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EUR274m
Research: TMT
Media and Games Invest (MGI) reported FY20 revenues of €140.2m and adjusted EBITDA of €29.1m, ending the year strongly to deliver 67% y o y revenue growth. In H220, MGI completed a dual listing and share placing (for €29m) on Nasdaq First North Premier and issued an €80m bond. MGI has carried its momentum into FY21, with the transformational acquisition of KingsIsle Entertainment (Wizard101, Pirate101) for US$126m in cash upfront, up to US$210m including earn-out. The acquisition was funded by the placings, together with a further placing of c 9% of MGI’s shares to Oaktree Capital, an anchor investor for MGI. MGI had net interest-bearing debt of €91.6m (post KingsIsle), with net leverage of 2.0x pro forma FY20 adjusted EBITDA (€46.0m).
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Media and Games Invest |
Strong momentum carrying into FY21
Software & computer services |
Scale research report - Update
11 March 2021 |
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Media and Games Invest (MGI) reported FY20 revenues of €140.2m and adjusted EBITDA of €29.1m, ending the year strongly to deliver 67% yoy revenue growth. In H220, MGI completed a dual listing and share placing (for €29m) on Nasdaq First North Premier and issued an €80m bond. MGI has carried its momentum into FY21, with the transformational acquisition of KingsIsle Entertainment (Wizard101, Pirate101) for US$126m in cash upfront, up to US$210m including earn-out. The acquisition was funded by the placings, together with a further placing of c 9% of MGI’s shares to Oaktree Capital, an anchor investor for MGI. MGI had net interest-bearing debt of €91.6m (post KingsIsle), with net leverage of 2.0x pro forma FY20 adjusted EBITDA (€46.0m).
FY20 results: Six-year revenue CAGR of 45% to FY20
MGI reported FY20 revenues of €140.2m, up 67% y-o-y (FY19: €83.9m) and adjusted EBITDA of €29.1m, an increase of 61% y-o-y (€18.1m). FY20 adjusted EBITDA margins were 21%, a slight reduction from 22% in FY19. MGI’s strong performance resulted in the group reporting a net profit of €2.7m, a rise of 116% yoy (FY19: €1.3m). The group had cash and cash equivalents as at 31 December 2020 of €46.3m (FY19: €33.0m), with net interest-bearing debt of €61.6m (FY19: €34.9m). The games division was the main driver of MGI’s performance, although the media division also reported strong growth and improving margins. MGI has delivered a six-year revenue CAGR of 45% to FY20.
KingsIsle, a transformative M&A deal
Post-year end, in February 2021, MGI announced the acquisition of US-based KingsIsle (online PC games Pirate101, Wizard101) for total cash consideration of up to US$210m. FY21 guidance for KingsIsle is for revenues of US$32m and adjusted EBITDA of US$21m (66% adjusted EBITDA margin). This is a major, transformative acquisition for MGI, struck at an attractive price (5.8–7.3x FY21 adjusted EBITDA), with potential upside from taking KingsIsle’s IP to mobile and console from FY22.
Valuation: Attractive growth fundamentals
Management’s focus in FY21 is likely to be to consolidate its recent acquisitions ahead of further M&A. With numerous organic growth projects in the pipeline, MGI’s valuation is supported by continuing attractive underlying growth, with net leverage set to fall to the lower end of management’s 2–3x target range within 12–18 months.
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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.
FY20 results: Record year, more to come in FY21
MGI is a fast-growing and profitable games and digital media business. In its maiden full-year results following its Deutsche Börse Scale listing in July 2020, MGI reported FY20 revenues of €140.2m, up 67% y-o-y (FY19: €83.9m) and adjusted EBITDA of €29.1m, an increase of 61% y-o-y (FY19: €18.1m). FY20 adjusted EBITDA margins were 21%, a slight reduction from 22% in FY19. MGI’s strong performance resulted in the group reporting a net profit of €2.7m, a rise of 116% y-o-y (FY19: €1.3m). The group had cash and cash equivalents as at 31 December 2020 of €46.3m (FY19: €33.0m), with net interest-bearing debt of €61.6m (FY19: €34.9m).
Exhibit 1: FY20 financial results
€000 |
FY19 |
H120 |
H220 |
FY20 |
Revenue |
83,893 |
56,569 |
83,651 |
140,220 |
Capitalised development |
10,187 |
7,993 |
8,001 |
15,994 |
EBITDA |
15,543 |
11,629 |
14,920 |
26,549 |
Adjusted EBITDA |
18,135 |
13 |
29,122 |
29,135 |
Depreciation & Amortisation |
(10,543) |
(6,583) |
(8,925) |
(15,508) |
EBIT |
5,000 |
5,046 |
5,995 |
11,041 |
Net profit/(loss) |
1,253 |
474 |
2,233 |
2,707 |
Owners of the Company |
(324) |
848 |
2,211 |
3,059 |
Non-controlling interests |
1,577 |
374 |
(726) |
(352) |
Number of shares outstanding (m) |
70.02 |
70.02 |
117.07 |
117.07 |
Average shares in issue (m) |
60.39 |
65.21 |
93.55 |
85.50 |
EPS (adjusted) (€) |
(0.01) |
0.01 |
0.03 |
0.04 |
Net cash/(debt) |
(34,911) |
(70,709) |
(61,600) |
(61,600) |
Source: MGI
MGI and the games sector as a whole have benefited from the COVID-19 pandemic lockdown, driven by sustained levels of high demand for games over the course of 2020 and into 2021. Not surprisingly, the games division was the principal factor behind MGI’s strong performance (54% of FY20 revenues, 79% of FY20 EBITDA), although the media division (46% of FY20 revenues, 21% of FY20 EBITDA) also reported strong growth and improving margins.
With its ‘Buy, Integrate, Build and Improve’ acquisition strategy supplementing organic growth, MGI has now delivered a six-year revenue CAGR of 45% to FY20.
Group operating cash flow was €25.2m in FY20 (FY19: €16.2m), an increase of 56%, highlighting the strong cash generation of the business. Interest cover on MGI’s debt for FY20 was 4.1x (FY19: 3.1x). Leverage increased marginally to 2.1x as at 31 December 2020 based on FY20 adjusted EBITDA (1.9x as at 31 December 2019) as MGI completed three M&A transactions in FY20, as well as the buyout of the gamigo minorities funded by both equity and bond placings.
Divisional breakdown
Games: Potential for sustained growth
Games represented 54% of group revenues but 79% of adjusted EBITDA in FY20, with adjusted EBITDA margins of 31% (FY19: 34%). MGI’s games segment includes over 10 massively multiplayer online games (MMOs) and over 5,000 casual games. Titles include ArcheAge Unchained, Aura Kingdom, Desert Operations, Grand Fantasia, Fiesta Online, Trove, Pirate101 and Wizard101 (acquired through the KingsIsle transaction). All share the same common characteristics, being established games, with loyal communities that can be grown through cost-effective user acquisition and supported and maintained through the launch of additional content.
MGI does not invest in developing new IP, seeing this as a high-risk exercise, but does develop new content for existing titles, as well as porting titles to new platforms (eg mobile, console).
Given the longevity of its titles and the stickiness of its player base, MGI expects the players it attracted through lockdown in FY20 and FY21 to deliver a long-term uplift to MGI’s player base and revenues as players become attached to games where they have invested in their character and the community. In a number of titles, more than half the player base has been playing the title for more than five years, leading to a highly sticky and predictable, recurring revenue stream.
Verve Group: A media platform ready for growth
Media represented 46% of group revenues but 21% of adjusted EBITDA in FY20, with adjusted EBITDA margins of 9% (FY19: 9%), which the group expects to push up to 15–20% over the medium term. In addition to supporting MGI's games division, providing cost-effective user acquisition, Verve has become a substantial advertising business in itself, focused on the SaaS-based programmatic and advertising technology segments. After more than 10 acquisitions, Verve now offers a fully integrated technology suite, incorporating a demand side platform (DSP), data management platform (DMP) and supply side platform (SSP) as well as a strong in-app ad-serving solution. The recent acquisition of video platform LKQD, from Nexstar Digital, adds additional video capabilities as well as a strong market position in smart TV and over-the-top (OTT) advertising.
MGI is building Verve into an effective media platform, with streamlined integration of acquisitions, to build critical mass and deliver cost savings. Management believes that Verve’s open exchange platform is now one of the top 20 programmatic marketplaces worldwide, meaning that Verve is well-placed to benefit from medium-term growth in the online advertising sector. eMarketer forecasts worldwide digital advertising revenues to grow at a CAGR of c 12% from 2020 to 2024.
Leverage: Remains within target range, before falling
Post-year end, MGI announced the acquisition of US-based KingsIsle (online PC games Pirate101, Wizard101) for US$126m in cash (up to US$210m including earn-out), covered in our recent note Acquisition of KingsIsle Entertainment. As at 31 December 2020, net interest-bearing debt amounted to €61.6m (31 December 2019: €34.9m), a net leverage ratio of 2.1x (FY19: 1.9x). However, net interest-bearing debt rises to €91.6m when adjusted for the acquisitions of KingsIsle and LKQD in January 2021, with net leverage of 2.0x pro-forma FY20 EBITDA (€46.0m). Looking ahead, even with a maximum payout for KingsIsle, management expects net leverage to remain within its target range of 2–3x FY21 EBITDA, before falling back towards the lower end of the range within 12–18 months through free cash flow generation. Management expects the fixed deferred consideration (30 June 2021/2022) to be paid from cash resources and operating cash flow, without the need for further financing.
Outlook: A balance between organic growth and M&A
After a record FY20, management has indicated that it also expects FY21 to be a strong year, although with more of a focus on operational growth than M&A. MGI has a number of games under development and expects strong continued demand for the existing games portfolio, with key games benefiting from being launched on new platforms as well as internationalisation (eg Trove, Wizard101 and Pirate101). Growth in FY21 is expected to be driven by a combination of organic growth from new game launches, internationalisation of proven IP, improved user acquisition, new content launches for existing titles as well as further M&A in both the games and media segments.
Management has set out the following KPIs for the business as its mid-term financial targets:
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Revenue CAGR: 25–30% (FY20: 67% growth). FY21 consensus estimates: 22% growth. Revenue growth in FY21 is expected to be supported by organic revenue growth opportunities, together with a strengthening media business and M&A.
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EBITDA margin: 25–30% (FY20: 19%). FY21 consensus estimates: 28%. the KingsIsle acquisition should support increased group margins, with management guidance of 66% EBITDA margins for KingsIsle in FY21.
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EBIT margin: 15–20% (FY20: 12%). FY21 consensus estimates: 18%. As above, the KingsIsle acquisition should drive increased margins.
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Net leverage: 2–3x (FY20: 2.1x). Net leverage is towards the top of management’s target range following the acquisition of KingsIsle. However, management expects net leverage to remain within its target range of 2–3x FY21 EBITDA even factoring in the largest payout to KingsIsle, before falling back towards the lower end of the range within 12–18 months.
MGI’s M&A pipeline remains full, with management indicating that it is in ongoing discussions with 10 companies (five games and five media businesses) and has contacted a further 25 businesses to explore the potential for a future deal. Management expects to complete further M&A deals in both the games and media sectors in FY21.
Valuation: Narrowed discount to peers
FY20 has seen a transformation in terms of MGI’s valuation, with the shares more than tripling over the last 12 months. Much of the valuation disparity of being a stranded games asset on the German market has now disappeared, but we would note that MGI still offers significant potential for margin improvement (following the acquisition of KingsIsle) and strong M&A-driven growth prospects, with management targeting sustained growth of 25–30% in the medium term. Consensus estimates imply 40% y-o-y revenue growth for MGI in FY21, with 17% growth in FY22, while EPS is estimated to grow by 30% in FY21 and 38% in FY22.
From our analysis, MGI trades at a material discount to the peer group based on sales metrics (c 50% discount) for FY21e and FY21e, but a narrower (but material) 30–38% discount based on EV/EBITDA. Management is targeting medium-term EBITDA margins of 25–30%, which compares to 30%+ for the peer group. Looking at FY21e, MGI trades on a consensus EV/sales multiple of 3.2x, an EV/EBITDA multiple of 11.3x (a 28.3% EBITDA margin) and a P/E ratio of 30.1x.
Exhibit 2: Peer group comparison (based on consensus estimates)
Year |
Current price (ccy value) |
Quoted currency |
Market cap (€m) |
EV (€m) |
EBITDA margin 1FY (%) |
EBITDA margin 2FY (%) |
EV/ |
EV/ |
EV/ |
EV/ |
P/E |
P/E |
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European peer group |
|||||||||||||||
Embracer Group AB |
Mar-21 |
214.0 |
SEK |
8,245 |
7,530 |
42.6 |
44.9 |
8.6 |
5.1 |
20.2 |
11.4 |
nm |
nm |
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Stillfront Group AB (publ) |
Dec-21 |
84.5 |
SEK |
2,985 |
3,165 |
38.3 |
39.6 |
4.9 |
4.3 |
12.7 |
10.8 |
18.6 |
15.9 |
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Modern Times Group MTG |
Dec-21 |
114.9 |
SEK |
1,097 |
1,422 |
15.6 |
18.6 |
2.7 |
2.3 |
17.3 |
12.4 |
45.0 |
31.8 |
||
Playway SA |
Dec-20 |
554.0 |
PLN |
805 |
773 |
71.7 |
75.2 |
18.3 |
11.4 |
25.6 |
15.1 |
22.2 |
19.5 |
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Ten Square Games SA |
Dec-20 |
499.5 |
PLN |
800 |
768 |
33.8 |
34.7 |
5.7 |
4.6 |
16.8 |
13.2 |
19.8 |
14.9 |
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Sumo Group PLC |
Dec-20 |
296.0 |
GBp |
587 |
580 |
23.9 |
24.4 |
7.6 |
5.2 |
31.7 |
21.4 |
42.3 |
32.0 |
||
Rovio Entertainment Oyj |
Dec-21 |
6.22 |
EUR |
508 |
423 |
17.0 |
16.5 |
1.5 |
1.5 |
8.9 |
9.0 |
16.8 |
15.3 |
||
G5 Entertainment AB (publ) |
Dec-21 |
451.0 |
SEK |
394 |
375 |
24.6 |
26.5 |
2.5 |
2.2 |
10.1 |
8.3 |
19.3 |
15.4 |
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11 Bit Studios SA |
Dec-20 |
530.0 |
PLN |
276 |
252 |
63.0 |
46.0 |
13.6 |
17.5 |
21.6 |
38.1 |
33.8 |
68.4 |
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Mean |
36.7 |
36.3 |
7.3 |
6.0 |
18.3 |
15.5 |
27.2 |
26.7 |
|||||||
Median |
33.8 |
34.7 |
5.7 |
4.6 |
17.3 |
12.4 |
21.0 |
17.7 |
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Media and Games Invest plc |
Dec-21 |
3.54 |
EUR |
456 |
547 |
28.3 |
25.6 |
3.2 |
2.8 |
11.3 |
10.9 |
30.1 |
23.2 |
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Premium/(discount) to peer group mean |
(56%) |
(53%) |
(38%) |
(30%) |
11% |
(13%) |
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Premium/(discount) to peer group median |
(44%) |
(39%) |
(35%) |
(12%) |
43% |
31% |
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Source: Refinitiv data, priced as at 10 March 2021
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