before growth resumes in FY22, with 8% annual growth from FY21–24. Driven by global growth as well as increasing demographic penetration, we expect that the games sector will remain high growth for the foreseeable future.

Sensitivities: Execution risk a focus for investors

With FY23 critical to the investment case, investors are being asked to look through FY22 to potential higher levels of profitability in FY23 and beyond. CI Games has learnt from the challenges it faced in 2017 and reconfigured its strategy to deliver consistently higher-quality games. Currently CI Games holds a relatively narrow portfolio of titles, so a key risk is whether management can deliver successive titles of increasingly higher quality, to budget in a timely manner. Recent launches indicate that quality is steadily improving. As a people-based business, CI Games is reliant on the quality of staff that it can attract and retain. Management has chosen to continue with a strategy of distributed development post-pandemic, allowing the business to attract key talent who might otherwise not be prepared to relocate to Warsaw. However, this increases execution risk. CI Games is reliant on a stable tax regime and plans to use Poland’s IP box tax relief to reduce its effective tax rate from 2022. With an increasingly European cost base and revenues principally denominated in US dollars, euros and pounds sterling, CI Games reports its results in Polish zloty, although it seeks to hedge FX risk.

Valuation: Potential for c 5x upside if targets are met

CI Games trades on 4.0x FY21e EV/EBITDA and a P/E of 8.9x, with its key FY21 title already released and performing well. Based on our base case assumptions, CI Games trades on 1.9x FY23e EV/EBITDA, together with a P/E of 3.1x. This compares to the peer group EV/EBITDA of 13.1x and a P/E of 23.4x. With FY21/22 already largely underpinned by the successful launch of SGWC2 in H121, if CI Games can successfully meet our FY23 targets, and build a broad-based and sustainable business thereafter, then both our discounted cash flow (DCF) analysis and peer multiples indicate that there is the potential for 5x upside as a reward for early investors in this growth story. Investors should closely monitor development progress at LotF2.

Company overview

Business description

CI Games is a global video games developer and publisher, founded in 2002 in Warsaw and listed on the Warsaw Stock Exchange. It focuses on premium AA+/AAA multi-platform games, currently centred around two main franchises: a FPS title, SGW; and a fantasy role-playing game action title, LotF. The company has an in-house development and publishing arm, CI Games, and a third-party publishing arm, United Label, targeting non-mainstream titles from independent (indie) games developers.

With a headcount now in excess of 150 people, and with offices in five countries (Poland, Spain, UK, United States and Romania), CI Games has sold over 15m units and established two franchises. CI Games publishes titles both digitally and physically and distributes product across all major console platforms (PS4, PS5, Xbox One, Xbox X/S, Nintendo Switch) and PC (Steam, GoG). Despite being based in Poland, the group has minimal domestic sales (typically less than 1%), and although CI Games does not break down its international sales, in line with the industry, we would assume that the vast majority of players will come from the United States, the UK and Europe.

Background

CI Games was founded as City Interactive in 2002, through the merger of three video game companies: Lemon Interactive, We Open Eyes and Tatanka. In 2007, City Interactive merged with Oni Games and Detalion before listing on the Warsaw Stock Exchange later that year.

City Interactive released its first sniper title, Sniper: Art of Victory, in 2008 and then Sniper: Ghost Warrior in 2010, launching the eponymous franchise, before announcing its change of name to CI Games. SGW2 was launched in 2013 and then its second franchise, LotF, co-developed by Deck13, was released in 2014. After problems with SGW3 in February 2018, CI Games’ development team was shrunk to 30 staff, before being rebuilt. United Label, a new publishing arm for independent games, was established later in 2018. CI Games currently has a headcount of over 150 people, of whom c 120 are directly involved in game production, with a team of over 60 people working on the next instalment of the SGW franchise and a similar sized team working on LotF2.

Business model

CI Games develops, publishes and distributes video games, both digitally and physically:

Development: CI Games has two principal development studios, CI Games in Warsaw (specialising in first person shooter (FPS) titles), which has been responsible for the SGW franchise, and Hexworks, launched in 2020. Based out of Barcelona and Bucharest, Hexworks is working on LotF2, and specialises in soulslike fantasy action RPGs.

Publishing: CI Games publishes games based on both its own IP and licences, marketing and distributing titles online as well as through local distributors for physical product. The company publishes games on all key platforms, including the new console generation (PS5 and Xbox Series X/S), as well as PC.

United Label: founded in 2018, United Label publishes non-mainstream premium games developed by independent development studios (indie games) on PS4, Xbox One, Nintendo Switch, PC and mobile. These typically sell at a lower price point than CI Games’ other titles (typically at or around €/$19.99) and in lower volumes. The company published Roki in 2020 and has launched Elder Souls and Tails of Iron in 2021, with plans to release one to four games per year. In 2021, United Label floated on NewConnect (Warsaw’s alternative SME market) to raise additional capital of PLN4.1m, with CI Games retaining a 78.4% holding in the company, valued at c PLN16.3m.

Distribution: CI Games distributes its games (both digitally and physically) directly to retailers. The group’s titles are sold in over 160 countries worldwide, including in the United States, through CI Games USA Inc. CI Games also works with distribution partners (eg Koch Media, part of Embracer Group).

Exhibit 1: Physical/digital revenue profile

Exhibit 2: Physical/digital unit sales

Source: CI Games

Source: CI Games

Exhibit 1: Physical/digital revenue profile

Source: CI Games

Exhibit 2: Physical/digital unit sales

Source: CI Games

Improving digital product mix to offer enhanced margins

CI Games did not release a major title in FY20 as it completed work on SGWC2, released in June 2021. This partly accounts for the significant fall in physical sales in FY20 (25% of total revenues) versus FY19 (55% of total revenues), as boxed product sales typically tend to fall in the month after a major release. This combined with the lockdown surge in digital sales seen throughout the games industry helped to sustain digital sales at an elevated level in FY20.

With the release of SGWC2, physical sales rose to 33% of total sales in H121. We do not expect material further physical sales in H221 as there are no further releases planned, and as such we expect the proportion of physical to remain below 20% for FY21. Thereafter, momentum is clearly for physical sales to tail-off substantially over the next two to five years. As can be seen in Exhibit 3, the higher margins achievable on digital sales and the increasing penetration of digital sales in CI Games’ revenue mix should lift group margins over this transition period.

Exhibit 3: Digital sales offer higher margins than physical sales

Retail

Digital

Comment

RRP

$49.99

$49.99

Equivalent sales price

VAT

20%

20%

Discount/commission

35%

50%

Scope for higher discounts on digital sales

Gross revenues

$27.08

$20.83

Price protection

10%

0%

No need to de-risk retailer for digital sales

Net revenues

$24.37

$20.83

COGS

$7.00

-

Digital sales have zero COGS

Marketing

15%

15%

Similar levels of marketing

Gross margin

$13.71

$17.70

Zero COGS drives higher digital margins

Royalties

0%

0%

Net margin

$13.71

$17.70

Net margin (%)

51%

85%

Digital margins are more attractive than physical

Source: Edison Investment Research

CI Games: Established franchises

Exhibit 4: Review scores improving over time

Source: CI Games

Sniper: Ghost Warrior (2010–21)

Exhibit 5: Track record of the Sniper: Ghost Warrior franchise

Release date

Title

1st year unit sales

2010

Sniper: Ghost Warrior

1.50m

2013

Sniper: Ghost Warrior 2

1.50m

2017

Sniper: Ghost Warrior 3

1.30m

2019

Sniper: Ghost Warrior Contracts

1.00m

2021*

Sniper: Ghost Warrior Contracts 2

0.56m

5.86m

Source: CI Games. Note: *To end August 2021 (launched June 2021).

Sniper: Ghost Warrior is the best-selling first-person sniping franchise of all time, having sold over 12.5m units over more than a decade.

Sniper: Art of Victory was the first sniper game developed and published by CI Games in 2008. Since 2010, a further five titles have been released as part of the SGW franchise:

SGW (2010) was a commercial success, selling over 1.5m units in the 12 months after launch. SGW2 (2013) achieved similar sales figures. SGW3 (2017) was developed on a larger budget and was intended to break the franchise out of its tight, first-person sniper niche. Unfortunately, with disappointing reviews given its loftier ambitions and increased budget (Metacritic: 59), SGW3 only sold 1.3m units in its first year. Based on this misstep, CI Games then decided to refocus on lower-budget AA releases, with more limited gameplay.

Exhibit 6: Sniper: Ghost Warrior Contracts 2

Source: CI Games

The latest two releases in the franchise, Sniper: Ghost Warrior Contracts (November 2019) and SGWC2 (June 2021), have followed a similar formula, with the games right-sized to optimise returns, providing focused content (c 20 hours of single-player gameplay) at an appropriate budget, targeted largely at the core of existing players. SGWC had sold over 1m units as at January 2021. Following its release in June 2021, SGWC2 has already broken even by late July 2021 (against a development and marketing budget of c €6.5m). In the first 10 days following launch, SGWC2 delivered a 170% uplift in digital revenue versus SGWC and had sold 560,000 units by the end of August (the first circa two months of sales). Although it is too early to know what units SGWC2 will ultimately deliver, it appears on track to sell over 1m units in its first year of sales.

The enduring nature of the back catalogue is highlighted by the H121 revenue figures, where, although sales of SGWC2 accounted for 68.5% of revenues, the past four iterations of the franchise still collectively accounted for over 23% of H121 revenues (PLN11.4m) (Exhibit 4). The remaining revenue came from continuing LotF and United Label sales.

Lords of the Fallen (2014)

LotF is a soulslike action RPG, a sub-genre typically characterised by difficult, high-risk combat with hard-hitting enemies, sparse checkpoints and enemies dropping souls, typically in a dark-fantasy setting. The genre was named after the Dark Souls series developed by FromSoftware, published by Nintendo. The original LotF title was co-developed by German studio Deck13 Interactive with a budget (including marketing) of PLN40m (c US$10m), a AAA title at the time. Despite a Metacritic score between 68–73 (depending on platform), the game only went on to sell c 1m units in the 12 months after launch, failing to deliver on CI Games’ ambition for what was the group’s highest budget release at the time. However, in the seven years since launch, LotF has sold over 3m units (with 10m players including subscriptions), generating over PLN100m in sales revenue and c PLN50m in profits.

Exhibit 7: Lords of the Fallen (2014)

Source: CI Games

After several false starts with first Deck13 and then Defiant Studios, LotF2 is now under development by Hexworks, CI Games’ internal studio based in Barcelona and Bucharest. Given the group’s ambitions for the title, we estimate a development budget of c US$15m (PLN60m) and expect the game to be launched as a full price product on the PC, PS5 and Xbox Series S/X. Although no launch date has been confirmed, we expect the game to be released in H123.

Game development: The historical context

Following initial success with the SGW franchise, CI Games’ subsequent track record is mixed, although the group is now back on an improving trend. The challenges crystallised in 2017 following the release of SGW3 to a low Metacritic score of 55–59, together with the termination of Deck13’s contract to co-develop LotF2.

The original LotF was co-developed by Deck13 and launched in October 2014. The studio was in pre-production on LotF2 thereafter but left the project in 2015. CI Games sub-contracted Defiant Studios to take over development of LotF2 in 2018, however, Defiant’s contract was also terminated at vertical slice (the first snapshot of the full gameplay) in 2019. Since then, CI Games’ internal studio, Hexworks, has picked up the title, which we expect to be released in H123 as a dark fantasy soulslike game.

The latest two releases in the SGW franchise, SGWC1 and SGWC2 (November 2019 and June 2021 respectively), show that lessons have been learnt from the quality issues and slippage evident on LotF2 and SGW3. After an ambitious approach to SGW3, CI Games significantly reduced play-through length for the subsequent SGWC1 and SGWC2, focusing on delivering higher-quality content to appeal to existing players of the franchise.

CI Games: New development model for LotF2

From its previous experience on LotF, the management team has sought to re-engineer and de-risk the development process to produce LotF2 as a high-quality title, to time and to budget.

Initiatives have included:

Strengthened in-house development – having previously worked with Deck13 and Defiant Studios, CI Games realised that in order to deliver its vision, it needed to implement better processes and controls, overseen by an experienced development team. For LotF2 it has preferred an in-house team over a third-party studio.

Refreshing the development team – in order to deliver higher-quality games, management made the difficult decision to lay off a significant part of its development expertise, shrinking the development team to 30 people in 2018. Capacity has been steadily rebuilt over the course of 2020 and 2021, with the team’s headcount now standing at over 150 people, including over 120 experienced developers.

Partnering Polish with European expertise – although there is increasing expertise in Poland, Polish development capacity remains constrained, with strong demand raising salaries. As a result, CI Games has been recruiting heavily outside Poland, building teams in a number of other European countries, notably Spain and Romania (Hexworks), as well as the UK.

Increased budgets – in order to improve game quality, the company has largely focused on AA+/AAA games, rather than lower budget titles. To deliver high-quality titles, CI Games has recognised that team sizes and development budgets have had to increase ($5–6m for SGWC2, an assumed $15m for LotF2), despite relatively constrained playthrough time, alongside improved management of the development process. However, these budgets (and the development risk) remain substantially below those for AAAA games (eg Cyberpunk 2077).

Use of third-party game engines – LotF2 is being (and we expect the next instalment of the SGW franchise to be) developed on the Unreal game engine, a market-leading games engine delivering standardised tools, a leading graphics capability, art management and physics, rather than an in-house games engine. This choice saves significant development time, allowing the teams to focus on gameplay. Having developed internal experience of the engine, future games are also likely to be built on Unreal.

The success of this revised strategy will be judged by user reviews (as an indicator of end-user demand), Metacritic scores (as an indicator of quality) and ultimately units sold for future game releases. We have already highlighted the improving trend of CI Games’ Metacritic scores since the low point of SGW3 and SGWC1, released in 2017 and 2019 respectively. If CI Games is to establish a strong sustainable franchise, management recognises that LotF2 will need to raise the quality threshold further.

Publishing: United Label

In 2018, CI Games founded United Label, a new indie publishing arm specialising in ambitious smaller titles. United Label subsequently listed on NewConnect (Warsaw’s alternative investment market) in January 2021, raising PLN4.1m for its publishing business, with CI Games holding a 78.4% stake following the IPO.

United Label was established to work with innovative and experienced independent developers, offering a flexible publishing structure that works for both parties. So far, United Label has worked with four studios: Fallen Flag, Lunaris Iris, Odd Bug (now working on its second title with United Label) and Polygon Treehouse.

United Label’s first title, Röki, was released in July 2020 (PC, Nintendo Switch) and received positive reviews from both critics (Metacritic: 79) and users (user review: 8.5). In March 2021, the game broke even for CI Games, recouping all production and marketing expenses. Röki received a nomination at The Game Awards in the ‘Best Indie Debut of 2020’ category, was nominated for ‘Best Debut Game’ and ‘Best British Game’ at the BAFTAs in 2020 and has been nominated for ‘Best Narrative’ at the 2021 Develop:Star Awards, where the developer, Polygon Treehouse, has also been nominated for ‘Best Micro Studio’.

Exhibit 8: United Label’s publishing line-up

Source: CI Games

United Label launched its second title, Eldest Souls (RPG soulslike adventure), in July 2021 on PC, Switch, PS4/5, Xbox Series S/X, with Tails of Iron (an adventure RPG-lite) released in September 2021 on PC, Switch, PS4/5, Xbox Series S/X. The release date for Horae (a rogue-like RPG), due on the PC, has yet to be confirmed.

Strategy

Over the next five years, CI Games wants to establish itself as one of Europe’s major games developers and publishers, building out its existing franchises, but also launching new games on a more regular basis. Currently, with two teams, new titles are lunched every c 24 months, but from 2023 this should reduce to 18–24 months (assuming a third team works alongside Hexworks and CI Games Warsaw), with the intention of launching a new major title every 12–18 months from 2024.

Companies with successful strategies that CI Games would like to emulate include Frontier Developments (four established franchises in the simulation and RTS genres, with two further titles under development); Paradox Interactive (nine franchises in the RTS and RPG genres); and Remedy Entertainment: four teams working across five games).

Exhibit 9: Indicative long-term revenue profile for CI Games

Source: Edison Investment Research

Ambitious growth strategy, with increasing digital sales

Exhibit 9 shows an indicative revenue profile for CI Games, building up to title launches every 12–18 months and benefiting from the long-tail of digital sales, supported by downloadable content (DLC) and the games-as-a-service business model.

CI Games’ strategy is to deliver significant growth through regular releases of genre-specific games to a loyal and growing global audience, with a business model that allows simultaneous production of multiple high-quality games spanning a variety of genres. As part of its strategy, CI Games intends to move SGW more into the mainstream, establishing the IP within the FPS genre (whereas today it sits within the tighter sniper sub-category) and increasing the title’s accessibility and appeal to a broader audience. Management also intends to establish United Label as a high-quality indie publisher.

Management

Exhibit 10: Experienced international management team

Source: CI Games

CI Games has made the decision to continue with an international development strategy, partnering Polish (Warsaw) with European development expertise (Barcelona and Bucharest), and an international management team (Exhibit 10). This is a continuation of the remote development strategy implemented by necessity during the COVID-19 lockdown, recognising that Polish development capacity remains constrained, leading to high wage inflation. This strategy allows CI Games to attract and retain experienced senior staff and developers, who would otherwise not be prepared to relocate to Poland. As a result, CI Games has built teams in a number of European countries, notably Spain and Romania (Hexworks), as well as the UK. CI Games also has a US-based distribution business.

Market background

Games: A global industry offering double-digit growth

Market analyst Newzoo estimates that almost three billion gamers are set to generate global revenues of c US$176bn in 2021, representing a small growth hiatus overall in 2021 (a year-on-year fall of 1.1% globally) after the year-on-year growth of more than 20% seen in 2020, driven by lockdown demand for content. From 2021–24 more regular growth is expected to return, with Newzoo estimating annual growth of 7.6%, building to a total market size of over US$219bn by 2024.

The Europe, Middle East and Africa (EMEA) and North American markets together are estimated to represent c 46% of 2021 global revenues, with Asia-Pacific (dominated by China) representing 50% of total revenues, although we would note that the increasingly tough regulatory and political climate in China, particularly restricting children’s game time, may slow future growth. 52% of global revenues were on mobile devices (smartphones and tablets), with 28% on console, with the remaining 20% on PC (both via download and browser-based games). CI Games has no material exposure to China.

Exhibit 11: A US$176bn global market

Exhibit 12: Three billion strong global player base

Source: Newzoo

Source: Newzoo

Exhibit 13: 2021 forecast to see a 1.1% fall in growth

Exhibit 14: 2021 breakdown by platform

Source: Newzoo

Source: Newzoo

Exhibit 11: A US$176bn global market

Source: Newzoo

Exhibit 13: 2021 forecast to see a 1.1% fall in growth

Source: Newzoo

Exhibit 12: Three billion strong global player base

Source: Newzoo

Exhibit 14: 2021 breakdown by platform

Source: Newzoo

Financials

H121 results

Based around the release of SGWC2 on 4 June 2021 (for PC, PS 4, Xbox One, Xbox Series S/X; H120 included no major game releases), CI Games reported a strong first half to the year, with revenues up 82% y-o-y. Gross margins also strengthened to 59% in H121 (H120: 44%) driving gross profit up 145% and EBITDA up 77%, with an H121 EBITDA margin of 60% (H120: 61.8%). End June 2021 net cash stood at PLN15.2m.

Exhibit 15: CI Games’ H121 results presentation

Source: CI Games

The vast majority of H121 revenue was generated in the second quarter (Q221: 81%), with the release of SGWC2 leading to Q221 revenues of PLN39.7m. CI Games capitalises and amortises game development, with associated costs incurred prior to release being included in intangible assets. The intangible asset is then amortised through the P&L (within cost of goods sold) over the economic life of the title, not longer than 5 years. For this reason, EBITDA is typically higher than gross profit. Based on this approach, CI Games reported a development project intangible asset of PLN58.1m (FY20: PLN54.4m), covering development costs from both SGWC2 and ongoing development work for LotF2.

Exhibit 16: H121 results

IFRS (PLNm)

H120

H220

2020

H121

Net revenue

27,037

18,973

46,010

49,224

COGS

(15,241)

(11,442)

(26,683)

(20,368)

Gross profit

11,796

7,531

19,327

28,856

EBITDA

16,704

12,215

28,919

29,559

Normalised operating profit

5,672

3,555

9,380

17,365

Profit before tax (norm)

6,290

2,740

9,183

17,687

EPS - normalised (PLN)

0.03

0.01

0.05

0.07

Revenue growth (%)

-

-

(3.1)

82.1

Gross margin (%)

43.6

39.7

42.0

58.6

EBITDA margin (%)

61.8

64.4

62.9

60.0

Normalised operating margin

21.0

18.7

20.4

35.3

Source: CI Games

Physical boxed product represented 33% of total revenue in H121, but given the vast majority of physical product sales occur within the first month of release, management expects the continuing revenue profile from SGWC2 to be digital, with consequently reduced production costs in H221, supporting margins. Management also noted that the selling costs in Q221 included the majority of the marketing costs for SGWC2, with minimal additional marketing expenses expected in H221.

SGWC2 on PS5 was released in Q321 (24 August 2021).

Revenue estimates: dependent on game release schedule

We have built our revenue estimates based around an assumed game release schedule (see Exhibit 9). With SGWC2 released in H121 (and on PS5 in Q321), we do not expect the next major release (LotF2) before H123, meaning that we expect a fall in revenues in FY22. Given an approximate 18–24 months development time between iterations of the SGW franchise, we also anticipate the next instalment of the SGW franchise in FY23, though probably in H223. With this being the sixth title in an established franchise, with a proven audience, we believe the downside risk is limited. Instead, investors should focus on progress on LotF2, which will follow approximately nine years after the successful release of LotF, with an assumed development budget of $15m, at least double that for SGWC2 (development and marketing budget of €6.5m). As such, in Exhibit 19, we have modelled low, base and upper case scenarios for LotF2, reflecting digital sales of 1.5m, 2.5m and 4.0m units respectively.

Thereafter, assuming CI Games decides to run a third development team in parallel (although this strategy is our own assumption and has not been confirmed), we would expect a new IP to be launched in FY24 with major game releases following every 12–18 months thereafter.

To these release assumptions, we add a low level of revenue from United Label (a 78.4% held subsidiary), building over time as more niche titles are released, as well as CI Games’ back catalogue, principally from prior releases from the SGW franchise.

Exhibit 17: FY19–23e revenue forecasts and margins

Source: CI Games accounts, Edison Investment Research

FY22 a ‘lull’ year, followed by two releases in FY23

Driven by global growth as well as increasing demographic penetration, we anticipate the games sector will continue to deliver high growth for the foreseeable future. As set out in the market section, Newzoo estimates 8% annual growth from FY21–24.

As SGWC2 was released shortly before the end of H121, we see significant sales of the title continuing in H221.

For FY21, we estimate revenues of PLN93.7m, 104% y-o-y growth as well as an almost doubling of H121 revenues. In the H121 commentary, we note that the majority of marketing and production costs for SGWC2 have been borne in H121, so we expect a margin uplift in H221 over H121, with our FY21 EBITDA margin estimate of 66.5% leading to EBITDA of PLN62.4m.

In FY22, as in FY20, we expect no major new releases, and therefore we have modelled the year based around the FY20 results, with an increased contribution from United Label and the back catalogue (including the recent and well reviewed SGWC2), as well as a margin uplift from an increased proportion of digital over physical sales. We assume revenues of PLN55.7m, with a gross margin of 47% (FY20: 42%) and EBITDA of PLN33.5m (margin of 60.2%).

In FY23, as noted above, we anticipate LotF2 being released in H123 and the next iteration of the SGW franchise being released in H223, reflecting a full year contribution for LotF2 and a part-year for SGW. We have assumed 1.5m unit sales for the SGW title, after what we believe will be a strong performance from SGWC2, assuming a c 20% unit sales uplift as the quality of the franchise improves and the title offers more universal appeal. However, LotF2, in particular, is hard to forecast with any degree of certainty. We have therefore decided to look at upper, base and low case sales scenarios (set out below) and modelled our forecasts on the base case. The low and upper case scenarios suggest that net margins for LotF2 in FY23 could be PLN50m below or PLN80m above our estimates.

Exhibit 18: Game sales margin assumptions

Exhibit 19: LotF2 unit sales scenario analysis

Retail

Digital

RRP

$49.99

$49.99

VAT

20%

20%

Discount/Commission

35%

50%

Gross revenues

$27.08

$20.83

Price protection

10%

0%

Net revenues

$24.37

$20.83

COGS

$7.00

-

Marketing

15%

15%

Gross margin

$13.71

$17.70

Royalties

0%

0%

Net margin

$13.71

$17.70

Net margin (%)

51%

85%

Assumed development cost

 

$15

million

 

Marketing

15%

of net revenues

Digital price discounting

 

50%

of RRP

 

DLC monetisation

 

8%

of net revenues

 

Digital units

Physical units

Y1 revs

Y2 revs

Y1/2 net margin

m

m

65%

35%

PLNm

Low

1.5

0.3

82.3

45.4

127.8

Base

2.5

0.4

133.6

75.7

209.4

Upper

4.0

0.5

210.5

121.2

331.7

Source: Edison Investment Research

Source: Edison Investment Research

Exhibit 18: Game sales margin assumptions

Retail

Digital

RRP

$49.99

$49.99

VAT

20%

20%

Discount/Commission

35%

50%

Gross revenues

$27.08

$20.83

Price protection

10%

0%

Net revenues

$24.37

$20.83

COGS

$7.00

-

Marketing

15%

15%

Gross margin

$13.71

$17.70

Royalties

0%

0%

Net margin

$13.71

$17.70

Net margin (%)

51%

85%

Source: Edison Investment Research

Exhibit 19: LotF2 unit sales scenario analysis

Assumed development cost

 

$15

million

 

Marketing

15%

of net revenues

Digital price discounting

 

50%

of RRP

 

DLC monetisation

 

8%

of net revenues

 

Digital units

Physical units

Y1 revs

Y2 revs

Y1/2 net margin

m

m

65%

35%

PLNm

Low

1.5

0.3

82.3

45.4

127.8

Base

2.5

0.4

133.6

75.7

209.4

Upper

4.0

0.5

210.5

121.2

331.7

Source: Edison Investment Research

Based on these assumptions, we estimate FY23 revenues of PLN257m, with c 53% of revenues coming from LotF2 and c 34% from the next iteration of the SGW franchise, with United Label and the back catalogue making up the remainder (Exhibit 9). We have assumed gross margins of 56.5%, in line with FY21e, with an EBITDA margin of 51% in line with its Polish peer group (Exhibit 20). This leads to an FY23e gross profit of PLN145.1m and EBITDA of PLN132.1m.

Although we have not explicitly modelled future years, from FY24 onwards, we assume major new releases every 12–18 months, together with increasing downloadable content (both free and paid for), which should lead to an ever broader portfolio of titles, increasing the percentage of revenues from back catalogue, improving revenue visibility as well as the predictability of the business through a smoother revenue profile, less exposed to any single game being a ‘hit’ or ‘miss’. As we have seen with Frontier Developments and Remedy Entertainment, which trade on 34x FY22 (year-end May) and 44x FY21 consensus estimates, respectively, investors are prepared to attribute high valuations to such broad-based, growth portfolios.

CI Games plans to use Poland’s IP box tax relief to reduce its effective tax rate to 5% for qualifying development revenue from 2022. With the IP box tax regime being implemented in Poland, we assume an effective tax rate of 10% in FY21, rising to 20% from FY23 onwards.

Balance sheet

CI Games has a relatively straightforward balance sheet, with fixed assets principally composed of intangibles, of which the vast majority relate to capitalised game development costs (both internal as well as advances to third party developers), which are then amortised through the P&L over the life of the game.

The group has no long-term borrowings and had net cash of PLN22m as at 31 December 2020, following a share placing in September 2020 that raised PLN29.1m (21m shares issued at a price of PLN1.39) to provide additional working capital as well as to fund development of LotF2. As at 30 June 2021, net cash stood at PLN15.2m, allowing for PLN5.0m of lease labilities. With positive net cash flow in FY21–23, we estimate net cash of PLN33.7m in FY21, rising to PLN70.5m in FY23.

Cash flow

CI Games generated operating cash flow of PLN40.6m in FY20. We forecast PLN44.8m and PLN42.9m in FY21/22 respectively, mainly due to sales of SGWC2 and the back catalogue, climbing to PLN76.3m in FY23. Capitalised development costs were PLN19.9m in FY20 and we expect similar levels in FY21–23, with PLN20.6m assumed across the period. Capex was 5.6% of revenues in FY20 (PLN2.6m), so we have assumed capex remains fixed at 5.6% as a percentage of revenues over the period FY21–23, rising from PLN5.3m in FY21 to PLN14.5m in FY23.

CI Games does not currently pay a dividend, preferring to reinvest cash in the business.

Valuation

In looking at CI Group’s valuation, we primarily focus on a comparable company approach, validated by a DCF. Currently, we would argue that CI Games’ valuation ignores the group’s improving execution and its future prospects, by default, assuming that future titles will disappoint. However, we believe that the market view is overly negative and consequently there is a probability of a material upside surprise. Both the peer analysis and DCF argue for a higher valuation, at a multiple of the current share price, once investors get comfortable that CI Games will deliver on estimates for FY23.

Comparable company analysis

Firstly, to determine an appropriate comparable company peer group, we have segmented the potential universe of approximately 100 companies through applying the following filters:

We have disregarded US and Asian based businesses. This includes the largest global publishers, which operate at a different scale to CI Games and do not enjoy the same growth opportunities, choosing to focus on UK and European small and mid-cap games companies.

Of this reduced universe, we have then looked for companies operating a similar business model (developers, self-publishers and smaller publishers), ignoring companies reliant on a free-to-play and casual games business model. We have also set aside the games services and esports companies.

Given the international nature of the games industry, with companies largely serving a global rather than domestic audience, we do not want to over-index our comparator universe to Polish games companies. There are relatively few Polish based companies listed on the Warsaw Stock Exchange (where CI Games is listed), with the vast majority of smaller Polish games companies listed on NewConnect (where United Label is listed), a stock market that is much more domestically orientated with lower liquidity.

Exhibit 20: CI Games peer group

Name

Year end

Quoted ccy

Market cap (US$m)

EV (US$m)

Sales Growth 1FY (%)

EBITDA margin 1FY (%)

EV/ sales 1FY (x)

EV/ sales 2FY (x)

EV/ EBITDA 1FY (x)

EV/ EBITDA 2FY (x)

EV/ EBITDA 3FY (x)

P/E 1FY (x)

P/E 2FY (x)

P/E 3FY (x)

CD Projekt

Dec-21

PLN

4,678

4,419

(39)

51

13.6

14.5

26.8

26.3

26.4

36.8

32.4

42.0

Paradox Interactive

Dec-21

SEK

1,657

1,590

(0)

60

7.8

6.1

13.2

9.9

8.4

31.3

22.8

20.3

Team17 Group

Dec-21

GBp

1,411

1,312

10

37

10.8

9.7

29.2

26.2

23.9

41.5

37.8

34.1

Frontier Developments

May-22

GBp

1,284

1,246

55

39

6.6

5.4

16.9

14.0

13.1

34.4

28.7

27.0

Playway

Dec-21

PLN

738

695

34

72

11.4

9.0

15.9

12.7

11.5

22.9

17.1

15.6

Tinybuild

Dec-21

GBp

665

604

32

40

12.2

10.9

30.6

26.7

22.9

47.9

41.7

35.3

Remedy Entertainment

Dec-21

EUR

589

519

12

37

9.7

9.1

26.3

26.3

13.2

43.9

43.4

25.6

Digital Bros

Jun-22

EUR

514

507

(1)

33

3.0

2.7

8.9

6.9

N/A

20.1

17.8

N/A

Thunderful Group

Dec-21

SEK

485

463

5

12

1.3

1.3

10.1

9.1

8.2

18.8

16.0

14.7

Focus Home Interactive

Mar-22

EUR

362

351

(17)

27

2.1

1.7

8.0

6.4

5.2

26.4

17.5

10.9

11 Bit Studios

Dec-21

PLN

241

216

(31)

44

14.4

6.8

32.7

17.1

5.1

47.1

24.8

8.5

Next Games

Dec-21

EUR

56

54

36

3

1.3

0.7

46.3

8.7

5.8

NM

NM

NM

Mean

 

8

38

7.8

6.5

22.1

15.8

13.1

33.7

27.3

23.4

Median

 

7

38

8.8

6.5

21.6

13.3

11.5

34.4

24.8

22.9

CI Games

Dec-21

PLN

68

63

104

(41)

2.7

4.5

4.0

7.5

1.9

8.9

24.7

3.1

Source: Refinitiv (1 October 2021). Note: CI Games is based on Edison Investment Research estimates.

The games industry has benefited from increased demand over the last 18 months as a result of COVID-19 related lockdowns. Significant numbers of new players have started playing games, with existing players playing for longer, driving insatiable demand for new content. In parallel, there has been a console transition with both Sony and Microsoft launching their next-generation consoles, the PS5 and Xbox Series X/S, respectively. As can be seen from the peer group, the profitability and valuations of content providers, such as CI Games, remain elevated.

It is also notable that the Polish comparators (CD Projekt, Playway and 11 Bit Studios) have some of the highest EBITDA margins among the group, benefiting from the cost-effective development talent available in Poland. Although it is more international, CI Games sees some of these benefits.

As we have already discussed, given its launch schedule, FY21 is expected to be a relatively strong year for CI Games, with FY22 a fallow year and FY23 likely to benefit from two launch titles, broadening the portfolio thereafter. The peer group is trading on a mean EV/EBITDA of c 22x in FY21, 16x in FY22 and 13x in FY23. This compares with CI Games, on 4.0x our FY21e EV/EBITDA, rising to 7.5x for FY22, before falling to 1.9x in FY23. Similarly for P/E multiples, the peer group trades on almost 34x FY21 earnings, c 27x FY22 and 23x FY23. This compares to CI Games on 8.9x our FY21e P/E, rising to 24.7x FY22e and then only 3.1x FY23e.

If CI Games successfully delivers on our FY21e estimates, what this suggests is that there could be potential upside of as much as 6–7x once the market starts to focus on, and get comfortable with, CI Games delivering LotF2 to schedule, to budget and at high quality in FY23. This would reassure the market on our FY23 earnings forecasts.

As we have noted previously, we have used a base case assumption of 2.5m digital unit sales for LotF2. Our upper case envisages sales of 4.0m digital units, which would add another c PLN77m of revenues to FY23, further reducing the FY23 valuation multiples.

Discounted cash flow approach

Looking at the net present value (NPV) of future cash flows, we derive a core value of PLN6.96 per share, almost 5x the current share price of PLN1.49. This valuation is based on an explicit forecast period of 2021–31, before adding a perpetuity calculation, and a WACC of 8.6%. We show the sensitivity to different WACC assumptions in Exhibit 22, with our key valuation assumptions in the table below.

Exhibit 21: Key NPV inputs

WACC

8.6%

Terminal growth rate

3.0%

Enterprise value (PLNm)

1,250.5

Adjusted net debt (PLNm)

22.0

Equity valuation (PLNm)

1,272.5

Equity value per share (PLN)

6.96

Source: Edison Investment Research

Exhibit 22: NPV sensitivities (PLN per share)

Terminal growth rate

2.0%

2.5%

3.0%

3.5%

4.0%

WACC

12.0%

4.14

4.24

4.35

4.47

4.61

11.0%

4.61

4.74

4.90

5.07

5.26

10.0%

5.20

5.39

5.60

5.84

6.13

8.6%

6.29

6.60

6.96

7.38

7.90

7.0%

8.43

9.07

9.86

10.88

12.24

Source: Edison Investment Research

Our forecasts are built on the gating assumption that LotF2 and the next iteration of the SGW franchise are both launched in FY23 and achieve moderate to good digital sales figures, of 2.5m and 1.5m units respectively. We assume games are launched every 12–18 months thereafter, with a broadening and increasingly stable future revenue profile.

The resultant NPV valuation largely reinforces the conclusions of the peer group valuation, indicating that if CI Games can successfully achieve its FY23 targets, and build a broad-based and sustainable business from there, then there is the potential for 5x upside as a reward for early investors to this growth story.

Sensitivities

A summary of the principal risk factors relating to CI Games is set out below:

Execution risk: the key challenge for CI Games remains the ability to deliver successive titles of increasingly higher quality, to budget in a timely manner. Material release slippage is likely to lead to spiralling development costs, or the alternative for ‘buggy’ releases likely to lead to lower review scores, which will in turn have an impact on unit sales. Either outcome would potentially undermine the chance of establishing cornerstone franchises, as well as having a significant financial impact on the business. Specifically, the investment case requires LotF2 to be delivered to schedule, to budget and offer attractive unit sales in order to justify the identified valuation upside.

Portfolio concentration: CI Games holds a relatively narrow portfolio of titles, with a strategy to add new titles to broaden the portfolio over the coming years. Management’s target is to develop and launch at least one major title every 12–18 months from 2024 onwards. As the portfolio grows, the group’s exposure to a single title reduces; however, currently any single failure would likely have a material financial impact on the business.

Distributed development: having weathered the initial impact of COVID-19 and substantially built its LotF2 development team during the pandemic, CI Games has developed the systems and processes to effectively manage distributed game development. Management has used the opportunity to continue to work from home to attract key international development talent that would not otherwise relocate to Poland, and sees this model as a market differentiator. However, remote teams make collaboration harder and inevitably increase development risk.

Tax risk: CI Games plans to use Poland’s IP box tax relief to reduce its effective tax rate to 5% for qualifying development revenue from 2022. In addition, the Polish government’s proposed tax changes for sole traders are likely to raise labour costs in the tight market for Polish games developers. Although CI Games is increasingly building development teams outside Poland, adverse changes to Poland’s tax legislation would likely have a material impact on CI Games’ future financial results.

Foreign exchange: with an increasingly European cost base and revenues principally denominated in US dollars, euros and pounds sterling, while results are reported in Polish zloty, CI Games has significant exchange rate exposure. Although CI Games seeks to hedge these risks, given uncertainties around unit sales volumes in different geographies, CI Games’ hedging strategy is unlikely to provide a perfect offset.

Attraction and retention of key staff: as a people-based business, CI Games is reliant on the quality of staff that it can attract and retain. If key staff were to leave in search of higher wages or new projects, this could influence the quality of games being developed and their market success. As well as continuing its policy of remote working, CI Games has instituted a long-term incentive plan in order to incentivise and retain senior management.

Track record: CI Games has learnt from the challenges it faced in 2017 and reconfigured its strategy in order to be able to deliver consistently higher-quality games with internal development teams based outside Poland. Recent launches indicate that quality is steadily improving (its latest release, SGWC2 on PS5, achieved its highest yet Metacritic score of 80), which management believes should lead to stronger financial returns. This strategy remains at an early-stage and there is no assurance of its long-term success.

Exhibit 23: Financial summary

PLN'000

2018

2019

2020

2021e

2022e

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

21,985

47,478

46,010

93,734

55,651

256,661

COGS

(17,131)

(29,013)

(26,683)

(40,736)

(29,492)

(111,543)

Gross Profit

4,854

18,465

19,327

52,998

26,159

145,118

EBITDA

 

 

6,916

21,598

28,919

62,379

33,480

132,074

Normalised operating profit

 

 

(4,658)

2,837

9,380

38,173

13,708

111,571

Amortisation of acquired intangibles

0

0

0

0

0

0

Exceptionals

(17,720)

(1,790)

(651)

0

0

0

Share-based payments

0

0

0

0

0

0

Reported operating profit

(22,378)

1,047

8,729

38,173

13,708

111,571

Net Interest

431

(828)

(197)

30

89

(37)

Joint ventures & associates (post tax)

0

0

0

0

0

0

Exceptionals

0

0

0

0

0

0

Profit Before Tax (norm)

 

 

(4,227)

2,009

9,183

38,203

13,797

111,534

Profit Before Tax (reported)

 

 

(21,947)

219

8,532

38,203

13,797

111,534

Reported tax

(746)

(3,096)

(1,435)

(3,820)

(1,380)

(22,307)

Profit After Tax (norm)

(2,959)

(1,553)

7,607

30,562

11,038

89,227

Profit After Tax (reported)

(22,693)

(2,877)

7,097

34,383

12,418

89,227

Minority interests

0

0

0

0

0

0

Discontinued operations

0

0

0

0

0

0

Net income (normalised)

(2,959)

(1,553)

7,607

30,562

11,038

89,227

Net income (reported)

(22,693)

(2,877)

7,097

34,383

12,418

89,227

Average number of shares outstanding (m)

151.1

155.4

167.8

182.9

182.9

182.9

EPS - normalised (PLN)

 

 

(0.02)

(0.01)

0.05

0.17

0.06

0.49

EPS - diluted normalised (PLN)

 

 

(0.02)

(0.01)

0.05

0.17

0.06

0.49

EPS - basic reported (PLN)

 

 

(0.15)

(0.02)

0.04

0.19

0.07

0.49

Dividend (PLN)

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

(78.7)

116.0

(3.1)

103.7

(40.6)

361.2

Gross Margin (%)

22.1

38.9

42.0

56.5

47.0

56.5

EBITDA Margin (%)

31.5

45.5

62.9

66.5

60.2

51.5

Normalised Operating Margin

(21.2)

6.0

20.4

40.7

24.6

43.5

BALANCE SHEET

Fixed Assets

 

 

60,261

62,297

69,137

63,440

65,414

66,657

Intangible Assets

52,282

54,828

58,987

53,866

56,342

58,021

Tangible Assets

1,083

376

437

396

375

372

Right-of-use assets

0

1,133

6,484

5,949

5,468

5,035

Investments & other

6,896

5,960

3,229

3,229

3,229

3,229

Current Assets

 

 

19,433

34,803

41,150

74,019

80,436

162,247

Stocks

2,687

3,118

1,576

2,518

1,742

6,894

Debtors

3,110

19,921

6,833

21,140

10,001

46,126

Cash & cash equivalents

12,612

6,659

28,207

46,327

64,657

105,191

Other

1,024

5,105

4,534

4,035

4,035

4,035

Current Liabilities

 

 

(8,615)

(30,308)

(5,570)

(8,665)

(6,248)

(20,901)

Creditors

(3,375)

(4,675)

(3,169)

(4,668)

(3,524)

(11,454)

Tax and social security

(450)

0

0

0

0

0

Short term borrowings

(3,468)

(24,051)

(33)

(67)

(40)

(184)

Lease liabilities

(224)

(634)

(324)

(660)

(392)

(1,807)

Other

(1,098)

(948)

(2,044)

(3,270)

(2,292)

(7,456)

Long Term Liabilities

 

 

(17,209)

(6,474)

(8,173)

(16,650)

(9,886)

(45,592)

Long term borrowings

(12,744)

0

0

0

0

0

Lease liabilities

(303)

(269)

(5,867)

(11,953)

(7,096)

(32,728)

Other long term liabilities

(4,162)

(6,205)

(2,306)

(4,698)

(2,789)

(12,864)

Net Assets

 

 

53,870

60,318

96,544

112,143

129,716

162,410

Minority interests

0

0

(169)

(169)

(169)

(169)

Shareholders equity

 

 

53,870

60,318

96,375

111,974

129,547

162,241

CASH FLOW

Op Cash Flow before WC and tax

7,347

20,770

28,722

62,409

33,569

132,037

Working capital

5,040

(20,665)

13,485

(13,750)

10,771

(33,347)

Exceptional & other

(3,592)

(1,463)

(51)

(15)

(106)

(91)

Tax

0

(136)

(1,547)

(3,820)

(1,380)

(22,307)

Operating cash flow

 

 

8,795

(1,494)

40,609

44,824

42,854

76,292

Capex

(1,107)

(2,059)

(2,597)

(5,291)

(3,141)

(14,487)

Capitalised development costs

(24,386)

(18,255)

(19,864)

(20,577)

(20,577)

(20,577)

Acquisitions/disposals

0

0

0

0

0

0

Net interest

(151)

(574)

(391)

(391)

(391)

(391)

Equity financing

20

9,279

29,124

0

0

0

Dividends

0

0

0

0

0

0

Other

126

538

190

(434)

(435)

(435)

Net Cash Flow

(16,703)

(12,565)

47,071

18,131

18,310

40,402

Opening net debt/(cash)

 

 

(13,335)

4,127

18,295

(21,983)

(33,691)

(57,126)

FX

0

0

(16)

0

0

0

Other non-cash movements

(759)

(1,603)

(6,777)

(6,424)

5,124

(27,047)

Closing net debt/(cash)

 

 

4,127

18,295

(21,983)

(33,691)

(57,126)

(70,480)

Source: Company accounts, Edison Investment Research

Contact details

Revenue by geography

Rondo Daszyńskiego 2B

00-843 Warsaw
Poland
+48 22 718 35 00
www.cigames.com

Contact details

Rondo Daszyńskiego 2B

00-843 Warsaw
Poland
+48 22 718 35 00
www.cigames.com

Revenue by geography

Management team

Chairman of the Supervisory Board: Ryszard Bartkowiak

CEO: Marek Tymiński

Ryszard graduated from the Faculty of Law and Administration at the Mikołaj Kopernik University in Poznan in 2000 and was admitted to the Bar in Bydgoszcz in 2006. He has worked as a legal advisor to listed companies, investment funds and leasing companies for 18 years, providing advice on fund-raising, M&A, restructuring as well as real estate transactions and corporate disputes. Between 2001 and 2009 he worked for the GWW Law Firm, where he became a partner in 2005. In 2009 he founded the BWHS Bartkowiak Wojciechowski Hałupczak Springer Law Firm, based in Warsaw, where he is the managing partner, working in the corporate law and capital transactions practice. Ryszard Bartkowiak is a member of Supervisory Board Auditing Committee.

Marek graduated from the Management Programme at the Canadian International Management Institute, University of Virginia and the Leadership Development Programme and Advancing Global Leadership Programme in the Center for Creative Leadership. In 1997 he launched his first business and in the following years, he was a board member and associate in numerous video games companies. Since 2002, he has been the CEO, founder and chief shareholder of CI Games SA.

FD: Katarzyna Sermanowicz-Giza

CEO, United Label: Darren Newnham

Katarzyna heads the finance and accounting functions at CI Games, which she joined in 2019. She previously worked in the transaction services team at Deloitte from 2000–19, advising private equity funds and strategic investors on transactions. Katarzyna graduated with an MA in finance and banking from the University Marii Curie-Skłodowskiej w Lublinie and also completed the Executive Education Advanced Management Program from IESE Business School at the University of Navarra in 2015.

Darren is a graduate of the Open University in the UK. He has over 25 years of experience in the video game industry, having worked for companies including Hutchison 3G, O2, SEGA and The Walt Disney Company. During his professional career, he has been involved in both retail game sales as well as building European sales strategies for Asian publishers. Since 2016, Darren focused on esports, advising both esports teams and organisations on how to maximise partnership and sponsorship opportunities. He has also advised British government ministers on the esports sector. For the last two years he has been a member of the British Esports Association Advisory Board.

Management team

Principal shareholders

(%)

Marek Tymiński

29.02

Rockbridge Towarzystwo Funduszy Inwestycyjnych S.A.

8.59

Free float

62.39


General disclaimer and copyright

This report has been commissioned by CI Games and prepared and issued by Edison, in consideration of a fee payable by CI Games. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. CI Games never take payment in stock, options or warrants for any of CI Games’ services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however CI Games do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that CI Games provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If CI Games’ advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by CI Games and prepared and issued by Edison, in consideration of a fee payable by CI Games. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. CI Games never take payment in stock, options or warrants for any of CI Games’ services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however CI Games do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that CI Games provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If CI Games’ advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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