Four pillar growth strategy

CI Games 24 November 2021 Update
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CI Games

Four pillar growth strategy

Q321 results

Video games

24 November 2021

Price

PLN1.70

Market cap

PLN311m

PLN4.18/US$

Net cash (PLNm) at 30 September 2021

37.2

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

1.8

9.8

29.9

Rel (local)

8.8

11.1

5.2

52-week high/low

PLN1.90

PLN1.19

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 Sniper Ghost Warrior and Lords of the Fallen franchises.

Next events

FY21 preliminary 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

In its Q321 results, CI Games reported results ahead of guidance, with revenues of PLN33m, EBITDA of PLN19m (a 59% margin) and PAT of PLN14m, a 42% net margin. 9M21 revenue of PLN82m is c 75% of our FY21 estimate and 9M21 EBITDA of PLN49m is c 76% of our FY21 estimate, leaving the group well placed to meet full year expectations. CI Games also clarified its intended release schedule for its forthcoming titles: Lords of the Fallen 2 in H123; the next iteration of the Sniper: Ghost Warrior franchise in FY23; and Project Survival (the newly announced IP being developed by BatFields) by end FY24. At 2.1x FY23 EV/EBITDA and 3.3x P/E, the valuation remains attractive compared to peers.

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

(170.0)

12/20

46.0

28.9

9.2

0.05

0.00

34.0

12/21e

109.0

63.9

39.8

0.17

0.00

10.0

12/22e

56.9

34.1

14.5

0.06

0.00

28.3

12/23e

268.1

137.4

117.1

0.51

0.00

3.3

Note: *Estimates are based on sales forecasts largely denominated in € and US$, and therefore vary with exchange rate movements to the PLN. **PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Q321 results ahead of trading update guidance

CI Games reported Q321 results ahead of guidance from its trading update, with revenues of PLN33m, EBITDA of PLN19m (a 59% margin) and PAT of PLN14m, a 42% net margin. Net cash rose by PLN22m to PLN37m, reflecting net operating cash flow of PLN37m, less PLN15m invested in development for LoTF2 and SGW, leaving the group in a strong net cash position as it looks to establish three core franchises. Ahead of the seasonally strong Q4, 9M21 revenue of PLN82m is c 75% of our FY21 estimate and 9M21 EBITDA of PLN49m is c 76% of our FY21 estimate. SGWC2 contributed 66% of 9M21 revenues.

The four pillars of growth

CI Games has now identified four pillars on which it plans to build a sustainable, growing business: 1) the SGW franchise, 2) LotF2, 3) Project Survival (the new third IP), and 4) United Label, the indie publishing business. To end Q321, the group has spent PLN51m on development for LotF2 and the next instalment of the SGW franchise, with both due to be published on the Unreal Engine in FY23. Pre-marketing for LotF2 is due to start in Q1/Q222, with the title aiming to be content-complete in H122. While CI Games’ current titles are single player, future titles will also implement a complementary multiplayer component to broaden their audience.

Valuation: Potential upside as multiples normalise

Based on the 9M21 results, CI Games looks on track to meet our FY21 estimates (revised with the Q3 trading update). As a domestically held stock with a mixed history of execution, CI Games trades on 2.1x EV/EBITDA and 3.3x P/E in FY23e, compared to its peer group on 12x EV/EBITDA and 22x P/E in FY23e. If CI Games can successfully launch LotF2, to broaden its portfolio, as well as the next SGW title, both in FY23, our DCF analysis and peer multiples indicate the potential for c 5x upside assuming the valuation multiples become in line with the peer group.

An increasingly broad-based, international group

CI Games now has three titles in development, with two titles in-house (Lords of the Fallen 2 (LotF2) and the next title in the Sniper: Ghost Warrior (SGW) franchise) and one (Project Survival) being developed by the third-party Czech developer BatFields. To attract and retain the best talent, the two in-house teams are using distributed development, drawing on experienced international developers from multiple locations across Europe and further afield, although principally from five territories: Poland (the hub of CI Games’ Warsaw studio); Spain and Romania (the two primary locations for CI Games’ own internal studio, Hexworks); the UK; and France.

Exhibit 1: Hexworks – LotF2 resources

Exhibit 2: Warsaw studio – SGW resources

Source: CI Games

Source: CI Games

Exhibit 1: Hexworks – LotF2 resources

Source: CI Games

Exhibit 2: Warsaw studio – SGW resources

Source: CI Games

These teams outsource the production of art assets, so that, for example, Hexworks supplements its 62-strong internal team with 55–60 outsourcing partners, bringing the total number of people working on the game to well in excess of 100 full-time equivalents. Outsourcing allows the teams to adjust resourcing to different stages of development, without needing to hire and lay off staff.

In terms of roles, the majority of group headcount is committed to development, with 80% of the group’s 156 employees actively involved in development (including quality assurance (QA)). The remaining 20% of headcount is in sales and marketing or central roles (Exhibit 3).

Exhibit 3: Headcount by function

Exhibit 4: 9M21 revenues by title

Source: CI Games

Source: CI Games. Note: Subject to rounding errors.

Exhibit 3: Headcount by function

Source: CI Games

Exhibit 4: 9M21 revenues by title

Source: CI Games. Note: Subject to rounding errors.

Finally, it is worth noting the diversity of CI Games’ revenue streams. In a year where the group has only launched one major title, Sniper: Ghost Warrior Contracts 2 (SGWC2: 66% of revenues for the first nine months of 2021 (9M21)), the smaller indie titles published by United Label in 2021 (Eldest Souls, Tails of Iron) have also made a meaningful contribution (7% of revenues). The back catalogue (titles published prior to the current year) constitutes 27% of 9M21 revenues, with previous iterations of the SGW franchise continuing to sell well (SGWC and SGW3 together represent 22% of 9M21 sales). Even LotF, despite its 2014 vintage, still makes a measurable 2% revenue contribution.

Valuation: Looking forward to FY23

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 internal teams, new titles are launched every c 24 months, but with the announcement of Project Survival developed by BatFields, a third-party developer, the intention is to launch a new major title every 12–18 months from 2024.

As we discussed in our initiation (An emerging European game publisher), 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, with the portfolio broadening thereafter. The peer group is trading on a mean EV/EBITDA of c 22x in FY21, 16x in FY22 and 12x in FY23. This compares with CI Games, on 4.5x our FY21e EV/EBITDA, rising to 8.5x for FY22, before falling to 2.1x in FY23. Similarly, for P/E multiples, the peer group trades on almost 34x FY21 earnings, c 27x FY22 and 22x FY23. This compares to CI Games on 9.8x our FY21e P/E, rising to 26.9x FY22e and then only 3.3x FY23e.

If CI Games successfully delivers on our FY21 estimates, investors should then start to focus on FY23. Once investors start to get comfortable with CI Games delivering LotF2 to schedule, to budget and at high quality in FY23, this would likely reassure the market on our FY23 forecasts. The peer group valuation suggests that there could be potential upside of as much as 5x as CI Games’ valuation converges with the peer group multiples for FY23.

Exhibit 5: 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

4,439

4,232

(46)

51

15.1

14.5

29.3

25.8

25.0

43.4

31.7

40.0

Paradox Interactive

Dec-21

SEK

1,704

1,661

(11)

52

9.2

7.4

17.7

13.0

10.7

NM

29.9

28.3

Frontier Developments

May-22

GBp

1,316

1,290

55

38

6.8

5.6

17.7

14.5

13.5

34.4

28.3

27.8

Team17 Group

Dec-21

GBp

1,187

1,100

9

37

9.1

8.2

24.4

22.1

20.3

35.1

31.9

29.3

Playway

Dec-21

PLN

689

683

34

72

11.6

9.1

16.1

12.8

11.6

22.2

16.6

15.1

Remedy Entertainment

Dec-21

EUR

592

530

7

36

10.6

9.9

29.1

27.4

13.3

44.7

44.7

26.6

Tinybuild Inc

Dec-21

GBp

572

511

32

40

10.3

8.9

25.9

22.0

18.5

41.6

35.7

29.4

Digital Bros

Jun-22

EUR

515

496

(1)

33

2.9

2.7

8.9

6.9

NM

20.7

18.4

11.9

Thunderful Group

Dec-21

SEK

462

477

5

12

1.3

1.3

11.0

9.2

8.3

19.2

15.0

13.7

Focus Home Interactive

Mar-22

EUR

276

269

(21)

31

1.7

1.4

5.7

4.9

4.0

23.2

11.4

8.7

11 Bit Studios

Dec-21

PLN

269

246

(31)

44

16.8

8.0

38.3

20.0

6.0

54.5

28.7

9.9

Next Games

Dec-21

EUR

49

47

21

3

1.3

0.7

41.7

10.4

6.0

NM

NM

NM

Mean

 

4

37

8

6

22

16

12

34

27

22

Median

 

6

38

9

8

21

14

12

35

29

27

CI Games

Dec-21

PLN

74

69

137

59

2.7

5.1

4.5

8.5

2.1

9.8

26.9

3.3

Source: Refinitiv (22 November 2021), Edison Investment Research estimates for CI Games

Financials

We revised our estimates with the Q321 trading update in October (Strong Q321 update, third title in development) and have not changed our principal P&L assumptions for this note, although we have ensured the balance sheet reflects progress to 9M21 in terms of for example cash and intangibles, both of which were higher than anticipated. However, given sales are largely dollar or euro denominated, but the company reports in Polish zloty, our headline estimates do still change slightly with underlying exchange rate movements.

Exhibit 6: Financial summary

Year end 31 December

PLN'000

2018

2019

2020

2021e

2022e

2023e

INCOME STATEMENT

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Revenue

 

 

21,985

47,478

46,010

109,020

56,901

268,138

COGS

(17,131)

(29,013)

(26,683)

(51,880)

(30,154)

(116,531)

Gross Profit

4,854

18,465

19,327

57,140

26,747

151,607

EBITDA

 

 

6,916

21,598

28,919

63,896

34,067

137,430

Normalised operating profit

 

 

(4,658)

2,837

9,380

39,689

14,295

116,927

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

39,689

14,295

116,927

Net Interest

431

(828)

(197)

76

163

147

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

39,765

14,459

117,074

Profit Before Tax (reported)

 

 

(21,947)

219

8,532

39,765

14,459

117,074

Reported tax

(746)

(3,096)

(1,435)

(3,977)

(1,446)

(23,415)

Profit After Tax (norm)

(2,959)

(1,553)

7,607

31,812

11,567

93,659

Profit After Tax (reported)

(22,693)

(2,877)

7,097

35,789

13,013

93,659

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

31,812

11,567

93,659

Net income (reported)

(22,693)

(2,877)

7,097

35,789

13,013

93,659

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

0.51

EPS - diluted normalised (PLN)

 

 

(0.02)

(0.01)

0.05

0.17

0.06

0.51

EPS - basic reported (PLN)

 

 

(0.15)

(0.02)

0.04

0.20

0.07

0.51

Dividend (PLN)

0.00

0.00

0.00

0.00

0.00

0.00

Revenue growth (%)

(78.7)

116.0

(3.1)

136.9

(47.8)

371.2

Gross Margin (%)

22.1

38.9

42.0

52.4

47.0

56.5

EBITDA Margin (%)

31.5

45.5

62.9

58.6

59.9

51.3

Normalised Operating Margin

(21.2)

6.0

20.4

36.4

25.1

43.6

BALANCE SHEET

Fixed Assets

 

 

60,261

62,297

69,137

80,847

100,228

110,894

Intangible Assets

52,282

54,828

58,987

71,273

91,156

102,258

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

75,601

55,124

143,964

Stocks

2,687

3,118

1,576

3,206

1,781

7,202

Debtors

3,110

19,921

6,833

17,921

10,660

48,779

Cash & cash equivalents

12,612

6,659

28,207

50,439

38,648

83,948

Other

1,024

5,105

4,534

4,035

4,035

4,035

Current Liabilities

 

 

(8,615)

(30,308)

(5,570)

(19,881)

(6,478)

(19,780)

Creditors

(3,375)

(4,675)

(3,169)

(15,451)

(3,386)

(11,262)

Tax and social security

(450)

0

0

0

0

0

Short term borrowings

(3,468)

(24,051)

(33)

0

0

0

Lease liabilities

(224)

(634)

(324)

(768)

(768)

(768)

Other

(1,098)

(948)

(2,044)

(3,663)

(2,324)

(7,750)

Long Term Liabilities

 

 

(17,209)

(6,474)

(8,173)

(11,918)

(9,951)

(21,248)

Long term borrowings

(12,744)

0

0

0

0

0

Lease liabilities

(303)

(269)

(5,867)

(6,454)

(7,099)

(7,809)

Other long term liabilities

(4,162)

(6,205)

(2,306)

(5,464)

(2,852)

(13,439)

Net Assets

 

 

53,870

60,318

96,544

124,649

138,923

213,830

Minority interests

0

0

(169)

(169)

(169)

(169)

Shareholders’ equity

 

 

53,870

60,318

96,375

124,480

138,754

213,661

CASH FLOW

Op Cash Flow before WC and tax

7,347

20,770

28,722

63,972

34,231

137,577

Working capital

5,040

(20,665)

13,485

3,346

(3,378)

(35,664)

Exceptional & other

(3,592)

(1,463)

(51)

(15)

(106)

(91)

Tax

0

(136)

(1,547)

(3,977)

(1,446)

(23,415)

Operating cash flow

 

 

8,795

(1,494)

40,609

63,327

29,300

78,406

Capex

(1,107)

(2,059)

(2,597)

(2,228)

(2,228)

(2,228)

Capitalised development costs

(24,386)

(18,255)

(19,864)

(37,984)

(37,984)

(30,000)

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

(459)

(488)

(487)

Net Cash Flow

(16,703)

(12,565)

47,071

22,265

(11,791)

45,300

Opening net debt/(cash)

 

 

(13,335)

4,127

18,295

(21,983)

(43,216)

(30,780)

FX

0

0

(16)

0

0

0

Other non-cash movements

(759)

(1,603)

(6,777)

(1,032)

(645)

(710)

Closing net debt/(cash)

 

 

4,127

18,295

(21,983)

(43,216)

(30,780)

(75,370)

Source: Company accounts, Edison Investment Research

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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 £60,000 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.

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

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Australia

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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.

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United States

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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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