Media and Games Invest — Strong H1 performance, more to come

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Media and Games Invest — Strong H1 performance, more to come

In its maiden results following the group’s Scale listing in July, Media and Games Invest (MGI) reported a 97% like-for-like increase in Q2 revenues to €30.0m, with EBITDA up 68% to €6.3m. The group reported H120 revenues of €56.6m and EBITDA of €11.6m. With the sustained growth in EBITDA, leverage has fallen to 3.2x LTM EBITDA. Management raised its FY20 guidance, with a revenue target of €115–125m (37–49% growth y-o-y) and introduced FY20 EBITDA guidance of €20–23m (29–48% growth y-o-y). These forecasts exclude the impact of any potential M&A in H220, which would be expected to bring valuation multiples down further. Management is actively exploring options to further internationalise MGI’s gaming base in Asia and is opportunistically looking to build mobile gaming revenues. Management is also considering a dual listing for the shares in Sweden.

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Written by

TMT

Media and Games Invest

Strong H1 performance, more to come

Software & computer services

Scale research report - Update

20 August 2020

Price

€1.25

Market cap

€115m

Share price graph

Share details

Code

M8G

Listing

Deutsche Börse Scale

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

92.2m

Last reported net debt at 30 June 2020

€70.7m

Business description

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

Bull

Management team with a proven track record.

Capitalising on surge in gaming demand and also set to benefit from long-term growth trends.

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

Bear

High (but declining) levels of debt in the near term, 3.1x consensus FY20e net debt/EBITDA.

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

Limited free float, currently c 36.5%.

Analysts

Richard Williamson

+44 (0) 20 3077 5700

Dan Ridsdale

+44 (0) 20 3077 5700

In its maiden results following the group’s Scale listing in July, Media and Games Invest (MGI) reported a 97% like-for-like increase in Q2 revenues to €30.0m, with EBITDA up 68% to €6.3m. The group reported H120 revenues of €56.6m and EBITDA of €11.6m. With the sustained growth in EBITDA, leverage has fallen to 3.2x LTM EBITDA. Management raised its FY20 guidance, with a revenue target of €115–125m (37–49% growth y-o-y) and introduced FY20 EBITDA guidance of €20–23m (29–48% growth y-o-y). These forecasts exclude the impact of any potential M&A in H220, which would be expected to bring valuation multiples down further. Management is actively exploring options to further internationalise MGI’s gaming base in Asia and is opportunistically looking to build mobile gaming revenues. Management is also considering a dual listing for the shares in Sweden.

H120 results – margins set to improve

MGI reported a like-for-like increase in Q2 revenues of 97% to €30.0m, with EBITDA up 68% to €6.3m, driven by high levels of demand for MGI’s games in Q220 (35% organic growth), supported by acquisitions. The group reported H120 revenues of €56.6m (H119: €28.6m) and EBITDA of €11.6m (H119: €7.5m). Gaming margins softened from 32% in Q120 to 28% in Q220 with the surge in demand but are expected to recover in H220. EBITDA margins were also soft in the media division (H120: 9%) as the group continues the integration of recent acquisitions, with management targeting 15–20% margins in the medium term. With the sustained growth in EBITDA, leverage fell to 3.6x last 12 months (LTM) reported EBITDA, leaving headroom for potential future M&A.

FY20 revenue and EBITDA guidance raised

Following its exceptionally strong H120 performance, management has raised revenue guidance for FY20 from €110m to €115–125m, 37–49% growth vs FY19 (€83.9m). MGI has also introduced FY20 EBITDA guidance of €20–23m, growth of 29–48% vs FY19 (€15.5m), with implied EBITDA margins that look conservative of 17.4–18.4%. Forecasts exclude any potential M&A deals in H220.

Valuation: Improving valuation as gearing falls

Based on the mid-point of management’s guidance for FY20, MGI trades at an EV/sales multiple of 1.6x and an EV/EBITDA multiple of 8.8x. With predictable revenues and strong cash flow generation, MGI’s gearing should fall quickly, absent further M&A. Underlying growth remains attractive and, supported by M&A, there is considerable scope for further share price appreciation as investors become more familiar with the equity story and multiples normalise towards peer group averages.

Consensus estimates

Year
end

Revenue
(€m)

Adj EBITDA*
(€m)

PBT
(€)

EPS
(€)

EV/EBITDA*
(x)

P/E
(x)

12/18

32.6

13.4

0.7

0.01

13.9

96.9

12/19

83.9

18.1

(0.8)

(0.01)

10.3

NM

12/20e

112.0

22.7

1.7

0.04

8.2

28.8

12/21e

131.5

29.9

5.8

0.05

6.2

25.0

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

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

H120 results – strong Q2 growth

MGI is a fast-growing and profitable games and digital media business. In its maiden results following the group’s Scale listing in July, the group reported a like-for-like increase in Q2 revenues of 97% to €30.0m, with EBITDA up 68% to €6.3m. These results were driven by sustained levels of demand for MGI’s games in Q220, supported by acquisitions.

As previously reported, MGI and the games sector as a whole have benefited from the COVID-19 pandemic lockdown. Following a particularly strong Q220 with 35% organic revenue growth in a typically weak quarter, MGI reported net revenues of €56.6m, an increase of 98% over H119 (€28.6m) (see Exhibit 2). EBITDA rose 54% to €11.6m (H119: €7.5m), with adjusted EBITDA rising 51% to €12.7m (H119: €8.4m). This resulted in net profit for H120 of €0.5m (H119: €0.9m), a slight fall from H119 due to increased financial costs and depreciation of acquired goodwill following the recent M&A transactions, as well as financing for the buy-out of the gamigo minorities.

Exhibit 1: Quarterly summary

€m

H120

Q220

Q120

FY19

Group

Net revenues

56.6

30.0

26.5

83.9

y-o-y growth

98%

97%

99%

157%

EBITDA

11.6

6.3

5.3

15.5

Margin (%)

21%

21%

20%

19%

Adjusted EBITDA

12.7

6.7

5.9

18.1

Margin (%)

22%

22%

22%

22%

Cash and cash equivalents

15.4

15.4

26.2

33.0

Net debt

70.7

70.7

71.8

34.9

Gaming division

Revenues

32.7

18.8

13.9

43.1

EBITDA

9.8

5.3

4.5

12.6

Margin (%)

30%

28%

32%

29%

Media division

Revenues

23.8

11.2

12.6

40.8

EBITDA

1.8

1.0

0.8

2.9

Margin (%)

8%

9%

7%

7%

Source: MGI

Group EBITDA margins fell from 26% to 21% compared to H119, due to the increasing size of the media segment within the group. The media division has lower margins than the gaming division, with H120 EBITDA margins in the gaming division of 30%, compared to 8% for the media division. Management expects EBITDA margins in the media division to build to 15–20% once current acquisitions are fully integrated, while gaming margins are targeted to remain above 30%.

Group cash flow from operating activities was €10.8m in H120 (H119: €5.8m), an increase of 86%, highlighting the strong cash generation of the business. Interest cover on MGI’s debt in Q220 was 3.5x (Q219: 3.6x) despite the bond issue and corresponding increased interest expense.

Debt – falling leverage as EBITDA grows

The group’s liabilities increased to €172.5m in H120 (FY19: €143.9m). Net debt was largely unchanged at €70.7m (Q120: €71.8m), with interest-bearing debt falling to €86.2m and gross cash of €15.4m at period end (Q120: €26.2m). Despite strong cash generation, net debt (excluding shareholder loans of c €3.6m) remained relatively stable due to the bond issues (to finance M&A and the acquisition of the gamigo minorities) and a new credit line from UniCredit. Leverage fell to 3.6x LTM reported EBITDA as at 30 June 2020 (31 March 2020: 4.2x) and 3.2x adjusted EBITDA (31 March 2020: 3.7x). Looking ahead, leverage is 3.2x net debt/consensus FY20e EBITDA, Together with MGI’s strong operating cashflow, this leaves headroom for potential future M&A.

Exhibit 2: H120 financial results

€ '000

FY18

FY19

H119

H120

Revenue

32,621

83,893

28,575

56,569

Capitalised development

2,791

10,187

3,658

7,993

Oher operating income

6,506

4,636

2,773

1,806

Cost of purchased services

(12,699)

(45,803)

(13,508)

(35,152)

Employee-related costs

(10,438)

(27,358)

(10,451)

(19,587)

Other operating expenses

(10,135)

(10,012)

(3,506)

-

EBITDA

8,646

15,543

7,541

11,629

Adjusted EBITDA

13,409

18,100

8,371

12,700

Depreciation & Amortisation

(6,318)

(10,543)

(4,276)

(6,583)

EBIT

2,328

5,000

3,265

5,046

Net financial income (expense)

(1,641)

(5,758)

(1,874)

(3,457)

Income (loss) before taxes

687

(758)

1,391

1,589

Income taxes

895

2,011

(511)

(1,115)

Net profit/(loss)

1,582

1,253

880

474

Consolidated profit

5,255

1,253

880

474

Owners of the Company

4,323

(324)

353

848

Non-controlling interests

932

1,577

(527)

374

Number of shares outstanding (m)

59.85

70.02

62.02

70.02

Average shares in issue (m)

50.36

60.39

60.39

70.02

EPS (reported) (€)

0.09

(0.01)

0.01

0.01

EPS (adjusted) (€)

0.01

(0.01)

0.01

0.01

Net cash/(debt)

(20,430)

(34,911)

(54,155)

(70,709)

Source: MGI

Divisional breakdown

Gaming – potential for sustained growth

Gaming represented 58% of group revenues and 84% of EBITDA in H120. As well as delivering 35% organic revenue growth in Q2 (q-o-q), MGI’s gaming division also saw a significant increase in new players in Q220: a 75% increase in April over the level of registrations in January and February, with user activity also 31% higher over this period. This growth was entirely organic, as MGI did not complete any acquisitions in the period. Growth was largely driven by new content launches for games including ArcheAge, Trove and Aura Kingdom, including two extensive game expansions in ArcheAge (Garden of the Gods) and in Trove (Delves).

Given the longevity of its titles and the stickiness of its player-base, MGI expects the players won in Q220 to be more than a ‘flash in the pan’, delivering a long-term benefit to MGI’s player-base and revenues as players stick with games where they have invested in their character class and become members of clans or guilds.

MGI now has more than 600,000 daily players and five million monthly average users.

Gaming channel strategy – considering mobile

In Q220, 88% of MGI’s revenues came from PC-games (PC-client and browser), while mobile represented only 1% of gaming revenues. Globally, mobile represents approximately 48% of gaming revenues, with market growth of 13% y-o-y, while PC gaming has been growing at 7%. Although PC will remain MGI’s core business, management plans to expand MGI’s mobile gaming presence to position the group in this fast-growing market segment. This is particularly relevant as MGI looks to expand in SE Asia, where markets are more mobile led.

International ambitions

While Europe and North America will remain MGI’s core gaming markets, MGI is actively seeking to expand through publishing partnerships in SE Asia, the Commonwealth of Independent States (CIS) and South America. MGI has already closed a partnership with a South Korean publisher, with localisation of the game in its final phase. Negotiations with other regional publishers are ongoing. MGI is also expanding its international sales reach and management has announced the expansion into a number of new territories to broaden the group’s global footprint, including Australia, New Zealand, Colombia and Mexico.

Media – consolidating under Verve

Media represented 42% of group revenues in H120, but delivered EBITDA of €1.0m (Q120: €0.8m), a 26% increase on the prior quarter, but still only 16% of group EBITDA with the adverse impact of the COVID-19 pandemic. MGI strengthened its media division through the acquisition of Verve. Following the acquisition, MGI is in the process of integrating the media business on to a single platform, allowing efficient integration of future acquisitions. EBITDA margins increased from 7% in Q120 to 9% in Q220, with scope for realisation of further cost savings expected to drive increasing profitability in H220 and beyond. After the media businesses are fully integrated, management expects to deliver long-term sustainable EBITDA margins of 15–20% - although this is still lower than the 30%+ EBITDA margins management is targeting in the gaming division.

Management considering a dual listing in Sweden

As part of its market strategy, management is considering a dual listing in Sweden to provide better access to Scandinavian and international investors, particularly those with a gaming focus. To support continued growth, both organic and via M&A, management will continue to actively explore equity and non-equity financing options through the capital markets.

Valuation

Peer valuation – based on European peers

We believe that MGI’s closest peer is Stillfront Group (Sweden), which offers an indication of the potential valuation for MGI as it matures (FY20e: 7.3x sales, 17.9x EV/EBITDA).

From our analysis, MGI trades at a material discount to the peer group based on sales metrics (70%+ discount) for FY20e and FY21e, but a narrower (but material) 58–69% discount based on EV/EBITDA. Management is targeting medium-term EBITDA margins of 20%+ (30% for gaming), which compares to 30%+ for the peer group. Looking at FY21e, MGI trades on a consensus EV/sales multiple of 1.4x, an EV/EBITDA multiple of 6.2x (a 22.7% EBITDA margin) and a P/E ratio of 25.0x. We believe that as MGI scales, there is considerable scope for multiples to improve in the short to medium term as international investors become more familiar with the equity story.

Exhibit 3: Peer group comparison (based on consensus estimates)

Year
end

Current price (ccy value)

Quoted currency

Market cap (US$m)

EV (US$m)

EBITDA margin 1FY (%)

EBITDA margin 2FY (%)

EV/
sales 1FY (x)

EV/
sales 2FY (x)

EV/
EBITDA 1FY (x)

EV/
EBITDA 2FY (x)

P/E
1FY (x)

P/E
2FY (x)

European peer group

Embracer Group AB

Mar-21

156.9

SEK

5,482

5,077

41.1

42.4

5.6

4.8

13.5

11.2

NM

NM

Stillfront Group AB (publ)

Dec-20

884.0

SEK

3,497

3,593

40.8

42.2

7.3

6.1

17.9

14.5

29.5

23.7

Modern Times Group MTG

Dec-20

121.5

SEK

946

934

9.1

12.8

1.9

1.6

20.6

12.3

NM

NM

Ten Square Games SA

Dec-20

574.0

PLN

1,122

1,107

34.5

38.1

7.3

6.1

21.3

16.1

22.6

18.7

Playway SA

Dec-20

482.5

PLN

860

842

63.3

64.4

16.0

12.3

25.3

19.0

32.9

24.4

Sumo Group PLC

Dec-20

186.0

GBp

388

385

24.4

26.9

5.1

4.3

20.7

15.8

30.3

23.7

Rovio Entertainment Oyj

Dec-20

7.0

EUR

675

541

18.8

18.1

1.5

1.4

8.1

7.9

19.3

18.2

11 Bit Studios SA

Dec-20

539.0

PLN

343

324

48.1

17.4

16.3

12.9

33.9

74.2

51.3

81.7

G5 Entertainment AB (publ)

Dec-20

366.8

SEK

372

365

18.0

17.5

2.4

2.1

13.2

12.3

38.5

33.6

Mean

33.1

31.1

7.0

5.7

19.4

20.4

32.1

32.0

Median

34.5

26.9

5.6

4.8

20.6

14.5

30.3

23.7

Media and Games Invest*

Dec-20

1.25

EUR

137

221

20.2

22.7

1.7

1.4

8.2

6.2

28.8

25.0

Premium/(discount) to peer group mean

(76%)

(75%)

(58%)

(69%)

(10%)

(22%)

Premium/(discount) to peer group median

(70%)

(70%)

(60%)

(57%)

(5%)

5%

Source: Refinitiv data. Note: Prices as at 19 August 2020. *MGI figures assume 92.2m shares in issue and net debt of €70.7m.

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 £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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

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

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

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

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

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Research: Investment Companies

Deutsche Beteiligungs — Lower portfolio earnings but on higher multiples

Deutsche Beteiligungs (DBAG) saw a partial rebound of its investment portfolio value in Q320 due to higher market multiples. While this had a €60.6m net positive impact in 9M20, it was more than offset by reduced earnings forecasts for DBAG’s portfolio companies, especially in its core sectors (eg automotive). As a result, DBAG’s NAV total return (TR) in 9M20 was a negative 4.8%. Meanwhile, the fund services business delivered a solid €6.6m profit in 9M20 (vs €1.6m in 9M19), which should improve further with the start of DBAG Fund VIII’s investment phase in August (it recently announced it first MBO).

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