Benefiting from lockdown, ready for lift-off

Media and Games Invest 13 July 2020 Initiation
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Media and Games Invest

Benefiting from lockdown, ready for lift-off

Software & computer services

Scale research report - Initiation

13 July 2020

Price

€1.33

Market cap

€123m

Share details

Code

M8G

Listing

Deutsche Börse Scale

Shares in issue (and shortly to be issued with respect to the recent acquisitions)

92.2m

Last reported net debt at 31 March 2020

€71.8m

Business description

Media and Games Invest (MGI) is a fast-growing games and media company, following a ‘buy, integrate, build and improve’ M&A strategy. Its principal divisions are games (online games) and media (online marketing).

Bull

Seasoned management team with a proven track record.

Profitable business with strong growth prospects in global games and media sectors.

Low-risk ‘buy, integrate, build & improve’ M&A strategy, focused on distressed assets.

Bear

High levels of debt in the near term, with 3.1x consensus FY20e net debt/EBITDA.

Full benefits of the recently completed transformation programme are yet to be realised.

Limited free float, currently c 36.5%.

Analysts

Richard Williamson

+44 (0) 20 3077 5700

Dan Ridsdale

+44 (0) 20 3077 5700

Media and Games Invest (MGI) is a games and media business, operating through two divisions, games (free-to-play MMO and casual games) and media (cost-effective user acquisition). The group supplements organic growth (Newzoo: 8.4% growth 2019–22) with a ‘buy, integrate, build and improve’ acquisition strategy. On a pro forma basis, MGI delivered an FY15–19 revenue CAGR of 40% and an adjusted EBITDA CAGR of 43%. MGI’s M&A strategy is focused on the acquisition of assets from distressed businesses at attractive valuations, with growing cash flows expected to rapidly reduce outstanding net debt (€72m at end Q120). MGI has significantly benefited from increased consumer demand as a result of the COVID-19 lockdown. Having recently bought out the gamigo minorities, management sees no slowdown in growth or attractive acquisition opportunities in FY20 or the foreseeable future.

Buy, integrate, build and improve

MGI’s stated strategy is to acquire ‘preferably distressed companies with sustainable revenue streams’ in games and digital advertising, restructuring and integrating them to scale the business. The group has a proven M&A track record, with more than 30 acquisitions since 2012. MGI’s increasingly broad portfolio (25+ MMOs, 5,000 casual games) offers predictable, long-term revenue, which it leverages. MGI expects to drive greater efficiencies (through shared services and platform integration) and higher margins as it scales.

Streamlined group focused on games and marketing

MGI’s business has been transformed over the past two years, with a series of acquisitions funded by both debt and equity as the company focuses on its interests in games and advertising. The March acquisition of the outstanding minorities in gamigo for up to €38m in cash and equity, 5.1x FY19 EBITDA, presents a simpler, streamlined group with two divisions, games and media.

Valuation: Improving valuation as gearing falls

Following a number of strategic acquisitions, MGI has entered FY20 with a cleaner, more transparent business but with high levels of gearing (c 3.1x consensus FY20e net debt to EBITDA). Although debt is not common in the games industry, MGI’s transformation brings more predictable revenues and cash flow generation, suggesting that it can sustain and pay down this debt. Based on consensus forecasts, sales are forecast to grow at a 19% CAGR (FY19–21e) and EBITDA at 30% over the same period, as MGI scales in a high-growth sector. Looking at FY21e, MGI trades on an EV/sales multiple of 1.6x, EV/EBITDA of 6.3x and a P/E of 29.6x, leaving significant scope for further share price appreciation.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA*
(€m)

PBT
(€)

EPS
(€)

EV/EBITDA*
(x)

P/E
(x)

12/18

32.6

13.4

0.7

0.01

14.5

103.0

12/19

83.9

18.1

(0.8)

(0.01)

10.7

NM

12/20e

101.1

22.9

2.0

0.05

8.5

28.5

12/21e

118.7

30.8

5.9

0.05

6.3

29.6

Source: MGI and gamigo accounts (historical figures), Refinitiv consensus (forecasts).
Note: *EBITDA adjusted for one-off M&A and financing costs.

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Company description: Games and media group

MGI operates in the media and games sectors, supplementing strong organic growth with a buy, integrate, build and improve acquisition strategy that, on a pro forma basis, has delivered a revenue CAGR of 40% and an EBITDA CAGR of 38% FY15–19.

When buying companies, MGI drives synergies from technology integration (eg cloud-based game hosting), cutting costs and creating efficiency improvements to provide its competitive advantage. The group divides its business between its games division, principally gamigo, and its media division, integrating its media and advertising assets. MGI’s most important investments include gamigo, a fast-growing games and media company; ReachHero, an influencer marketing platform; Applift, a mobile advertising company; PubNative, a supply-side platform (SSP) for mobile advertising; and its most recent acquisition, Verve Wireless, a location-based performance marketing business.

Exhibit 1: MGI – a balanced media and games business

Source: MGI

MGI has evolved through a number of corporate transformations, but through its predecessor companies can trace its roots back to 2000, when gamigo was first founded. Since then, the company has become a leading European publisher of free-to-play and freemium games titles, as well as a significant player in online and mobile advertising. MGI employs approximately 650 staff.

Following its latest acquisition, Verve Wireless, in January 2020, the group’s revenues are now split roughly 50/50 between the B2C games segment and the B2B media business, although games contributed c 81% of FY19 EBITDA. As well as being profitable in its own right, the media businesses provide cost-effective customer acquisition, retention and monetisation, significantly benefiting the games segment.

In its Q120 quarterly results, following the acquisition of Verve Wireless as well as the minority holdings in gamigo, MGI reported net debt of €71.8m (c 3.1x consensus FY20e EBITDA of €22.9m) (excluding €3.6m of shareholder loans), with cash and cash equivalents of €13.0m. Gross debt includes two listed bonds, a €23.8m MGI unsecured 7% bond repayable at par in 2024, and a €50m gamigo secured 7.75% bond repayable at par in 2022, as well as a €10m term loan from UniCredit.

Exhibit 2: Games revenue split by title (FY19)

Exhibit 3: MGI/gamigo pro forma revenue and margins*

Source: gamigo, Edison Investment Research

Source: Edison Investment Research. Note: *Based on MGI results following its FY18 acquisition of a controlling interest in gamigo and gamigo numbers in prior years (FY15–17).

Exhibit 2: Games revenue split by title (FY19)

Source: gamigo, Edison Investment Research

Exhibit 3: MGI/gamigo pro forma revenue and margins*

Source: Edison Investment Research. Note: *Based on MGI results following its FY18 acquisition of a controlling interest in gamigo and gamigo numbers in prior years (FY15–17).

Q120 update

Exhibit 4: Headline figures

€m

Q120

Q119

FY19

MGI

Net revenues

26.5

13.3

83.9

Y-o-y growth

99%

157%

EBITDA

5.3

3.8

15.5

Margin

20%

28%

19%

Adjusted EBITDA

5.9

4.5

18.1

Margin

22%

33%

22%

Games

Net revenues

13.9

43.1

EBITDA

4.5

12.6

Margin

32%

29%

Media

Net revenues

12.6

40.8

EBITDA

0.8

2.9

Margin

7%

7%

Source: MGI

As well as dealing with the challenge of lockdown and remote working, MGI reported a successful Q120, with revenue doubling to €26.5m from €13.3m in Q119 and EBITDA of €5.3m (Q119: €3.8m).

In January, MGI completed the acquisition of Verve Wireless (US, asset deal) for a total consideration of US$10–15m. In Q120, MGI acquired substantially all the remaining minorities in gamigo for up to €38m in cash and equity, taking its holding to 99.9%, with a squeeze-out of the remaining shareholders anticipated. This valued gamigo at up to c €84m (c 5.1x FY19 EBITDA) based on the closing price of €1.18 on 14 February 2020, the last date prior to the announcement of the acquisition. The company paid €16.5m in cash and will issue up to 18.2m MGI shares (subject to a 25-month lock-up). Together with a further 4.0m shares committed (but not yet issued) for the acquisitions of Applift and Verve Wireless, MGI expects to have 92.2m shares in issue.

COVID-19: Material uplift from lockdown

As we have noted in our report on the impact of COVID-19 on the games sector (European video games: A safe haven in troubled times), mature games companies are a net beneficiary of increasing consumer demand as a result of lockdown. The games sector is also a stable business in challenging times and historically has proven resilient during economic downturns.

Following the COVID-19 pandemic, as a result of lockdown, online games across Europe, the US and in other parts of the world grew significantly. MGI reported that the number of new registrations rose 43% in April over the average for January and February 2020. The rise was particularly pronounced for massively multiplayer online games (MMOs), with new registrations in March up by 35% (against January/February) and 75% in April. Typically, the group would expect to see a c 8–12% decline over this period as the improving weather draws players away from games, however this year boredom and social interaction more than offset seasonal factors.

Similarly, the number of active players in April was 31% above the typically stronger months of January and February. The latest data for May and June show this trend being sustained, with significantly higher levels of engagement persisting. By type of game, in April 2020, turnover for MGI’s top 10 MMOs peaked at 56% above the January/February average, while single-player casual games saw a more modest 20% increase in sales.

Regionally, sales in Europe climbed 12% in March 2020, compared to January and February. However, in April, the trend went global, with games sales up 59% in North America, 48% in South America and a 47% increase in Europe.

Exhibit 5: Q120 games revenue by region

Source: MGI, Edison Investment Research

Low-risk strategy with a diversified revenue base

MGI’s management highlights the following benefits from the group’s buy, integrate, build and improve strategy in the high-growth media and games sectors:

Low business risk

Predictable M&A strategy, offering long-term revenues and predictable returns.

Diversified portfolio with multiple revenue streams; sustainable long-term revenue drivers.

Does not participate in the risky and capital-intense development of new games IP.

High synergies via platform approach

Concentration on operational cash flow: buy, integrate, deliver synergies and grow.

Technology-led, using cloud infrastructure to cut IT costs, as well as to scale the media and games platforms internationally.

Platform philosophy: economies of scale, increased volume delivers greater efficiency.

Active in attractive growth segments

Strong growth (c 19% consensus revenue CAGR FY19–21e, 30% EBITDA CAGR).

An identified pipeline of attractive M&A targets and opportunities for growth.

KPI-driven financial model

Targeting 30%+ annual growth for the group.

MGI targeting 20%+ EBITDA margins, 30%+ EBITDA margins for the games business.

Active use of capital markets (debt and equity) to deliver funding advantage and growth.

Built on M&A competence: 30+ acquisitions in past six years with low rate of failure.

Exhibit 6: Games buy-and-build

Exhibit 7: Media buy-and-build

Source: MGI

Source: MGI

Exhibit 6: Games buy-and-build

Source: MGI

Exhibit 7: Media buy-and-build

Source: MGI

Distressed assets: Buy, integrate, build and improve

MGI follows a buy, integrate, build and improve strategy in both the media (B2B) and games (B2C) segments, focused around distressed companies that have come under pressure, suffering from a lack of scale and high overhead costs (particularly personnel, distribution and IT infrastructure). After the companies are acquired, they are restructured and integrated with a focus on the realisation of cost synergies in personnel, IT and marketing/distribution, cutting overheads substantially. After integrating a business, MGI continues to invest in organic growth, supporting for example game acquisition, ongoing development, in-game advertising, new launches or the internationalisation of its properties.

A brief history

MGI’s principal subsidiary gamigo, which publishes MMOs and casual games, was founded in 2000 and acquired by Samarion (Remco Westermann’s investment vehicle) from Axel Springer in 2012. Under Remco Westermann’s management, the business model was changed, moving away from capital-intensive and risky new game development and concentrating instead on licensing and acquiring proven games and IP rights from distressed games and media companies.

The group has completed more than 30 acquisitions since 2012 and delivered a 40% pro forma revenue CAGR FY15–19, as well as an EBITDA CAGR of 43%. In May 2018, MGI bought 53% of the voting rights in gamigo and currently holds 99.9% of the equity following the acquisition of the substantial outstanding minorities in Q120. MGI’s strategy is now fully focused on the media (B2B) and games (B2C) sectors.

Exhibit 8: MGI and gamigo – a brief history

2000

Gamigo founded as online games magazine

2016

Acquisitions of Aeria Games and adspree media

Gamigo evolves into a publisher of online browser-based role-playing games (RPGs)

2017

Acquisition of Mediakraft

Sep-08

Axel Springer acquires gamigo outright

May-18

MGI acquires an indirect 39% stake in gamigo (53% of voting rights)

Gamigo starts developing games in-house

Oct-18

Acquisition of Trion Worlds

Jul-11

IPO of blockescence (now MGI)

Apr-19

Acquisition of WildTangent

Oct-12

Samarion (Remco Westermann's investment vehicle) acquires gamigo

Jun-19

Name changed to MGI (from blockescence)

2013

Buy and build M&A strategy starts, in-house development ceases

Jul-19

MGI increases stake in gamigo from 39% to 53% leaving MGI with 67% of the voting rights

Sep-14

Acquisition of INTENIUM, a casual games publisher

Jan-20

Acquisition of Verve Wireless

2015

Gamigo commences IP acquisition and game improvement and development strategy

Feb-20

Acquisition of substantial outstanding minorities in gamigo announced.

Source: MGI, gamigo

Games business

In games, MGI publishes online and casual games, through its subsidiary, gamigo, which publishes first-party titles and provides a degree of in-house ‘update and improve’ development support for end-customers. The group supports a broad portfolio of online and console games including casual, role-playing and strategy games, mainly targeting gamers in Europe and North America. Gamigo’s portfolio includes c 25 MMOs and more than 5,000 casual games, distributed via 15 online portals. Games are typically licensed worldwide or licensed exclusively for specific regions or territories.

MGI driven by free-to-play business model

Free-to-play MMOs account for the largest share of revenues. Free-to-play means users are able to play for free (with low-level ad-funding), but can purchase in-game items at a range of prices. The business model requires ongoing support to develop the game and related content, working in close collaboration with the playing community. In addition to regular events and competitions, new items (eg costumes, skins, weapons) and content (new functions, levels and opponents) are provided on a regular basis to enhance the game and maintain a fresh playing experience for the committed community.

Predictable, long-lived recurring revenues

With appropriate support, users can remain loyal to the game for many years, playing for free or investing money in the game over the player lifetime. For established games, over 50% of revenues can be generated by players who have been active for more than five years. For paying users, monthly investment of €50–80 is not uncommon and over the full lifetime of a game (sometimes 10 years or more), superfans may choose to invest thousands or even tens of thousands of euros to maintain their playing experience. To highlight this longevity, set out below are the player age groupings for certain of MGI’s games portfolio.

Exhibit 9: Overall spending by player lifetime –
Last Chaos North America

Exhibit 10: Overall spending by player lifetime –
Fiesta Online Europe

Source: MGI

Source: MGI

Exhibit 9: Overall spending by player lifetime –
Last Chaos North America

Source: MGI

Exhibit 10: Overall spending by player lifetime –
Fiesta Online Europe

Source: MGI

MGI’s core demographic are male and female gamers aged 20–34, playing for an average of 10–15 hours per week. With gamers spending multiple hours per week, potentially over a number of years, on a cost per hour basis, even to higher spenders, MGI’s games offer a very cost-effective form of community-based entertainment, typically < €1 per hour (less than cinema).

Exhibit 11: User acquisition and retention metrics for MMO portfolio

Average customer acquisition cost (CAC): €1.00–1.50

Payback period for customer acquisition: c 90–120 days

Average conversion rate (registration to paying user) after 30 days: 7–10%

Monthly ARPU after 180 days: €50–80

Stickiness (DAU/MAU*): c 30–40%

Source: MGI. Note: *Stickiness calculation divides daily average users by monthly average users.

Massively multiplayer online games

MMOs are where several thousand players meet, connect and interact with each other through fixed player communities (so-called ‘guilds’ or ‘clans’) on a playing field or server environment, with this community aspect creating a strong bond between the users and the game.

There is a technical difference between browser-based games (BBGs, games played online through an internet browser) and client games (games that are downloaded, with the client stored on the PC), although both are PC-based. However, when playing either BBGs or client games, players must be online to communicate with the server. Console games are games played online on consoles such as Xbox, PlayStation or Nintendo Switch.

As shown in Exhibit 12, PC-based online titles represented c 89% of gamigo’s Q120 revenues (client-based plus browser), with console titles 10% of revenues and mobile titles only 1%. Unity’s recent report, COVID-19’s Impact on the Gaming Industry: 19 Takeaways, highlighted the strong performance of mobile and social games over other types of games over the past few months. In this context, although MGI’s own titles also performed very well (particularly its multiplayer titles), management recognises the need to increase MGI’s mobile revenues and diversify the business but intends to wait for the right strategic opportunity at an appropriate price.

Exhibit 12: Q120 games revenue by platform

Source: MGI, Edison Investment Research

In addition to offering MMOs, MGI also supports more than 5,000 casual games, playable on different platforms and devices. These are mostly single-player games accessed on the platforms of deutschland-spielt.de and WildTangent (acquired in April 2019), offering access to all the games on the portal for a monthly subscription. MGI’s casual games portfolio also includes Facebook titles as well as mobile titles. For all these casual titles (in contrast to premium titles paid for upfront), a portion of MGI’s revenues come from advertising and promotional videos.

The gamigo group currently offers over 25 MMOs, including Fiesta Online and Desert Operations, which have already been on the market for over 10 years, as well as more than 5,000 casual games. If games are well supported and actively marketed, in collaboration with the existing player community, the company can maintain a low churn rate and stabilise or revitalise mature titles through targeted marketing and refreshed game content.

A risk-balanced approach avoiding original IP development

Launching new games on the market is a major risk for games companies, since there are already many games with a long-term loyal player base, as well as large numbers of new games launched every month. To manage this risk, MGI prefers to acquire mature game licences by taking over companies with titles with an established user and sales base rather than developing original IP.

Gamigo has grown strongly in recent years and so has a large registered customer base and a good reputation, and is increasingly focusing on stronger licences. Gamigo looks to ‘fail fast’, with titles that under-deliver against expectations being swiftly discontinued or phased out.

However, gamigo does acquire new games IP and licences, but only based on strict data-driven criteria, minimising upfront investment and committing marketing budget only if user numbers and revenue targets justify it. Since 2016, gamigo has invested in IP and development rights and has now acquired the worldwide rights for six of its 10 best-selling games, with ongoing development work (improvement, updates and sequels) taken in-house.

Media business: The digital advertising sector

Through its media (B2B) segment, Verve group, MGI covers the entire digital advertising value chain.

Exhibit 13: Programmatic ads value chain

Exhibit 14: Verve group media positioning

Source: Edison Investment Research

Source: MGI

Exhibit 13: Programmatic ads value chain

Source: Edison Investment Research

Exhibit 14: Verve group media positioning

Source: MGI

MGI’s most important investments include ReachHero, an influencer SaaS platform; Applift, a mobile advertising specialist; PubNative, an SSP platform for mobile advertising; and Verve Wireless, a mobile data platform for location-based programmatic marketing.

Following a similar approach to that taken in the games segment, MGI has started to integrate its media companies into a single platform under the Verve Wireless brand, reducing the overall cost base and leveraging their individual capabilities to extend MGI’s client reach.

MGI’s principal marketing subsidiaries are described below:

Verve Wireless (location-based mobile programmatic advertising): acquired in January 2020, Verve Wireless is a mobile data platform for location-based programmatic video and display marketing that expands MGI’s programmatic mobile brand marketplace, as well as its data management and location-based platform. Verve uses first-party mobile data, incorporating location data and ad products, for example, to allow retailers to drive store visits and pedestrian traffic.

Mediakraft (online influencer marketing agency): Mediakraft is MGI’s online advertising agency specifically focused on social, influencer and video marketing. The company produces content, but also manages YouTube channels, as well as designing and producing end-to-end influencer advertising campaigns. Its customers include advertisers as well as influencers and YouTube channels, focusing on the games sector. The company manages content for YouTubers and influencers, connecting their content to relevant advertising. The company is active in Germany, Poland and Turkey.

Adspree (online performance marketing): adspree manages MGI's games portals, acquiring new users both for MGI’s own games and for third-party titles. Adspree is also a publisher, seeking to maximise ad revenues for MGI and third-party providers. It manages clients' advertising campaigns across all major channels: search engine optimisation (SEO), pay-per-click (PPC), social media/impact marketing, programmatic media buying, affiliate marketing and TV advertising for both first-party and third-party titles.

Applift (app performance ad agency)/PubNative (SSP): Applift and PubNative operate in a highly competitive but fast-consolidating space, with major rivals such as The Trade Desk (demand side platform, DSP) or Google Ad Manager (SSP). Applift and PubNative differentiate themselves by focusing on games SMEs (c 50% of revenues), a market that remains highly fragmented.

Applift is an international mobile advertising agency, which supports app-owners with user-acquisition. It has 10 sales-led offices worldwide. The company specialises in customer targeting and re-engagement via publishers as well as via programmatic technology.

PubNative, Applift’s subsidiary, is an SSP for mobile programmatic in-app advertising and enables app publishers to monetise their advertising inventory. It enables publishers to connect directly via an application programming interface (API). As well as having connections to most important DSPs and SSPs, PubNative also has a large direct supply network via SDK integration.

ReachHero (SaaS-based influencer ad agency): ReachHero (MGI holds 67.38%) provides agency services for social media influencers and creators to connect brands/products/advertisers with the appropriate influencer and channel. ReachHero operates a SaaS platform where agencies and advertisers can book and manage influencer campaigns and have access to more than 70k registered influencers. ReachHero is involved in the entire creation process and acts as an advertising pipeline for Mediakraft.

Synergies between games and media

For online games, digital media is an important part of the value chain. Competition for valuable customers is primarily decided by targeted and efficient marketing. As such, a strong media business within the group reduces customer acquisition costs, benefiting existing games as well as new releases. In addition, advertising space on the company's game portals can be marketed more effectively, driving growth in advertising revenues for the gaming segment.

Media and games are sectors with a number of similar characteristics: technology-led, high growth and with a highly fragmented corporate landscape. From a group perspective, the complementary nature of the two sectors and the synergies between the two service lines are essential to MGI’s success.

Exhibit 15: Games and advertising synergies

Source: MGI

An effective advertising proposition requires attractive content, ie high-quality advertising space, transparency and reliable user metrics. With this in mind, advertisers are increasingly looking for private marketplaces with exclusive partners in preference to open marketplaces, where platforms integrate with multiple publishers with weaker control over data, formats, visibility and reporting.

Gamigo reaches more than 600,000 daily active users and more than five million monthly active users across its games portfolio and games portals, providing access to a rich source of user data. The unique dataset generated is a competitive advantage for MGI and provides a significant unique selling proposition for its advertising assets. In turn, the games business benefits considerably from access to in-house advertising specialists, particularly from cost-effective user acquisition. These advantages enable gamigo to acquire or license third-party titles and cross-sell them to its existing user base, supported by the technology and insight from its advertising arm to target new users and monetise existing users.

Market overview

Strong underlying growth

As an entertainment form, the games industry is now truly mainstream, spanning all geographies and most demographics. Supported by the rise of mobile games, 45% of US gamers are now female (source: Entertainment Software Association), with the balance in mobile games c 50/50. The average age of a US gamer is 34 (and ageing) and 64% of households are home to at least one person who plays video games.

Games: A global industry offering strong growth

Market analyst Newzoo estimates that more than 2.2 billion gamers generated c $148.8bn of revenues in 2019, with Western markets representing c 48% of global revenues and 45% of total revenues on mobile devices. Overall revenues are forecast to grow at c 8.4% (2019–22), building to a total market size of over $190bn by 2022. Mobile continues to offer a double-digit revenue CAGR, whereas PC and console offer single-digit growth (Newzoo).

To put this into context, the games market is already more than three times the value of global box office movie receipts, estimated to be $42bn (source: Statista), and seven times the size of the recorded music industry at $19bn (source: The International Federation of the Phonographic Industry (IFPI)), but remains some way behind the pay TV market, which ABI Research forecasts will reach $295bn by 2022, making the likes of Netflix increasingly nervous of the challenge from games for users’ screen time.

Exhibit 16: $149bn global market, split by region (with year-on-year growth rates)

Source: Newzoo, Edison Investment Research

Exhibit 17: Global games market value

Exhibit 18: Growth forecasts by segment

Source: Newzoo, Edison Investment Research

Source: Newzoo, Edison Investment Research

Management, organisation and corporate governance

MGI’s management team comprises:

Remco Westermann, CEO and chairman of the board: Mr Westermann is a manager, entrepreneur and investor with more than 25 years of leadership experience. He has founded, reorganised and grown TMT companies (eg Bob Mobile, CLIQ Digital) and has an MSc from Erasmus University.

Paul Echt, CFO: Mr Echt has more than eight years’ experience in the tech and finance industries. He previously held positions at UniCredit Bank and Shopgate. He has a master’s in business management/finance (MA) and a bachelor of laws (LLB).

Gary Coffey, chief technology officer (CTO): Mr Coffey has more than 12 years’ experience in fintech and engineering. Previously, he worked at Bombardier Transportation and BAE Systems Applied Intelligence. He has a diploma in computer applications from Dublin City University.

Jens Knauber, COO (games): Mr Knauber has more than 10 years’ experience in the games industry with over 300 published titles. He held a series of leadership positions at Hamburg publisher dtp. He has responsibility for the gamigo group.

Stefan Rascher, CSO (media): Mr Rascher has more than 20 years’ experience in marketing, ecommerce and telecommunications. Previously, he held various positions held at E-Plus, Quam and in his own consulting firm. He has responsibility for the Verve group.

Corporate structure

Following the acquisition of the gamigo minorities, MGI’s corporate structure is set out below:

Exhibit 19: MGI corporate structure

Source: MGI

Shareholders and free float

MGI’s shares remain relatively tightly held, although with relatively high liquidity for the company’s size:

43.0% – Remco Westermann (CEO).

36.5% – free float.

20.5% – other holders (subject to 25-month lock-up) include ‘family and friends’ who invested in gamigo after Remco Westermann took over in 2012).

Financials

Pro forma figures comprising gamigo

Given MGI’s transformation over the past few years into a games and media company, we examine the group’s pro forma track record based around its subsidiary, gamigo, as this is the core of the business today and the basis for future growth. MGI’s FY18 P&L reflects €4.3m of discontinued operations relating to the sale of residual real estate assets, but otherwise its FY18 and FY19 financials mainly reflect its holding in gamigo following initial consolidation of the business in May 2018.

Exhibit 20: Historical financials (gamigo FY15–17, MGI FY18-19)

€’000s

FY15

FY16

FY17

FY18

FY19

Revenue

21,644

38,975

42,082

32,621

83,893

Capitalised development

1,602

2,154

3,585

2,791

10,187

Oher Operating income

935

574

2,374

6,506

4,636

Cost of purchased services

(10,839)

(17,311)

(16,229)

(12,699)

(45,803)

Employee-related costs

(4,223)

(10,471)

(13,912)

(10,438)

(27,358)

Other operating expenses

(4,843)

(11,286)

(10,865)

(10,135)

(10,012)

EBITDA

4,276

2,636

7,035

8,646

15,543

Adjusted EBITDA*

4,276

6,921

10,459

13,409

18,100

Depreciation & Amortisation

(4,677)

(12,732)

(10,392)

(6,318)

(10,543)

EBIT

(402)

(10,097)

(3,357)

2,328

5,000

Net financial income (expense)

(955)

(1,892)

(2,308)

(1,641)

(5,758)

Income (loss) before taxes

(1,356)

(11,989)

(5,665)

687

(758)

Income taxes

2,287

2,909

675

895

2,011

Net profit/(loss)

931

(9,080)

(4,990)

1,582

1,253

Discontinued operations

-

-

-

3,673

-

Consolidated profit

931

(9,080)

(4,990)

5,255

1,253

- Owners of the company

-

-

(5,735)

4,323

(324)

- Non-controlling interests

-

-

745

932

1,577

Number of shares outstanding (m)

19.76

40.80

40.80

59.85

70.02

Average shares in issue (m)

19.76

40.80

40.80

50.36

60.39

EPS (reported) (€)

0.05

(0.22)

(0.14)

0.09

(0.01)

EPS (adjusted) (€)

0.05

(0.22)

(0.14)

0.01

(0.01)

Cash flow from operating activities

1,393

4,394

(7,511)

(3,534)

16,199

- (including) Discontinued operations

-

-

-

(10,476)

-

Cash flow from continuing activities

1,393

4,394

(7,511)

6,942

16,199

Cash flow from investing activities

(2,110)

(1,654)

(305)

(14,113)

(13,070)

Cash flow from financing activities

566

(1,249)

6,761

11,098

25,408

Net cash/(debt)

(13,068)

(20,453)

(25,210)

(20,430)

(34,911)

Source: MGI and Gamigo accounts. Note: *EBITDA adjusted for one-off M&A and financing costs, as well as costs of de-consolidation and integration of the acquired businesses into the group, including the hard synergies resulting from the integration.

Income statement: P&L

Through consistent organic growth, supplemented by M&A, MGI has achieved strong top-line growth over the last five years. The group has completed more than 30 acquisitions since 2012, delivering a pro forma revenue CAGR of 40% FY15–19, as well as an adjusted EBITDA CAGR of 43% over the period.

EBITDA rose to €15.5m in FY19, an 80% increase on FY18 (€8.6m), with consensus FY20e EBITDA of €22.9m, a further 48% increase over FY18. Adjusted EBITDA (adjusted for one-off M&A, financing and integration costs) grew by 35% to €18.1m (FY18: €13.4m), a 43% CAGR FY15-19. Historically, adjusted EBITDA margins for MGI and gamigo have largely varied between 20% and 30% since FY15; MGI is targeting EBITDA margins in the medium term of 20%+, with 30% EBITDA margins for gamigo. FY20e consensus EBITDA margins are 23%, rising to 26% in FY21e.

Looking further down the P&L, the figure for discontinued operations in FY18 related to the remaining real estate assets sold off as MGI focused solely on games and media.

Exhibit 21: MGI/gamigo revenue and EBITDA trends

Exhibit 22: MGI/gamigo capex spend

Source: MGI and gamigo accounts, Edison Investment Research. Note: Based on MGI results for FY18–19 and gamigo for FY15–17.

Source: MGI and gamigo accounts, Edison Investment Research.

Note: Based on MGI results for FY18–19 and gamigo for FY15–17.

Exhibit 21: MGI/gamigo revenue and EBITDA trends

Source: MGI and gamigo accounts, Edison Investment Research. Note: Based on MGI results for FY18–19 and gamigo for FY15–17.

Exhibit 22: MGI/gamigo capex spend

Source: MGI and gamigo accounts, Edison Investment Research.

Note: Based on MGI results for FY18–19 and gamigo for FY15–17.

Balance sheet and cash flow

As an active acquirer in the technology and media sectors, MGI’s fixed assets largely comprise intangible assets arising from acquisition activity in recent financial years. In FY19, intangibles of €233.2m represented 75% of total assets of €312.5m, an increase from €204.1m in FY18 (86% of total assets of €236.3m). Cash on the balance sheet as at 31 December 2019 was €33.0m, with net debt of €34.9m.

Gamigo has proved able to generate consistently strong operating cash flows, allowing the group to finance acquisitions, as well as raise and pay down its debt. FY19 saw MGI’s operating cash flow rise to €16.2m from €6.9m in FY18, sufficient to support five acquisitions and still leave €3.1m of free cash flow. Operating cashflow in Q120 was €5.9m (Q119: €2.5m).

Interest-bearing debt

In its Q120 quarterly results, following the acquisition of Verve Wireless as well as the minority holdings in gamigo, MGI reported net debt of €71.8m (c 3.1x consensus FY20e EBITDA of €22.9m) (excluding €3.6m of shareholder loans), with cash and cash equivalents of €13.0m. Gross debt includes two listed bonds, a €23.8m MGI unsecured 7% bond repayable at par in 2024, and a €50m gamigo secured 7.75% bond repayable at par in 2022, as well as a €10m term loan from UniCredit.

MGI has a long history of leverage and, despite increasing absolute levels of debt (see Exhibit 23 below), given healthy pro forma EBITDA growth since 2015, interest cover and leverage declined between FY16 and FY19. However, absolute debt and debt multiples have increased significantly in Q120, but despite this, with a strong operating performance, predictable revenue streams and robust cash flows, we believe that debt levels remain manageable and should quickly fall. Consensus estimates anticipate leverage to fall materially over the course of FY20 and FY21 (absent further M&A).

Exhibit 23: Historical net interest bearing debt (NIBD) coverage

Source: MGI, Edison Investment Research. Note: 2018/19 totals exclude €5m of shareholder loans.

Valuation

Peer valuation

As neither the German nor the DACH markets have many listed games companies, we need to look internationally for appropriate peers. This is entirely appropriate as games companies, by the nature of their player base, tend to be international if not global businesses (in Q120, 64% of MGI’s games revenues came from players outside of Europe). Although there are many quoted games companies around the world, there is a huge diversity in business model among this broader group and relatively few directly comparable companies. We believe that the most relevant peer group for MGI includes companies that: 1) operate in the free to play games space; 2) follow a buy-and-build model; 3) have exposure to media as well as games; and 4) use debt as well as equity finance.

For the moment, we have limited our comparator universe to European companies, although Zynga and Glu from the US, as well as some Asian companies, might also offer valid benchmarks. Based on our analysis, we believe that MGI’s closest peer is Stillfront Group (Sweden), which matches all the criteria set out above, although the business operates at greater scale. Stillfront’s valuation (FY20e: 7.3x sales, 17.8x EV/EBITDA) therefore might offer an indication of the valuation rating for MGI as it matures. We also include a number of other European casual and mobile games companies, as well as Embracer Group in Sweden (a buy-and-build model) and Sumo Group in the UK (a co-development and services provider) as additional reference points.

Exhibit 24: Peer group comparison (based on consensus estimates)

Year
end

Current price (ccy value)

Quoted currency

Market cap (€m)

EV (€m)

EBITDA margin 1FY (%)

EBITDA margin 2FY (%)

EV/
sales 1FY (x)

EV/
sales 2FY (x)

EV/
EBITDA 1FY (x)

EV/
EBITDA 2FY (x)

P/E
1FY (x)

P/E
2FY (x)

European peer group

Embracer Group AB

Mar-21

145.0

SEK

4,799

4,528

40.8

40.3

5.3

4.5

12.9

11.3

NM

NM

Stillfront Group AB (publ)

Dec-20

863.0

SEK

3,212

3,409

41.2

42.5

7.3

6.2

17.8

14.6

36.8

26.7

Modern Times Group MTG

Dec-20

114.2

SEK

843

826

6.4

11.7

1.7

1.4

26.3

12.4

NM

NM

Ten Square Games SA

Dec-20

595.0

PLN

1,092

1,067

34.4

38.9

7.7

6.6

22.3

16.9

23.3

19.5

Playway SA

Dec-20

539.0

PLN

901

877

61.9

62.9

17.0

13.1

27.5

20.9

35.7

26.2

Sumo Group PLC

Dec-20

197.0

GBp

377

370

25.0

26.9

5.2

4.3

20.7

15.9

31.7

24.2

Rovio Entertainment Oyj

Dec-20

5.6

EUR

516

386

17.3

18.3

1.1

1.1

6.6

5.9

16.8

17.0

11 Bit Studios SA

Dec-20

522.0

PLN

312

282

48.1

17.4

15.3

12.1

31.8

69.5

49.7

79.1

G5 Entertainment AB (publ)

Dec-20

195.9

SEK

192

173

17.5

17.4

1.2

1.1

6.9

6.3

22.4

18.0

Mean

32.5

30.7

6.9

5.6

19.2

19.3

30.9

30.1

Median

34.4

26.9

5.3

4.5

20.7

14.6

31.7

24.2

Media and Games Invest*

Dec-20

1.33

EUR

138

219

22.7

25.9

1.9

1.6

8.5

6.3

28.5

29.6

Premium/(discount) to peer group mean

(72%)

(71%)

(56%)

(67%)

(8%)

(2%)

Premium/(discount) to peer group median

(63%)

(64%)

(59%)

(57%)

(10%)

22%

Source: Refinitiv data. Note: Prices as at 9 July 2020. *MGI figures assume 92.2m shares in issue and net debt of €72m.

From this analysis, although MGI is not forecast to show meaningful net profits until FY21 based on consensus, it trades at a material discount to the peer group based on sales metrics (60–70% discount) for FY20e and FY21e and a 56–67% discount based on EV/EBITDA. Management has stated that it is targeting medium-term EBITDA margins of 20%+ (30% for the games business), which compares to 30%+ for the peer group. Looking through to FY21e, MGI trades on an EV/sales multiple of 1.6x, an EV/EBITDA multiple of 6.3x (a 25.9% EBITDA margin) and a P/E ratio of 29.6x. Reflecting on the group’s pro forma FY15–19 revenue CAGR of 40% and adjusted EBITDA CAGR of 43%, as MGI scales via a combination of organic revenue growth and M&A, and focuses on margin enhancement, there is considerable scope for multiples to improve in the short to medium term.

Sensitivities

There are a number of factors that investors should bear in mind when investing in MGI:

Acquisitions: MGI’s buy, integrate, build and improve strategy and track record of earnings-enhancing acquisitions, providing a platform for these businesses to perform, is key to the investment case. The success of this strategy hinges on the company’s ability to select the right acquisitions, maintain price discipline and retain a reputation as an attractive acquiror. While an acquisition strategy does bring inherent risk, each target further diversifies the group’s revenue streams, reducing the risk of any single acquisition significantly affecting results.

Leverage: with two listed bonds in addition to its banking facilities, MGI reported Q120 net debt of €72m (excluding €3.6m of shareholder loans). Although cash generation remains strong, this level of debt and leverage is higher than historically (c 3.1x FY20e consensus EBITDA) and MGI may need to demonstrate that it can manage and pay down this debt in FY20 and beyond before returning to the debt markets.

Interest rates and stock market rating: the current macro environment is supportive for MGI to execute its acquisition strategy, with low interest rates and distressed valuations. This tailwind would moderate if interest rates were to rise or MGI’s shares were de-rated or otherwise lost their attraction as an acquisition currency.

Key person exposure: we believe that MGI’s share price and potentially its operations could be affected by the loss of key management, particularly Remco Westermann, CEO.

Free float: Remco Westermann (chairman and CEO) is the controlling shareholder in MGI, currently holding c 45% of the equity (together with a €3.6m PIK note). ‘Family and friends’ hold 20.5% of the equity (subject to a 25-month lock-up), leaving a limited tradeable free float of 36.5%. Despite the limited free float, share liquidity remains good for a company of MGI’s size.


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This report has been commissioned by Media and Games Invest and prepared and issued by Edison, in consideration of a fee payable by Media and Games Invest. 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. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by Media and Games Invest and prepared and issued by Edison, in consideration of a fee payable by Media and Games Invest. 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. We never take payment in stock, options or warrants for any of our 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 we 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 we 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 2020 Edison Investment Research Limited (Edison).

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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 our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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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.

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