Media and Games Invest — Following in Stillfront’s footsteps

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Media and Games Invest — Following in Stillfront’s footsteps

Media and Games Invest (MGI) is a fast-growing games and media business, supplementing organic growth (Newzoo: 8.4% growth 2019–22) with a ‘buy, integrate, build and improve’ acquisition strategy. Gamigo, MGI’s principal gaming business, delivered an FY14–19 CAGR of 31% for revenue and 61% for EBITDA. 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 (estimated at c €70m at H120). It has recently bought out the remainder of gamigo and expects to see further efficiency gains as it scales. MGI is benefiting from increased consumer demand as a result of the COVID-19 lockdown, as can be seen in the double-digit growth in daily active users and new customers. Management sees no slowdown in growth or attractive acquisition opportunities in FY20 or the foreseeable future.

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TMT

Media and Games Invest

Following in Stillfront’s footsteps

Software & computer services

Spotlight - Initiation

18 May 2020

Price

€1.225

Market cap

€113m

Share price graph

Share details

Code

M8G

Listing

XETRA, Frankfurt

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

92.2m

Last reported net debt at 30 June 2019

€54.2m

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 subsidiaries include gamigo (online games), ReachHero (media influencer), Applift (mobile advertising) and PubNative (mobile advertising).

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 3.7x 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 is a research client of Edison Investment Research Limited

Media and Games Invest (MGI) is a fast-growing games and media business, supplementing organic growth (Newzoo: 8.4% growth 2019–22) with a ‘buy, integrate, build and improve’ acquisition strategy. Gamigo, MGI’s principal gaming business, delivered an FY14–19 CAGR of 31% for revenue and 61% for EBITDA. 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 (estimated at c €70m at H120). It has recently bought out the remainder of gamigo and expects to see further efficiency gains as it scales. MGI is benefiting from increased consumer demand as a result of the COVID-19 lockdown, as can be seen in the double-digit growth in daily active users and new customers. 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. Its management has a proven M&A track record, with more than 30 acquisitions over the last six years, and MGI’s increasingly broad portfolio offers predictable, long-term revenue, which it can then leverage. As it grows and integrates businesses with its existing platform, MGI expects to drive greater efficiencies and higher margins as it scales.

Acquisition of minorities in gamigo for up to €38m

MGI’s business has been transformed over the past 18 months, with a series of acquisitions funded by both debt and equity as the company focuses on its interests in gaming and advertising. The March acquisition of the outstanding minorities in gamigo for up to €38m in cash and equity, c 5x FY19 EBITDA, gives investors better visibility on the business and its future prospects.

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 gearing levels (c 3.7x 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 could sustain this debt burden. Based on consensus forecasts and looking at its peer group, sales and EBITDA are forecast to grow at a c 40–50% CAGR (2018–21e) as MGI scales in a high-growth sector. Looking at FY21e, MGI trades on an EV/sales multiple of 1.6x, EV/EBITDA of 7.1x and a P/E of 15.3x.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/18

32.62

2.33

0.69

0.03

39.0

-

12/19e

71.60

1.43

(2.68)

(0.01)

NM

-

12/20e

93.17

6.70

1.64

0.03

40.8

-

12/21e

114.67

12.27

7.14

0.08

15.3

-

Source: MGI and Gamigo accounts (historical figures), Refinitiv consensus (forecasts)

Company description: Gaming and media group

Media and Games Invest (MGI) operates in the media and gaming sectors, supplementing strong organic growth with a buy, integrate, build and improve acquisition strategy. Gamigo, MGI’s principal gaming business and now wholly owned, delivered a revenue CAGR of 31% and an EBITDA CAGR of 61% in FY14–19.

When buying companies, MGI drives synergies from technology integration (eg cloud-based game hosting), creating efficiency improvements and providing a competitive advantage. The group’s most important investments include gamigo, a fast-growing gaming 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 acquired by gamigo.

Exhibit 1: MGI – a balanced media and gaming 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 new business 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. As well as being profitable in its own right, the media businesses provide cost-effective customer acquisition, retention and monetisation, offering a tangible benefit to the games segment.

As at H119, MGI reported net debt of €54.2m (including IFRS 16 lease assets), with cash at bank of €26.2m. Following the acquisition of the minority holdings in gamigo, the group has estimated net debt of c €70m (c 3.7x consensus FY20e EBITDA of €19.0m) including two listed bonds, a €25m MGI unsecured 7% bond (of which €17m has been issued) repayable at par in 2024, and a €50m gamigo secured 7.75% bond repayable at par in 2022, as well as €10m of banking facilities drawn down and €2.5m undrawn.

Exhibit 2: gamigo’s 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 (FY14–17).

Exhibit 2: gamigo’s 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 (FY14–17).

COVID-19: MGI benefits 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.

MGI has successfully implemented remote working to ensure the continuing operation of its games and media platforms. As reported by gamigo, the number of new customers per day for the week of 30 March to 5 April 2020 (the latest data available prior to the release) had increased by 64% compared to the week of 9–15 March 2020, and the number of daily active users (DAU) had risen by 19% following lockdowns in gamigo’s main markets of Europe and North America. Although these are limited data points, they are consistent with data from across the industry and we believe the increase in demand highlighted is representative, supporting management’s expectation for further strong growth for FY20.

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 intellectual property (IP).

High synergies via platform approach

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

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

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

Active in attractive growth segments

Strong growth (c 40–50% consensus revenue and EBITDA CAGR 2018–21e) and attractive margins (MGI is targeting sustainable 20%+ EBITDA margins, with gamigo targeting 30%+ EBITDA margins).

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

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

Proven track record

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

Experienced management team.

Exhibit 4: Buy-and-build – games

Exhibit 5: Buy-and-build – media

Source: MGI

Source: MGI

Exhibit 4: Buy-and-build – games

Source: MGI

Exhibit 5: Buy-and-build – media

Source: MGI

Distressed assets: Buy, integrate, build and improve

MGI follows a buy, integrate, build and improve strategy in both the media (B2B) and gaming (B2C) segments, focused around distressed companies that have come under pressure due to a lack of scale and suffering from high overhead costs (particularly from 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, materially cutting overheads. 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 massively multiplayer online games (MMOGs) 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.

Management has completed more than 30 acquisitions and, following this revised strategy, have delivered a five-year revenue CAGR FY14–19 of 31% for gamigo, MGI’s principal gaming subsidiary, and a five-year EBITDA CAGR of 61%. 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 gaming (B2C) sectors.

Exhibit 6: MGI and gamigo – a brief history

2000

Gamigo founded as online gaming 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

Gaming business

In B2C gaming, MGI publishes online and casual games, mainly 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 (c 30 MMOGs and more than 5,000 casual games) including casual games, role-playing games and strategy games, mainly targeting gamers in Europe and North America 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 massively multiplayer online games (MMOGs) 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 entire period. For established games, over 50% of revenues can be generated by users who have been active players 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 gaming portfolio.

Exhibit 7: Overall spending by player lifetime – Last Chaos North America

Exhibit 8: Overall spending by player lifetime– Fiesta Online Europe

Source: MGI

Source: MGI

Exhibit 7: Overall spending by player lifetime – Last Chaos North America

Source: MGI

Exhibit 8: 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 9: 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 (MMOGs)

MMOGs 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 10, PC-based online titles represented c 92% of gamigo’s FY19 revenues (client-based plus browser), with console titles representing 7% and mobile titles only 1%. Management recognises that the proportion of mobile revenue needs to grow, but intends to wait for the appropriate opportunity at the right price.

Exhibit 10: FY19 revenue breakdown by platform

Source: gamigo, Edison Investment Research

In addition to offering MMOGs, 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 games as well as mobile games. 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 30 MMOGs and more than 5,000 casual games. These include MMOGs such as Fiesta Online and Desert Operations, which have already been on the market for over 10 years. However, if the games are well supported and actively marketed, the company can maintain a low churn rate and stabilise or revitalise titles through targeted marketing and refreshed game content, in collaboration with the existing player community.

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 game licences by taking over companies with titles with an existing 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. However, gamigo looks to ‘fail fast’, with titles that under-deliver against expectations being swiftly discontinued or phased out.

Gamigo does acquire new games IP and licences, but only based on strict criteria, minimising upfront investment and committing marketing budget only if user numbers and revenue targets are met. Since 2017, gamigo has invested in IP and development rights and has now acquired the worldwide rights for seven of its 10 best-selling games, with ongoing development work (improvement, updates and sequels) taken in-house.

The digital advertising sector

In the media (B2B) segment, MGI covers the entire value chain for digital advertising. In addition to adspree and Mediakraft, members of the gamigo group, MGI acquired three further media companies in 2019 – Applift, PubNative and ReachHero – as well as Verve Wireless in January 2020.

Online advertising value can be broken down into five distinct roles, as shown in Exhibit 11 below.

Exhibit 11: The programmatic advertising chain

Source: Edison Investment Research

MGI’s most important investments include ReachHero, a leading influencer SaaS platform; Applift, a leading media company specialising in mobile advertising; PubNative, an SSP platform for mobile advertising; and Verve Wireless, a mobile data platform for location-based programmatic video and display marketing.

Below is a summary of MGI’s principal marketing subsidiaries:

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 gaming 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 gaming 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 (DSP) or Google Ad Manager (SSP). Applift and PubNative differentiate themselves by focusing on gaming 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 also acts as an advertising pipeline for Mediakraft.

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

Following a similar approach to that taken in the gaming segment, MGI has started to integrate its media companies into a single platform, leveraging their individual capabilities to extend their client reach and reduce the overall cost base.

Synergies between gaming and advertising

Media and gaming are complementary sectors with a number of similar characteristics: technology-led, high growth and with a highly fragmented corporate landscape. However, from a group perspective, there are also strong synergies between the two service lines that are essential to MGI.

To provide an effective advertising proposition, companies need to offer attractive content, ie high-quality advertising space, transparency and reliable user metrics. Accordingly, 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 (DAUs) and more than five million monthly active users (MAUs) across its games portfolio and gaming portals, providing access to a rich source of user data. The unique dataset generated is a competitive advantage for MGI and provides a significant USP for its advertising assets. In turn, the gaming business benefits considerably from access to in-house advertising specialists, particularly from cost-effective user acquisition. Using these advantages, gamigo is able 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.

Recent newsflow and upcoming catalysts

Over the past couple of years, following the acquisition of MGI’s initial stake in gamigo in May 2018, management has focused on consolidating and scaling MGI’s interests in gaming and media. Since then, MGI has further expanded its interests in the media sector, with the acquisitions of ReachHero, Applift and PubNative in 2019. In total, management has completed more than 30 acquisitions over the past six years, funded by both equity and debt, including the issue of two listed bonds. Major strategic milestones over the last 18 months include:

Recent milestones

2020

March: MGI increased its holding in gamigo to 99.9%, with a squeeze-out of the remaining shareholders anticipated. Subject to a small delay due to COVID-19, MGI expects to issue 18.2m new MGI shares to the gamigo minorities (98% of which will be subject to a 25-month lock-up period), increasing the number of shares in issue from 70.0m to 88.2m. Together with the 4.0m shares committed (but not yet issued) for the acquisitions of Applift and Verve Wireless, the number of shares in issue is expected to increase to 92.2m.

February: acquisition of substantially all remaining minorities in gamigo for up to €38m in cash and equity (c 5.1x FY19 EBITDA) announced, taking MGI’s initial aggregate holding to 98%. The company paid €16.5m in cash and will issue up to 18.2m MGI shares (subject to a 25-month lock-up), valuing gamigo at up to c €84m based on the closing price of €1.18 on 14 February 2020, the last date prior to the announcement.

February: MGI bond issue increased to €17m (extendable to €25m).

January: c $10–15m acquisition of Verve Wireless (US, asset deal).

2019

October: MGI issues €5m bond (extendable to €25m).

July: MGI holding in gamigo increased from 38.8% to 52.6%.

July: share placing raising €9.2m (gross).

June: acquisition of Applift.

June: gamigo senior secured bond issue increased to €50m via two tap issues at above par.

June: change of name from BLOCKESCENCE to Media and Games Invest.

May: closing of acquisition of 67% stake in ReachHero.

April: $5m asset acquisition of WildTangent (US, asset deal).

February: announcement of c $5–10m acquisition of majority 67.4% holding in ReachHero.

2018

October: $9.25m acquisition of Trion Worlds (US, asset deal).

October: gamigo issues €32m senior secured bond (extendable to €50m).

Looking ahead, we foresee unfinished business as the group continues to scale and completes its transformation into a more transparent international gaming and media business. In addition, although MGI’s historical capital markets focus has been mainly in the DACH region, we expect the group to expand its footprint into English-speaking markets, to better reflect where the majority of its customers are located and to target a more international investor audience.

Potential future catalysts

Increasing scale both organically and through further M&A (2020 onwards).

Consolidation of outstanding bonds at the parent level (2020–21).

Development and diversification of the share register (2021 onwards).

Market overview

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 12: $149bn global market, split by region (with year-on-year growth rates)

Source: Newzoo, Edison Investment Research

Exhibit 13: Global games market value

Exhibit 14: Growth forecasts by segment

Source: Newzoo, Edison Investment Research

Source: Newzoo, Edison Investment Research

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 gaming, 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.

Underlying market growth: Gaming

As mentioned above, the games industry continues to enjoy strong secular growth, both in revenues and player numbers. Historically, this growth can be seen in terms of the number of titles submitted to Steam, the leading PC distribution platform:

Exhibit 15: Steam is the dominant PC games distribution platform

Source: Edison Investment Research, SteamSpy data

In 2019, Western markets represented c 49% of global games revenues estimated at $152bn, with 45% of total revenues on mobile devices. Overall revenues are forecast to grow at c 8.4%+ (2019–22), with a double-digit mobile CAGR, whereas PC and console offer single-digit growth (Newzoo).

As we consider the underlying drivers of growth, there are a number of themes we would highlight that are likely to drive continuing growth over the short to medium term.

Eight drivers of growth for the games industry

As part of our broader research on the games sector, we have identified the following eight factors as future drivers of growth in the games sector:

Driver 1 – digitalisation continues to transform business models: digitalisation has reduced the financial resources and capital intensity required to launch new titles, supporting business model diversity, more flexibility and better profitability for developers and IP owners.

Driver 2 – prevalence of games-as-a-service (GaaS): GaaS involves managing a game’s community post-launch and has helped transform the economics of game creation, reducing development risk, increasing player stickiness and longevity and improving profitability. The GaaS business model offers substantial outsourcing opportunities, with the creation of downloadable content (DLC) and live game support over an extended lifecycle post-release considered non-core by most developers.

Driver 3 – streaming and subscription models: Significant investment is going into developing effective video game streaming models and the associated technologies by both publishers and technology companies, leading to a broadening of the player base and increasing subscriptions.

Driver 4 – e-sports to drive growth: e-sports is another evolution of the games industry that will have a significant impact on future growth, providing another way to build a community around successful titles, streamed live to a global audience over Twitch and YouTube.

Exhibit 16: Twitch is the dominant eSports platform (growth in average concurrent viewers)

Source: TwitchTracker

Driver 5 – mobile capturing the casual audience: mobile offers the potential for global scale and penetration, but remains a casual medium where tastes, fads and fashions move quickly. Sustainable revenues are hard to achieve, but emerging business models may change this. Apple Arcade, a subscription service ($4.99 per month) offering exclusive premium mobile content, launched in 2019 and may herald a more sustainable, premium revenue model in this fast-moving market.

Driver 6 – Far East/Chinese opportunity: the size of the Chinese market is hard to ignore; China constituted $36.5bn of the $71.5bn Asian market in 2019, together representing c 48% of global games revenues (Newzoo).

Driver 7 – IP/content is king: with the prospect of a proliferation of channels to market in the coming years (eg streaming, digital distribution, next-generation consoles), this should represent a great opportunity for IP owners to maximise returns from their IP and expertise.

Driver 8 – tax reliefs level the playing field: tax reliefs for the games and broader creative industries are now either in place or under consideration across much of Europe. These are critical to levelling the playing field and sustaining a creative industry in high-cost jurisdictions.

Management, organisation and corporate governance

MGI’s management team comprises the following:

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 Masters 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 (gaming): Mr Knauber has more than 10 years’ experience in the gaming 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, e-commerce and telecommunications. Previously, he held various positions held at E-Plus, Quam and in his own consulting firm. He has responsibility for the Media Elements group.

Corporate structure

Much of the historical complexity of the group’s corporate structure has been resolved with the acquisition of the gamigo minorities. The corporate structure following the acquisition is set out below:

Exhibit 17: MGI corporate structure

Source: MGI

Shareholders and free float

MGI’s shares remain relatively tightly held, although with relatively high liquidity given 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 gaming 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 P&L reflects €5m of discontinued operations in H118 relating to the sale of its residual real estate assets, but otherwise its FY18 and H119 financials mainly reflect its holding in gamigo following its initial consolidation in May 2018.

MGI’s H119 balance sheet had intangible assets of €226.7m (of which €83.2m are acquired intangibles), as well as €143.5m of goodwill largely arising from the consolidation of the non-controlling interest in gamigo. Shareholders’ equity of €160.7m includes minority interests in gamigo of €91.4m. In H119, the profit attributable to minorities (€0.53m) was actually higher than the profit to shareholders (€0.35m). However, with the acquisition of the minority interests in gamigo in Q120, significant minorities will henceforward be eliminated from the accounts.

Exhibit 18: Historical financials (gamigo FY15–17, MGI FY18-H119)

€’000s

FY15

FY16

FY17

FY18

H118

H119

Revenue

21,644

38,975

42,082

32,621

8,896

28,575

Capitalised development

1,602

2,154

3,585

2,791

704

3,658

Oher Operating income

935

574

2,374

6,506

809

2,773

Cost of purchased services

(10,839)

(17,311)

(16,229)

(12,699)

(1,753)

(13,508)

Employee-related costs

(4,223)

(10,471)

(13,912)

(10,438)

(2,489)

(10,451)

Other operating expenses

(4,843)

(11,286)

(10,865)

(10,135)

(3,431)

(3,506)

EBITDA

4,276

2,636

7,035

8,646

2,736

7,541

Adjusted EBITDA*

4,276

6,921

10,459

13,409

3,693

8,371

Depreciation & Amortisation

(4,677)

(12,732)

(10,392)

(6,318)

(2,177)

(4,276)

EBIT

(402)

(10,097)

(3,357)

2,328

559

3,265

Net financial income (expense)

(955)

(1,892)

(2,308)

(1,641)

(274)

(1,874)

Income (loss) before taxes

(1,356)

(11,989)

(5,665)

687

285

1,391

Income taxes

2,287

2,909

675

895

379

(511)

Net profit/(loss)

931

(9,080)

(4,990)

1,582

664

880

Discontinued operations

-

-

-

3,673

5,093

-

Consolidated profit

931

(9,080)

(4,990)

5,255

5,757

880

Number of shares outstanding (m)

19.76

40.80

40.80

59.85

40.80

62.02

Average shares in issue (m)

19.76

40.80

40.80

50.33

40.80

60.39

EPS (reported) (€)

0.05

(0.22)

(0.12)

0.10

0.14

0.01

EPS (adjusted) (€)

0.05

(0.22)

(0.12)

0.03

0.02

0.01

Cash flow from operating activities

1,393

4,394

(7,511)

(3,533)

(8,187)

5,831

- (including) Discontinued operations

-

-

-

(10,476)

(10,476)

-

Cash flow from continuing activities

1,393

4,394

(7,511)

6,943

2,289

5,831

Cash flow from investing activities

(2,110)

(1,654)

(305)

(14,113)

(185)

(2,790)

Cash flow from financing activities

566

(1,249)

6,761

13,111

9,288

18,757

Net cash/(debt)

(8,206)

(7,667)

189

(37,849)

(26,018)

(54,155)

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 very strong top-line growth over the last five years. The group has completed more than 30 acquisitions since 2013, which has helped gamigo achieve a revenue CAGR of 31% in FY14–19, as well as an EBITDA CAGR of 61% over this period. H119 showed similar levels of ongoing growth, such that consensus forecasts indicate FY19 revenues of €71.6m for MGI, more than double FY18 revenues.

EBITDA rose to €8.65m in FY18, a 23% increase on FY17 (€7.0m), with consensus FY19e EBITDA of €14.5m, a further 67% increase over FY18. Historically, 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. FY19e consensus EBITDA margins are 20.2%, rising to 22.5% in FY21e.

With management having drawn down on both its gamigo and MGI bonds in FY19, there was a sharp increase in interest payable in H119 (H119: €1.9m vs H118: €0.3m) and, following further drawdowns in H219, net interest is expected to more than double in FY19 vs FY18 (€2.1m). Following the acquisition of the outstanding minorities in gamigo, we understand that MGI’s net debt has risen to c €70m.

Based on consensus estimates, both sales and EBITDA for MGI are forecast to grow at a c 40–50% CAGR (2018–21e) as MGI scales in a high-growth sector, with FY19 revenue forecast to be €71.6m and EBITDA €14.5m (20.2% margin). Looking through to FY21e, consensus estimates are for sales of €115m and EBITDA of €25.8m, a 22.5% EBITDA margin, with consensus net income of €5.5m.

Exhibit 19: MGI/gamigo revenue and EBITDA trends

Exhibit 20: MGI/gamigo capex spend

Source: MGI and gamigo accounts, Edison Investment Research

Source: MGI and gamigo accounts, Edison Investment Research

Exhibit 19: MGI/gamigo revenue and EBITDA trends

Source: MGI and gamigo accounts, Edison Investment Research

Exhibit 20: MGI/gamigo capex spend

Source: MGI and gamigo accounts, Edison Investment Research

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 H119, intangibles represented €226.7m of total assets of €295m, an increase from €204.1m and €236.3m from FY18. At 30 June 2019, MGI reported gross cash of €26.2m and net debt of €54.2m.

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. FY18 saw gamigo’s operating cash flow rise to €10.5m from €3.8m in FY17, sufficient to cover its cash commitment in the period (for the acquisition of Trion). In H119, the cash commitment for WildTangent was more than covered by MGI’s H119 operating cash flow of €5.8m.

As shown in Exhibit 21 below, MGI/gamigo’s revenue, EBITDA and operating cash flow trajectories on a pro forma basis have followed a positive upward trend since FY15.

Exhibit 21: Historical EBITDA and cash flow for MGI/gamigo

Source: MGI and gamigo accounts, Edison Investment Research

Interest-bearing debt

MGI has issued €17m of a €25m five-year unsecured bond issued by the parent company in 2019 and a €50m four-year secured bond issued by gamigo in 2018, in addition to its banking facilities (a €10m bank loan from UniCredit Bank and a €2.5m working capital facility from BillFront).

MGI has a long history of leverage and, despite increasing absolute levels of debt (see Exhibit 22 below), given healthy pro forma EBITDA growth since 2014 at gamigo, interest cover and leverage have continued to decline. However, with the recent transformation of the group, the acquisition of the remaining minority interests in gamigo and a number of major acquisitions in H219 (WildTangent) and H120 (Verve), we would expect H120 debt and leverage to reach record levels (net debt of c €70m, c 3.7x FY20e consensus EBITDA). Despite this, with the group’s predictable revenue streams and strong operating cash flow, consensus estimates anticipate leverage to fall materially over the course of FY20 and FY21 (absent further M&A).

Gamigo FY19 results summary

MGI’s principal free-to-play gaming subsidiary, gamigo, announced its audited FY19 results on 27 April 2020 ahead of MGI’s audited results, expected in June 2020. Gamigo’s revenues rose 30% to €59m (FY18: €45m), while EBITDA increased by 48% to €16m (2018: €11m) as margins widened to 28% from 24% in FY18. This led to a 22% increase in net profits of €2.0m (FY18: €1.6m).

As well as the positive business and financial progress made in FY19, the company highlighted the boost to game revenues it has been benefiting from in March and April 2020, seeing increased consumer demand as a result of international COVID-19 related lockdowns. In anticipation of the recessionary economic environment that is likely to follow later this year, the company’s CEO Remco Westermann also went further to highlight that historically games industry revenues have proven resilient in economic downturns.

Although gamigo has benefited from its mature games portfolio, management expects an increase in inbound M&A enquiries as other games and media businesses with financing challenges struggle. With gross cash of €22m as at 31 December 2019 and a net interest-bearing debt (NIBD)/EBITDA ratio of 1.7x (Exhibit 22), gamigo has the capacity for further M&A. Based on this analysis, management expects gamigo’s growth to continue in FY20.

Exhibit 22: gamigo net interest-bearing debt (NIBD) 2014–19

Source: Gamigo accounts. Note: NIBD excludes 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 relevant as games companies, by the nature of their player base, tend to be international if not global businesses. 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: 6.1x sales, 14.8x 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.

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, but a narrower 40-50% discount based on EV/EBITDA. Management has stated that it is targeting medium-term EBITDA margins of 20%+ (30% for gamigo), 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 7.1x (a 26.8% EBITDA margin) and a P/E ratio of 15.3x. Reflecting on gamigo’s pro forma five-year revenue CAGR of 31% and EBITDA CAGR of 61% FY14–19, 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.

Exhibit 23: 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-20

110.5

SEK

2,827

2,402

35.6

38.4

5.5

3.6

15.5

9.4

NM

61.9

Stillfront Group AB (publ)

Dec-20

686.0

SEK

1,831

1,971

41.2

42.0

6.1

5.0

14.8

11.9

26.1

20.1

Ten Square Games SA

Dec-20

466.5

PLN

662

647

31.9

36.1

7.6

7.2

23.8

19.9

23.4

23.4

Playway SA

Dec-20

426.0

PLN

551

536

65.0

64.4

19.2

17.2

29.5

26.7

41.8

38.0

Modern Times Group MTG

Dec-20

92.9

SEK

529

513

6.4

10.8

1.3

1.2

20.9

10.8

NM

NM

Rovio Entertainment Oyj

Dec-20

5.40

391

290

16.6

17.6

1.1

1.0

6.3

5.7

15.4

15.0

Sumo Group PLC

Dec-20

191.5

£

291

284

25.1

26.9

5.0

4.2

19.8

15.4

30.3

23.6

11 Bit Studios SA

Dec-20

459.5

PLN

206

190

41.0

55.4

13.7

8.2

33.4

14.9

56.7

12.2

G5 Entertainment AB (publ)

Dec-20

172.8

SEK

130

116

17.5

17.4

1.1

0.9

6.0

5.4

19.3

15.5

Mean

31.1

34.3

6.7

5.4

18.9

13.3

30.4

26.2

Median

31.9

36.1

5.5

4.2

19.8

11.9

26.1

21.7

Media and Games Invest*

Dec-20

1.225

113

183

23.7

28.8

2.0

1.6

9.6

7.1

40.8

15.3

Premium/(discount) to peer group mean

(71%)

(70%)

(49%)

(47%)

34%

(42%)

Premium/(discount) to peer group median

(64%)

(62%)

(51%)

(40%)

56%

(30%)

Source: Refinitiv data. Note: Prices as at 18 May 2020. *MGI figures assume 92.2m shares in issue and net debt of €70m.

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.

Scale/rating: pressure on management to pursue a more aggressive M&A strategy could increase as the size of company required to ‘move the needle’ rises or multiples re-rate upwards. M&A can deliver accelerated upside but also increases risk.

Games industry growth: the games industry has been enjoying strong structural growth for much of the past decade. However, we believe that this structural growth is set to continue (Newzoo: 8.4%+ games industry CAGR 2019–22). The attention of the tech majors, the roll-out of new technologies and business models, and the potential step-up in investment this is likely to bring makes it an exciting time to be in the games industry. However, in the short term, the impact of COVID-19 may lead to a severe global recession, and although the games industry has typically been resilient to recession, these remain uncertain times for all businesses.

Leverage: with two listed bonds in addition to its banking facilities, MGI has estimated net debt of c €70m. Although cash generation remains strong, this level of debt and leverage is higher than historically (c 3.7x 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 very 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.

Foreign exchange risk: MGI operates an international business and generates revenues in multiple currencies. However, we understand that there is a high degree of natural hedging in the business, particularly between its two principal currencies, the US dollar and the euro.

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 €5m 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.

Regulatory risk: there are both commercial and regulatory risks associated with data-driven performance marketing and aggressive monetisation of vulnerable audiences in the free-to-play and casual games sector. This is likely to be addressed jurisdiction by jurisdiction, but the timing and impact of any such regulatory tightening is currently unclear.

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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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Research: Healthcare

Oxford Biomedica — Further deals anticipated in 2020

Oxford Biomedica’s (OXB) FY19 results highlight strong operational momentum despite capacity constraints. OXB is investing for future growth and its 84,000 sq ft state-of-the-art bioprocessing facility OxBox is on track to produce commercial grade batches in Q220. Deals made include expansion of its commercial supply agreement with Novartis by five years and R&D partnerships with Santen and Microsoft, followed post period with the BMS/Juno licence and supply agreement. We expect further platform deals to be announced in 2020, as OXB exploits its position as the only FDA-approved, commercial-scale lentiviral vector (LVV) manufacturer in the US. In the long term, much value resides in OXB’s ability to develop and monetise its own gene therapies, an out-licence deal is also on the cards and OXB plans to move several proprietary gene therapy assets into the clinic in the next 12 to 18 months.

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