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Research: TMT
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.
Written by
Media and Games Invest |
Strong H1 performance, more to come
Software & computer services |
Scale research report - Update
20 August 2020 |
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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.
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Consensus estimates
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 |
Current price (ccy value) |
Quoted currency |
Market cap (US$m) |
EV (US$m) |
EBITDA margin 1FY (%) |
EBITDA margin 2FY (%) |
EV/ |
EV/ |
EV/ |
EV/ |
P/E |
P/E |
|||
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 |
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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 |
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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 |
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Premium/(discount) to peer group mean |
(76%) |
(75%) |
(58%) |
(69%) |
(10%) |
(22%) |
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Premium/(discount) to peer group median |
(70%) |
(70%) |
(60%) |
(57%) |
(5%) |
5% |
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Source: Refinitiv data. Note: Prices as at 19 August 2020. *MGI figures assume 92.2m shares in issue and net debt of €70.7m.
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Research: Investment Companies
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).