Media and Games Invest — Adtech player with first-party content

Verve Group (OMX: VER)

Last close As at 10/10/2024

EUR3.23

0.03 (0.78%)

Market capitalisation

EUR598m

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Research: TMT

Media and Games Invest — Adtech player with first-party content

MGI continued to perform strongly in FY21, beating initial guidance and ending up at the top end of the revised guidance. FY21 results showed revenue growth of 80% y-o-y to €252m, with 38% organic growth. Adjusted EBITDA increased 144% y-o-y to €71m, with margins of 28%. In June 2021, the acquisition of Smaato marked the group’s shift to become media led, with MGI evolving to become a content-owning, games-focused adtech platform, with closest peers including Applovin, Azerion and IronSource. Future growth will be both organic and from M&A, with management looking to drive synergies between MGI’s ad platform (Verve) and its content (gamigo). Management’s FY22 guidance is for revenues of €290–310m, with adjusted EBITDA of €80–90m.

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Written by

TMT

Media and Games Invest

Adtech player with first-party content

Software & computer services

Scale research report - Update

8 March 2022

Price

€3.27

Market cap

€489m

Share price graph

Share details

Code

M8G

Listing

Deutsche Börse Scale/
Nasdaq First North Premier

Shares in issue

149.7m

Net interest-bearing debt at 31 December 2021

€198.6m

Business description

Media and Games Invest is a fast-growing and profitable content-owning games-focused adtech platform. It combines organic growth with value-accretive acquisitions to deliver strong and sustainable earnings growth.

Bull

Proven buy-and-build model has delivered a five-year revenue CAGR FY16–21 of 45%.

Business with synergistic media/games platform, underpinned by long-term growth trends.

Has consistently beaten FY20/21 guidance.

Bear

After its rapid transformation, the adtech-led model still needs to be understood by investors.

MGI’s games portfolio remains PC focused, with mobile still substantially under-represented.

Media segment (Verve) margins remain below those of the games segment (gamigo).

Analysts

Richard Williamson

+44 (0) 20 3077 5700

Dan Ridsdale

+44 (0) 20 3077 5700

MGI continued to perform strongly in FY21, beating initial guidance and ending up at the top end of the revised guidance. FY21 results showed revenue growth of 80% y-o-y to €252m, with 38% organic growth. Adjusted EBITDA increased 144% y-o-y to €71m, with margins of 28%. In June 2021, the acquisition of Smaato marked the group’s shift to become media led, with MGI evolving to become a content-owning, games-focused adtech platform, with closest peers including Applovin, Azerion and IronSource. Future growth will be both organic and from M&A, with management looking to drive synergies between MGI’s ad platform (Verve) and its content (gamigo). Management’s FY22 guidance is for revenues of €290–310m, with adjusted EBITDA of €80–90m.

Media and games growing vigorously

MGI is a fast-growing and profitable media and games company, combining a specialist ad-software platform with first-party games content. However, for the first time, in FY21 the media segment overtook games to represent the majority (FY21: 55%) of group revenues. With an adjusted EBITDA margin of 38% for games versus 20% for media, games still contributed most group profits in FY21. However, given relative growth rates (media delivered 115% growth y-o-y in FY21, vs 50% growth for games), media’s contribution is expected to grow in future years, with strong organic growth coupled with targeted M&A.

M&A focus on mobile, 2.8x leverage, €180m cash

Net interest-bearing debt amounted to €199m at 31 December 2021 (FY20: €62m), with net leverage of 2.8x (FY20: 2.1x) following the acquisitions of KingsIsle and LKQD in Q121, as well as Smaato in Q421. Interest cover fell to 3.2x in FY21 (FY20: 4.1x). Absent major M&A and with a full-year contribution from Smaato in FY22, management expects net leverage to fall and interest cover to rise in FY22. Management anticipates further small M&A deals in FY22, with a focus very much on the high-growth mobile sector, now valuations have fallen.

Valuation: Material discount to adtech peers

MGI has achieved annual revenue growth of over 70% y-o-y for each of the last three years, contributing to a five-year revenue CAGR of 45% for FY16–21. In FY20 and FY21, management has also consistently beaten guidance. On this basis, we are confident in management’s FY22 guidance of €290–310m, with adjusted EBITDA of €80–90m. At the midpoint of this guidance, MGI is trading on 2.3x FY22e EV/revenue and 8.1x FY22e EV/ adjusted EBITDA, in line with our games peer group but at a material discount to MGI’s adtech peers.

Consensus estimates

Year
end

Revenue
(€m)

Adjusted EBITDA* (€m)

PBT
(€m)

EPS
(€)

EV/adjusted EBITDA* (x)

P/E
(x)

12/20

140.2

29.1

3.9

0.04

23.6

91.4

12/21

252.2

71.1

14.9

0.11

9.7

28.9

12/22e

304.8

85.6

31.8

0.22

8.1

15.1

12/23e

348.8

101.6

45.6

0.26

6.8

12.7

Source: MGI and Refinitiv. 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.

FY21 results: Delivery of both M&A and organic growth

MGI is a fast-growing and profitable media and games company, combining a specialist ad-software platform with first-party games content. In FY21, MGI delivered revenues of €252m, up 80% y-o-y (FY20: €140m) through strong organic growth (FY21: 38%), coupled with M&A, principally the acquisitions of KingsIsle and LKQD in Q121 and Smaato in Q421. Adjusted EBITDA increased 144% y-o-y to of €71m (FY20: €29m), with margins of 28% in FY21 up from 21% in FY20, as they strengthened in the games and (particularly) media divisions. This strong performance resulted in the group reporting a net profit of €16m, a five-fold rise year-on-year (FY20: €3m). The group had cash and cash equivalents at 31 December 2021 of €180m (FY20: €46m), with net interest-bearing debt of €199m (FY20: €62m).

Exhibit 1: FY21 financial results

€000

FY20

H121

H221

FY21

Revenue

140,220

109,045

143,121

252,166

Capitalised development

15,994

10,560

12,291

22,851

EBITDA

26,549

26,631

38,411

65,042

Adjusted EBITDA

29,135

28,700

435

71,100

Depreciation & Amortisation

(15,508)

(13,446)

(14,792)

(28,238)

EBIT

11,041

13,185

23,619

36,804

Net profit/(loss)

2,707

5,646

10,409

16,055

Owners of the Company

3,059

5,643

10,419

16,062

Non-controlling interests

(352)

(3)

(4)

(7)

Number of shares outstanding (m)

117.07

149.68

149.68

149.68

Average shares in issue (m)

85.50

133.61

149.68

141.71

EPS (adjusted) (€)

0.04

0.04

0.07

0.11

Net cash/(debt)

(61,600)

(44,100)

(198,600)

(198,600)

Source: MGI

MGI has now delivered a five-year revenue CAGR of 45% to FY16–21 with its ‘Buy, Integrate, Build and Improve’ acquisition strategy supplementing healthy organic growth. In FY21, group operating cash flow was €65m (FY20: €25m), an increase of 157%, highlighting the strong cash generation of the business (Q421 cash conversion of 122%). Net leverage remains within management’s target range of 2–3x adjusted EBITDA, rising to 2.8x at 31 December 2021 from 2.1x at 31 December 2020, with FY21 interest cover falling to 3.2x (FY20: 4.1x).

Divisional review

In FY21, the media sector became the largest contributor to net revenue (Exhibit 2) as it outgrew games, and its relative contribution is only expected to increase with strong organic growth and targeted M&A. However, with an adjusted EBITDA margin of 38% vs 20%, games still contributes the majority of profits (Exhibit 3).

Exhibit 2: In FY21, media delivered the majority of group net revenues

Exhibit 3: But games remains the engine of profits (FY21: adjusted EBITDA)

Source: MGI

Source: MGI

Exhibit 2: In FY21, media delivered the majority of group net revenues

Source: MGI

Exhibit 3: But games remains the engine of profits (FY21: adjusted EBITDA)

Source: MGI

Media: Building out the Verve adtech platform

Verve served more than 411bn ads in FY21, with 250m daily active users and 1.7bn connected devices. The division has more than 400 software clients with over US$100,000 of revenues, with a 95% client retention rate.

Having brought all of its games properties to a common platform, gamigo, MGI has repeated this strategy in media, aggregating its adtech properties on a single platform, Verve, serving both advertisers and publishers. Verve is a transparent, vertical omnichannel ad-tech platform that specialises in games and consists of connected demand-side platforms (DSP), data management platforms and supply-side platforms (SSPs) that enable and serve ads on mobile web, in-app, on web and via connected TV and digital-out-of home. Management thoughtfully set out its ambitions in adtech in a media seminar ahead of its acquisition of Smaato in June 2021.

The vast majority of Verve revenues derive from its function as an SSP (FY21: 86%) (Exhibit 5), taking revenue from advertisers looking to identify ad-space, with 71% of revenues coming from mobile devices (Exhibit 4). Management has identified that in FY22 M&A is likely to be focused on building up MGI’s DSP capabilities.

Exhibit 4: FY21 media revenues by device

Exhibit 5: FY21 media revenues by function

Source: MGI

Source: MGI

Exhibit 4: FY21 media revenues by device

Source: MGI

Exhibit 5: FY21 media revenues by function

Source: MGI

FY21 saw media revenue growth of 115% y-o-y, with the acquisition of Smaato (announced in July 2021) having a major impact on the growth of the segment in H221. As a result, media represented 55% of group revenues in FY21 and 39% of adjusted EBITDA. Adjusted EBITDA margins rose from 9% in FY20 to 20% in FY21.

Critical to MGI’s strategy are the synergies between the group’s games and media platforms. The essence of this is set out in Exhibit 6 below, where Verve is used to deliver cost-effective user acquisition for gamigo, delivering potential players at a lower price than gamigo could achieve through third-party ad partners and providing effective monetisation of its ad space. Additionally, by operating across the adtech value chain, Verve captures a greater proportion of advertising revenues for MGI. In particular, through accessing gamigo’s first-party data and its unique advertising inventory, Verve is able to leverage its owned content to deliver materially higher margins for the group. By management’s calculation, this allows Verve to double the cost per mille for MGI owned content over a third-party provider. When coupled with lower player acquisition costs for gamigo, this can lead to a tripling of the value retained within the group.

Verve’s success at positioning itself as a specialist games adtech platform can be judged by the clients it is attracting and retaining, with the likes of Applovin and Ironsource now clients, together with games publishers such as Zynga (Take-Two), King.com (EA), Loop Games and ILoveLOL.  

Exhibit 6: MGI’s integrated ad-tech platform leverages 1st party content to drive margins

Source: MGI

Games: Ongoing investment in ‘games as a service’ model

MGI’s games business has been built around its games platform, gamigo, and includes c 10 massively multiplayer online games (MMOs) and over 5,000 casual games, across the role-playing game, fantasy and strategy genres with over 100 million registered players. Titles include Trove, Aura Kingdom, Desert Operations, Grand Fantasia, Fiesta Online and Pirate101 and Wizard101, acquired through the KingsIsle transaction in January 2021. Gamigo delivers average revenue per paying user of €61.

Games delivered 50% growth in FY21 y-o-y, representing 45% of MGI group revenues and 61% of adjusted EBITDA. MGI’s games content remains the engine of group profitability.

MGI’s core MMOs are all established games operating a games as a service model, with games supported with regular content to maintain active communities, encourage user retention and add new players. This model extends the games’ lifespan and keeps players engaged and entertained. Gamigo regularly launches new games. with 370 games launched in FY21. This means that, on average, MGI published 30+ casual games every month with major releases weighted towards Q4, to drive engagement and monetisation in the high advertising season.

Leverage: Within target range, falling in FY22

At 31 December 2021, net interest-bearing debt increased to €199m (31 December 2020: €62m), leading to a rise in net leverage to 2.8x from 2.1x at 31 December 2020. This follows the acquisitions of KingsIsle and LKQD in Q121 and as well as Smaato in Q421 but remains within management’s target range of 2–3x net leverage. FY21 interest cover fell to 3.2x (FY20: 4.1x). Absent major M&A, and given a full-year contribution from Smaato, management expects both net leverage to fall and interest cover to rise in FY22.

Outlook: Balancing organic growth with M&A

MGI has achieved annual revenue growth of over 70% y-o-y for each of the last three years, contributing to a five-year revenue CAGR FY16–21 of 45%. In FY20 and FY21, management has developed an attractive habit of beating guidance:

FY20 guidance was for revenues of between €115-125m (FY20: €140m, top end beaten by 12%), with adjusted EBITDA of €20-23m (FY20: €29m, top end beaten by 27%).

FY21 initial guidance was for revenues of between €220-240m (FY21: €252m, top end beaten by 5%), with adjusted EBITDA of €60-65m (FY21: €71m, top end beaten by 9%).

Management guidance for FY22 is:

FY22 revenue: €290–310m (15–23% growth y-o-y)

FY22 adjusted EBITDA: €80–90m (13–27% growth y-o-y)

Management recognises this guidance is conservative, but also includes an allowance for c €20m of revenue from discontinued businesses (its media affiliate and influencer activities), which at the adjusted EBITDA level is broadly offset by the full-year inclusion of Smaato, so margins are sustained at 28–29%, a similar level to FY21.

Exhibit 7: Management’s medium-term targets

Source: MGI

In FY22, management intends to focus on growth based on its ‘integrated owned and operated ad-tech’ strategy. Management will continue to focus on growing both the media and the games divisions organically, enhancing the synergies between the two platforms and by M&A. Management believes that the synergies between media and games will underpin growth for FY22 and beyond and has maintained its medium-term targets for the business.

As was identified in MGI’s FY21 results presentation, as a fast-growing market in which MGI is underweight, management has been clear to identify mobile ad-tech infrastructure and mobile games content as key areas for M&A in FY22. Deals are likely to include small specialist acquisitions to build out platform capabilities (eg DSP acquisitions) and larger acquisitions that deliver scale. Management’s top five M&A targets are all in the mobile space, with three mobile adtech platforms (all DSPs) and two mobile games developers.

Management expects to complete further M&A deals in both the games and media sectors in FY22.

Vision 2025

As well as the company’s guidance for FY22 and its medium-term financial goals, for the first time management also set out four longer-term targets for the group:

Build a ‘white label’ SaaS ad-software platform.

Become a top five worldwide leading ad-software platform that is transparent, open source, innovative, multi-format, omniplatform and vertically integrated.

Respect partners’ values and deliver transparency to clients: consent-based data-sharing.

Be one of the most desired global companies for which to work.

We intend to examine these ambitions further and monitor progress in future research notes.

Valuation: Justified premium to games peer group

With media now the largest contributor to revenue, we have started to look at both games and adtech peer groups for MGI. Based on consensus, MGI is now trading broadly in line with its European games peer group but remains at a material discount (30%+) to its US adtech peers, such as Magnite, Applovin, Ironsource and Viant.

Management’s FY22 revenue guidance is for €290–310m (a 15–23% increase y-o-y) with adjusted EBITDA guidance of €80–90m (a 13–27% rise y-o-y), margins of 28–29%. At the midpoint of this guidance (adjusted EBITDA of €85m), MGI is trading on 2.3x FY22e EV/revenue and 8.1x FY22e EV/ adjusted EBITDA.

Exhibit 8: 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)

Media and Games Invest

Dec-22

3.27

EUR

490

688

28.1

29.1

2.3

2.0

8.1

6.8

15.1

12.7

Adtech peers

Applovin

Dec-22

50

USD

17,254

18,840

28.1

31.6

5.5

4.5

19.7

14.3

112.8

39.4

Ironsource

Dec-22

5.0

USD

4,453

3,732

31.9

33.1

5.0

4.0

15.7

12.0

47.3

30.8

Magnite

Dec-22

13

USD

1,531

1,983

32.3

33.9

4.0

3.3

12.5

9.8

16.9

12.4

Azerion Group

Jan-22

9.0

EUR

1,646

1,625

16.2

17.4

3.6

3.0

34.7

24.3

81.4

34.4

PubMatic

Dec-22

22

USD

1,031

906

36.3

37.9

3.5

2.8

9.6

7.5

32.5

24.4

dotDigital Group

Jun-22

58

GBp

209

165

32.5

32.0

2.1

1.9

6.6

6.1

14.7

14.1

Viant Technology

Dec-21

7.4

USD

410

398

15.8

14.8

2.0

1.7

12.9

11.3

NM

NM

CentralNic Group

Dec-22

123

GBp

426

501

11.6

11.8

1.1

1.0

9.5

8.3

12.4

11.0

Mean

26

27

3

3

15

12

34

24

Median

30

32

4

3

13

11

25

24

Games peers

Embracer Group

Mar-22

69.2

SEK

6,660

5,162

38.9

35.3

3.4

1.6

8.9

4.6

NM

NM

Zynga

Dec-22

9.1

USD

9,473

9,648

23.6

24.6

3.4

3.1

14.3

12.5

23.4

19.6

Stillfront Group

Dec-22

27.7

SEK

1,321

1,622

37.8

39.0

2.6

2.4

7.0

6.3

10.1

8.5

Modern Times Group (MTG)

Dec-22

114.4

SEK

1,191

1,522

26.1

26.9

3.1

2.8

11.8

10.6

25.9

23.6

Ten Square Games

Dec-21

203.0

PLN

312

293

27.2

26.6

2.1

1.9

7.7

7.0

8.6

7.9

G5 Entertainment

Dec-22

188.5

SEK

158

142

29.1

30.1

1.1

1.0

3.8

3.5

6.8

6.2

Mean

30

30

3

2

9

7

15

13

Median

28

28

3

2

8

7

10

9

Source: Refinitiv data. Note: Priced at 7 March 2022.

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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 £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. 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.

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General disclaimer and copyright

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 £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. 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.

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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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Tinexta — Guiding to mid double-digit profit growth to FY24

Tinexta’s FY21 headline results for revenue and adjusted EBITDA were in line with our expectations. The new three-year business plan is based on continued organic growth due to leadership in its reference markets (which are mainly experiencing structural growth), further domestic and international M&A and improved operating and cost efficiencies. Management is guiding for a mid-double-digit CAGR for adjusted EBITDA to FY24. Ahead of the publication of full financial results, our provisional new estimates reflect a modest increase to FY22 but a reduction in FY23. The latter reflects the new guidance, recent M&A (Evalue) and more conservative scheduling of the anticipated benefits from the Forvalue acquisition, completed in FY21. The recent share price weakness has seen near-term multiples return towards more attractive levels.

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