embracer group - s3-eu-west-1.amazonaws.com · enhancing deals. we are excited about the year ahead...
TRANSCRIPT
Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: [email protected]
Update
Equity Research 9 March 2020
KEY STATS
Ticker EMBRAC.ST Market Nasdaq
Share Price (SEK) 94.0 Market Cap (MSEK) 28746 Net Debt 20E (MSEK) -974 Free Float 60 %
Avg. daily volume (‘000) 900
BEAR BASE BULL 65.0
130.0
170.0
KEY FINANCIALS (SEKm)
2017 18/19 FY20E FY21E FY22E FY23E Net sales 508 5754 5126 7844 9493 10632 EBITDA 273 1592 1723 2960 3735 4176 Oper. EBIT 202 880 955 2010 2573 2924 EBIT 188 575 238 736 1299 1701 EPS (adj.)
2017 2018 2019E 2020E 2021E 2022E EPS (adj.) 1.8 3.5 1.1 1.6 2.7 3.6 EV/Sales 19.9 3.2 5.6 3.7 3.0 2.7 EV/EBITDA 37 11.7 11.6 8.7 7.3 6.9 EV/Op. EBIT 50.0 20.9 30.1 14.3 11.2 9.8 P/E 77 59.9 85.5 58.8 34.8 26.1
ANALYSTS
Kristoffer Lindstrom [email protected] Tomas Otterbeck [email protected]
Saber Deal Creating Value Redeye retains its positive stance on Embracer following another strong quarter, seeing
sales and operating profit all well ahead. Encouragingly, the recent acquisition of Saber
Interactive fits excellently, in our view, and we are confident that we will see more value-
enhancing deals. We are excited about the year ahead and view the current valuation as
attractive, as we find the discount compared to peers unjustified.
Stronger than expected
Embracer Group beat our expectations during Q3, the net sales landed 10% above our
projections, and the Operational EBIT was 11% higher. Despite there being no major release
during the quarter, the Group showed both a strong top-line and profitability. The backlog
continued to shine.
Saber Interactive joining the ranks
The big news, which was announced in conjunction with the Q3 report, was the acquisition
of Saber Interactive, the largest deal to date for the Group. Saber is a US-based game
developer with five studios, 600 developers, and more than 30m lifetime games sold. The
studio has their own IPs, do licensed IPs and do also a have recurring revenue streams
from Work-For-Hire/ royalty-based projects. If Saber Interactive had been consolidated
during 2019, the Operational EBIT for Embracer Group would have increased by roughly
50%, from SEK 1 143m to SEK 1 734m. The total dilution, if all earn-outs are paid amounts
to 11% of the capital, the net positive effect in increased earning-power compared to the
dilution is rather apparent. Following the acquisition, we have raised our forecast of
Operational EBIT for FY21 and FY22 by roughly 25%.
Unwarranted discount to peers
When the Saber deal was announced, we made a preliminary assessment of the financials
and raised our Base-case valuation to 130 SEK per share. We now reiterate the valuation
and our positive stance towards the deal. Based on our FY21 estimate of Operational EBIT,
Embracer is currently trading at a discounted to peers. Our Base-case implies an EV/Oper.
EBIT multiple of 20x, a level we deem as fair and still somewhat cautious given Embracers
track-record of M&A and organic prospects. The pipeline for FY21 looks extremely strong,
and we find that the long-term case is substantially strengthened through the latest
acquisition of Saber Interactive. Exciting times ahead!
Embracer Group Sector: Gaming
REDEYE RATING
54 4
EMBRAC.ST VERSUS OMXS30
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OMXS 30
Embracer Group
FAIR VALUE RANGE
Financials
People
Business
REDEYE Equity Research Embracer Group 9 March 2020
2
On the report Embracer Group beat our
expectations during FYQ3, the net
sales landed 10% above our
projections, and the Operational EBIT
was 11% higher. Despite there being
no major release during the quarter,
the Group showed both a strong top-
line and profitability. We want to
empathize, yet again, that EBIT and
net profit are of little worth when
looking at Embracer because they
follow the K3 accounting standard,
they depreciate their acquisitions over
five years. During Q3 alone there were
SEK 211m in acquisition-related
depreciation, which had not been
there if the company followed IFRS
accounting (as almost all peers).
The backlog continued to shine and was one of the main reasons that the net sales came in
above our forecast. The main driver here is the Metro Franchise but also KCD, Remnant,
Satisfactory, Outward, and Wreckfest. As we discussed in our preview comment Metro was
“re-released” on Steam on the 15th if February and Lars Wingefors, the CEO, commented at
the report presentation that the game had sold about 200k copies on Steam during the first
few days of the re-release. The sales return on the finished game asset has been stable in the
last few quarters and amounted to 1.4x based on the asset recorded at the start of the
quarter. The strong backlog development is an effect of the overall increased quality of the
game portfolio with Metro as a shining star.
Embracer: Backlog sales, Finished Games asset & sales return
Source: Redeye Research
5271
5165
145
386
259232
254
524555 545
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
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600
x s
ale
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Backlog Finished Games asset % return on released dev asset -1Q
Estimates vs Outcome Embracer Group
MSEK
Net sales 1 381 1 509 1 373 10%
of which New releases Games 321 291 353 -18%
Backlog Games 232 545 440 24%
Partner Publishing/Film 828 673 580 16%
Gross profit 542 762 705 8%
EBITDA 326 519 460 13%
Operational EBIT 194 302 271 11%
EBIT 152 91 109 -17%
Revenue growth 441% 9% -1%
Gross profit margin 39% 51% 51%
EBITDA margin 24% 34% 34%
Opr. EBIT margin 14% 20% 20%
EBIT margin 11% 6% 8%
Source: Redeye Research
FY19-
Q3*
FY20-
Q3
FY20-
Q3EDiff %
*FY19-Q3 w as the fourth quarter of the extended year 19/20, but
for easier comparison, w e call it Q3.
dsfdsf REDEYE Equity Research Embracer Group 9 March 2020
3
In terms of new releases, we already knew that this would be a slightly quite quarter. The
most major ones where Darksiders Genesis, Shenmue III, and Let’s Sing 2020. The new
release revenue came in below our expectations by 18%. It’s always tough to gauge new
release revenue. There were SEK 146m in completed development, and those generated a
sales return of 2.0x, compared to our estimate of SEK 158m in finalized development with a
sales return of 2.2x.
All in all, Shenmue could have performed better, but Genesis exceeded both our and likely
management expectations. The game sold more copies then Darksiders 3 during the same
period last; still, the third installment in the series was a full-priced game. Genesis was
released on consoles on the 14th of February; it will be interesting to follow the development.
Partner Publishing and Film (PPF) showed stronger sales then we thought. Due to there being
no major release, the business area showed a sales decline compared to last year, but this
was already expected. The decline was not as steep as we had thought, mainly thanks to
Codemasters Grid but also that the Film segment showed their strongest quarter ever. The
high revenue level for Film was mostly thanks to the distribution of the German version of
Oscar-winning Parasite. Significant releases in Q4 will be Doom Eternal and Persona 5 Royal
Edition.
In terms of gross margin profit, EBITDA, and Operational margin came in exactly as we
thought. Strong digital sales drove the high profitability level, large share of own IPs, and less
Partner Publishing sales.
As a summary, the report was strong, and the backlog continues to show Embracer Group’s
strength. We see a strong Q4 coming with Metro on Steam, Satisfactory Update 3, Metro
DLC, Genesis on consoles, and more. The management also commented on Biomutant, we
previously thought the game might be released in Q4, but that will not be the case. The game
will be launched when it’s ready, the bar for only releasing high-quality is apparent in the
management wording, which we obviously think is great. For us, it makes no difference if the
cash-flow comes in Q4 or next year, all that matters is the quality of the product that comes
to market to maximize the ROI.
Embracer: New release sales, Finalized dev. & Sales return
Source: Redeye Research
30 15 34
190246
98 117
321
781
117
261291
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New releases per quarter Finalized development Sales return New releases to fin. dev.
dsfdsf REDEYE Equity Research Embracer Group 9 March 2020
4
The fourt leg The company also announced that Amplifier Game Invest would be their fourth leg within the
Group, and both during and after the quarter Amplifier had helped set up several new studios.
We like the strategy to nurture talent within the Group and have a type of new studio thinking
within Amplifier.
Amplifier will for now not be reported as a separate business segment when it comes to
financials, as the revenue of the unit currently is minimal. Embracer aims to both acquire
external- and nurture internal-talent in that way it seems Amplifier is a great vehicle to do that.
Acquisition of Saber Interactive
In conjunction with the presentation of the Q3 report, Embracer announced the acquisition of
Saber Interactive. We strongly advise investors to look into Embracer’s presentation of the
deal. Here is the link. Saber Interactive will be the fifth leg within the Group.
Saber Interactive is a US-based
game developer with five studios,
600 developers, and more than
30m lifetime games sold. The
studio has their own IPs, do
licensed IPs and do also a have
recurring revenue streams from
Work-For-Hire/ royalty-based
projects. One of the most well
know latest games by Saber is
World War Z (WWZ) released on
the 16th of April 2019, the game
was developed on Saber’s
proprietary engine.
dsfdsf REDEYE Equity Research Embracer Group 9 March 2020
5
During 2019 (preliminary figures), Saber Interactive produced revenues of USD 105m with an
EBIT of USD 62m (59% margin). The up-take from 2018 was significant as they had revenues
of SEK 38m during that year, the growth was driven by the shift to owned/licensed IPs and
the success of WWZ. Our feeling is that the management expects that 2020 will be in line
with 2019 performance, with most sales in H2’20 (calendar). For 2021 however, more of the
current development pipeline will be realized.
If Saber Interactive had been consolidated during 2019, the Operational EBIT for Embracer
Group would have increased by roughly 50%, from SEK 1 143m to SEK 1 734m. The total
dilution, if all earn-outs are paid amounts to 11% of the capital, the net positive effect in
increased earning-power compared to the dilution is rather apparent.
Saber Interactive revenue & EBIT development
Source: Embracer Group
38
105
14
62
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40
60
80
100
120
2018 2019E
mU
SD
Revenue EBIT
Shi ft to owned/lic.IPs and success of WWZ
dsfdsf REDEYE Equity Research Embracer Group 9 March 2020
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Attractive pricing with low risk
Embracer is paying USD 150m in an upfront
payment, of which USD 100m in cash and USD
50m in equity. Also, there is an earn-out of a
maximum USD 375m that vested over six years,
of which USD 275m in Equity and USD 100m in cash. So, the upfront payment (which is the
only one risked if Saber would not hit their future goals) amounts to USD 150m,
corresponding to an EV/EBIT multiple of 2.4x (that’s cheap!). If full earn-out is paid, the
multiple on 2019’s EBIT amounts to 8.5x (also quite cheap). We feel that the deal structure
breaths long-term thinking, a six-year vesting most be some kind of record. The management
and owners of Saber clearly state that they see this as a way to help them take the company
to the next level. Embracer’s strategy to be a home of talented developers is
Our projections for Saber
Saber will have been consolidated in mid Q1'FY21, so the acquisition will not affect the
figures during Q4. In the near-term, the company is releasing SnowRunner on the 28th of
April. SnowRunner is the sequel to the popular game MudRunner and is published by Focus
Home Interactive. MudRunner (previously Spintires: MudRunner) sold 1 million copies in less
than a year. The SnowRunner IP is owned by Saber and will be is an Epic Games Store
exclusive for PC.
We model a similar revenue level during FY21 for Saber as during 2019. We expected Saber
to be consolidated from mid-April. We believe some internal IPs and projects will be moved to
Saber and that both Deep Silver and THQ Nordic will primarily be the publishers beyond the
year FY22 (most deals for the next two years are already made). We expect the revenues to
grow steadily, but that the margins will drop somewhat as there will be less royalty-based
income at extremely high margins and an increased staff-count. In the deal presentation
Saber states that they have a long-term target of increasing their workforce to 1500 FTEs
(630 FTEs today), so the ambition for growth is evident. It’s clear to us that Saber has an
extremely cost-efficient development structure, where most of the developers sit in Russia.
Saber Interactive Revenue & EBIT projections
Source: Redeye Reserach
38
105100
130
0%
10%
20%
30%
40%
50%
60%
70%
0
20
40
60
80
100
120
140
2018 2019E FY21E FY22E
mU
SD
Revenue EBIT margin
Saber Int. acquisition multiples
EV EV/EBIT
Up-front 150 2.4x
+earn-out 525 8.5x
Source: Embracer Group
dsfdsf REDEYE Equity Research Embracer Group 9 March 2020
7
More M&A to come There is still room for more deals for Embracer given the current balance sheet. Especially if
the company would increase its leverage. Given Embracer’s track-record of value-adding
deals, we believe it’s highly plausible that the company will yet again conduct a direct share
issue to load up the “guns” even further.
Q4 projections
For the last quarter of the Financial Year of 2020, we expect that the Group net sales will
reach SEK 1216m with an Operational EBIT of SEK 209m. We previously modeled a release
of Biomutant in Q4, now we have moved it into FY21. Compared to our previous research
update (2nd of Dec.), our estimates for FY21 and FY22 have increased 12% and 16%,
respectively, and our Operational EBIT forecast has been raised by about 25%.
• Games:
o New releases. We believe new releases will generate revenues of SEK
172m. We see a thinner release schedule compared to both Q3. The more
significant titles that will be released are: Metro Exodus DLC (Sam’s Story),
Metro Redux on Switch, Saints Row IV on Switch, Blair Witch, Hunt:
Showdown and Monster Energy Supercross 3. At the end of Q3, Embracer
had SEK 1.75bn in ongoing development assets, and we expect that 4% of
that will be finalized and create a sales return of roughly 1.9x. Last year’s
Q4 (reported as Q5) the company released, among others, Satisfactory,
DKS 3 DLC, Outward and most notably Metro Exodus, therefore a
significant drop in new release revenue is expected.
o Backlog: We expect that the backlog will remain strong and have a
significant boost from Metro Exodus releasing on Steam and Update 3 for
Satisfactory. We project backlog sales of SEK 508. Our assumption implies
a 1.2x sales return on the finished and completed games asset that was
recorded at Q2 end which stood at SEK 410m.
• Partner Publishing: Some of the more notable games that will come to market in Q4
within Partner Publishing are Doom Eternal and Persona 5 Royal Edition. We expect
to see relatively healthy volume and project a net sales of SEK 536m during Q4.
Profitability: We believe the company will have similar gross margins and cost levels as
during Q3. We expect to see an Operational EBIT at about SEK 209m.
Detailed estimates Embracer Group
Period FY20-Q1 FY20-Q2 FY20-Q3 FY20-Q4E FY20E FY21E FY22E
Net sales 1142 1260 1509 1216 5126 7844 9493
Of w hich New releases games 117 261 291 172 841 2102 2417
Backlog games 524 555 545 508 2132 2452 3310
Partner Publishing/Film 501 444 673 536 2153 2326 2512
Saber Interactive 0 0 965 1255
Other income 176 244 293 301 1014 1065 1118
CoS -528 -635 -747 -609 -2519 -3315 -3905
Gross profit 614 625 762 606 2607 4529 5588
Other OPEX -178 -192 -231 -219 -820 -1262 -1410
Staff cost -223 -258 -305 -292 -1078 -1412 -1614
EBITDA 389 418 519 397 1723 2920 3682
Depreciation -185 -177 -217 -188 -768 -910 -1109
Op. EBIT 204 241 302 209 955 2010 2573
Amortization -123 -164 -211 -219 -717 -1274 -1274
EBIT 81 77 91 -10 238 736 1299
Gross profit margin 54% 50% 51% 50% 51% 58% 59%
EBITDA margin 34% 33% 34% 33% 34% 37% 39%
Op. EBIT margin 18% 19% 20% 17% 19% 26% 27%
EBIT margin 7% 6% 6% -1% 5% 9% 14%
Source: Redeye Research
Yearly projectionsQuarterly projections
REDEYE Equity Research Embracer Group 9 March 2020
8
Valuation When the Saber deal was announced, we raised our Base-case valuation to 130 SEK per share. Now after digging
into the acquisition further, we reiterate the assessment and our positive stance towards the deal. Based on our
estimate of FY21 Operational EBIT, Embracer is currently trading at a discounted to both Nordic and international
peers. Our Base-case valuation implies an EV/Oper. EBIT multiple of 20x, a level we deem as fair and still somewhat
cautious given Embracers track-record of M&A and organic prospects. The next financial year will be the biggest in
the company’s’ history, and we see that the long-term case is substantially strengthened through the latest
acquisition of Saber Interactive.
Bear Case 65.0 SEK Base Case 130.0 SEK Bull Case 170.0 SEK Key model assumptions:
CAGR of 5% during forecast period
Average Op. EBIT margin of 19%
Terminal growth 2%
Terminal Op. EBIT margin of 27%
Key model assumptions:
CAGR of 12% during forecast period
Average Op. EBIT margin of 26%
Terminal growth 2%
Terminal Op. EBIT margin of 27%
Key model assumptions:
CAGR of 13% during forecast period
Average Op. EBIT margin of 30%
Terminal growth 2%
Terminal Op. EBIT margin of 30%
Peer valuation
S. CAGR
Company EV (MSEK) FY20E FY21E FY20E FY21E 18-21E FY20E FY21E
Nordic Gaming
Stillfront 14 314 4.3x 3.6x 10.3x 8.9x 31% 42% 40%
Paradox Interactive 14 149 8.4x 7.6x 22.6x 20.2x 19% 37% 38%
Remedy 1 556 4.5x 3.7x 21.4x 18.1x 9% 21% 21%
Funcom 1 316 5.1x 4.4x 37.6x 27.4x 23% 14% 16%
EG7 910 1.6x 1.3x 12.0x 7.7x 65% 14% 17%
Atari 738 2.3x 2.1x 18.0x 14.4x 25% 13% 14%
G5 Entertainment 636 0.5x 0.4x 7.9x 5.9x 11% 6% 7%
Starbreeze 524 3.7x 3.6x n.m. n.m. -18% -12% -28%
Median 1 113 4.0x 3.6x 18x 14x 21% 14% 16%
International Gaming
Tencent 4 643 895 8.9x 7.2x 27.9x 24.7x 24% 32% 29%
Activision 417 724 6.4x 5.8x 19.2x 15.7x 8% 33% 37%
Nintendo 348 777 3.1x 2.9x 12.5x 10.3x 7% 25% 28%
EA 258 975 5.2x 5.0x 16.7x 15.9x 8% 31% 31%
Take-Two 107 982 3.9x 4.1x 21.0x 21.2x 11% 19% 19%
Bandai Namco 98 169 1.5x 1.4x 12.5x 11.3x 7% 12% 12%
Ubisoft 90 988 5.8x 3.4x 69.5x 15.6x 13% 8% 22%
CD projekt 66 056 59.1x 8.3x 238.9x 11.9x 85% 25% 70%
Median 183 479 5.5x 4.5x 20x 16x 9% 25% 28%
Peer Group median 92 296 4.8x 4.1x 19x 15x 15% 19% 22%
Embracer Group 28 750 3.7x 3.0x 14x 11x 18% 19% 26%
Source: Bloomberg & Redeye Research
EV/Sales EV/(Op.)EBIT EBIT margin
REDEYE Equity Research Embracer Group 9 March 2020
9
Catalysts More value adding acquisitions
Embracer Group has a strong focus on acquiring IPs, franchises, and companies at low prices. They can do this by
utilizing one of the best characteristics of a great investor; patience. Larger acquisitions of well-known IPs could and
should enhance the valuation of the company.
AAA titles from Deep Silver and secret project announced
Deep Silver was a part of the Koch Media acquisition. Two studios within Deep Silver is currently developing two
AAA titles, one is a new Saints Row game and the other one is unknown, but they will be released in FY21. The
announcement of the unknown game would enhance the visibility of the IP portfolio and likely increase the
valuation. One of the large development projects from THQ Nordic remains undisclosed. This title has the same
type of budget as Darksiders 3 have, which should imply a similar sales potential.
REDEYE Equity Research Embracer Group 9 March 2020
10
Summary Redeye Rating The rating consists of three valuation keys, each constituting an overall assessment of several factors that are rated
on a scale of 0 to 1 points. The maximum score for a valuation key is 5 points.
Rating changes in the report
People: 5
The management team of Embracer Group is by our measures highly competent with extensive experience from the Gaming
industry. The company continuously puts emphasis on a shareholder focus to generate long-term value creation by keeping to
their core strategy; acquiring IPs at the cheap and increase their value by asset care. Lars Wingefors, the CEO and co-founder, is an
entrepreneur by heart; he started his first business at the age of 13 and has been selling video games for more than 20 years. We
find the management of Embracer as trustworthy as they have never tried to misguide the market; instead, they always make
conservative statements and educate the market about their business. The ownership structure of Embracer Group is, in our view,
one of its key strengths. All the key personnel has substantial holdings in the company with the co-founder Lars Wingefors
controlling more than 50% of the votes. The significant holdings create a focus on long-term value creation and not meeting short-
term financial goals that a company led by “hired guns.” In addition to the substantial holdings of the management team, some of
the most renowned institutional owners show up on the shareholder's list of Embracer Group.
Business: 4
Embracer Group has an extensive portfolio of game franchises with multiple streams of income and a massive player base. Some
of the IPs, like Darksiders, Spellforce, Red Faction and MX vs. ATV, Saints Row, Dead Island, and Metro has a large following and
good reputation in the gamer community; this creates a pricing power and demand for new products. Following the acquisition of
Koch Media, Embracer has become a power-house, but as the gaming industry is so massive, they are still a relatively small player.
The Partner Publishing business has lower margins than “Games”, but still generates a substantial EBIT contribution and acts as a
“funnel” for further business development relationships and possible acquisitions.
Financials: 4
Embracer is a company with a strong cash position. One of the company’s core strategies is to acquire game IPs from companies
in financial distress; this has led to a conservative approach regarding putting on debt. The income streams are diversified with a
large portfolio of IPs and different games. Overall the video game industry is not sensitive to the business cycle which dampens
the financial risk of downturns. During the past years, Embracer has been growing heavily and still producing more than satisfying
margins and return on asset. The future profitability levels will vary due to game release schemes as the business model inherits a
high degree of scalability. Long-term increasing margins as the company continue to grow and the revenue streams from their
own IPs increase even further.
REDEYE Equity Research Embracer Group 9 March 2020
11
PROFITABILITY 2017 18/19 FY20E FY21E FY22E ROE 20% 11% 2% 5% 8% ROCE 26% 17% 3% 7% 11% ROIC 91% 129% 9% 9% 17% EBITDA margin 54% 28% 34% 38% 39% EBIT margin 37% 10% 5% 9% 14% Net margin 27% 6% 3% 6% 9%
Please comment on the changes in Rating factors……
INCOME STATEMENT 2017 18/19 FY20E FY21E FY22E Net sales 508 5,754 5,126 7,844 9,493 Total operating costs -235 -4,162 -3,403 -4,884 -5,757 EBITDA 273 1,592 1,723 2,960 3,735 Depreciation 0 -23 -27 -40 -53 Amortization -84 -995 -1,458 -2,184 -2,383 Impairment charges 0 0 0 0 0 EBIT 188 575 238 736 1,299 Share in profits 0 0 0 0 0 Net financial items -6 -33 -25 -39 -46 Exchange rate dif. 0 0 0 0 0 Pre-tax profit 182 542 213 697 1,252 Tax -43 -183 -68 -222 -399 Net earnings 139 359 145 475 853
BALANCE SHEET 2017 18/19 FY20E FY21E FY22E Assets Current assets Cash in banks 627 2,929 2,674 3,643 4,796 Receivables 90 1,297 1,487 1,569 1,899 Inventories 30 323 410 471 570 Other current assets 0 0 0 0 0 Current assets 747 4,549 4,571 5,682 7,264 Fixed assets Tangible assets 8 156 229 304 374 Associated comp. 0 0 0 0 0 Investments 0 0 0 0 0 Goodwill 24 0 0 0 0 Cap. exp. for dev. 0 1,887 6,370 5,096 3,822 O intangible rights 541 1,820 2,600 3,698 4,746 O non-current assets 0 196 200 200 200 Total fixed assets 573 4,059 9,398 9,298 9,143 Deferred tax assets 2 0 0 0 0 Total (assets) 1,322 8,608 13,969 14,981 16,407 Liabilities Current liabilities Short-term debt 0 0 1,700 1,500 1,500 Accounts payable 208 2,018 1,538 2,275 2,848 O current liabilities 0 0 0 0 0 Current liabilities 208 2,018 3,238 3,775 4,348 Long-term debt 0 0 0 0 0 O long-term liabilities 0 211 210 210 210 Convertibles 0 0 0 0 0 Total Liabilities 208 2,229 3,448 3,985 4,558 Deferred tax liab 37 0 0 0 0 Provisions 4 667 1,300 1,300 1,300 Shareholders' equity 1,073 5,712 9,221 9,696 10,549 Minority interest (BS) 0 0 0 0 0 Minority & equity 1,073 5,712 9,221 9,696 10,549 Total liab & SE 1,322 8,608 13,969 14,981 16,407
FREE CASH FLOW 2017 18/19 FY20E FY21E FY22E Net sales 508 5,754 5,126 7,844 9,493 Total operating costs -235 -4,162 -3,403 -4,884 -5,757 Depreciations total -84 -1,018 -1,485 -2,224 -2,437 EBIT 188 575 238 736 1,299 Taxes on EBIT 0 0 0 0 0 NOPLAT 188 575 238 736 1,299 Depreciation 84 1,018 1,485 2,224 2,437 Gross cash flow 273 1,592 1,723 2,960 3,735 Change in WC 73 310 -757 594 144 Gross CAPEX -425 -4,504 -6,824 -2,124 -2,281 Free cash flow -79 -2,601 -5,858 1,430 1,599 CAPITAL STRUCTURE 2017 18/19 FY20E FY21E FY22E Equity ratio 81% 66% 66% 65% 64% Debt/equity ratio 0% 0% 18% 15% 14% Net debt -627 -2,929 -974 -2,143 -3,296 Capital employed 447 2,783 8,247 7,553 7,253 Capital turnover rate 0.4 0.7 0.4 0.5 0.6 GROWTH 2017 18/19 FY20E FY21E FY22E Sales growth 68% 1,034% -11% 53% 21% EPS growth (adj) 76% 100% -87% 227% 80%
DATA PER SHARE 2017 18/19 FY20E FY21E FY22E EPS 1.75 3.50 0.47 1.54 2.77 EPS adj 1.75 3.50 0.47 1.54 2.77 Dividend 0.00 0.00 0.00 0.00 1.11 Net debt -7.89 -28.58 -3.16 -6.96 -10.71 Total shares 79.36 102.49 307.70 307.70 307.70 VALUATION 2017 18/19 FY20E FY21E FY22E EV 10,087.2 18,594.7 P/E 77.0 59.9 P/E diluted 77.0 59.9 P/Sales 21.1 3.7 EV/Sales 19.9 3.2 EV/EBITDA 37.0 11.7 EV/EBIT 53.6 32.4 P/BV 10.0 3.8
SHARE INFORMATION Reuters code EMBRAC.ST List Share price 241.2 Total shares, million 307.7 Market Cap, MSEK 74218.2 MANAGEMENT & BOARD CEO Lars Wingefors CFO Johan Ekstöm IR Chairman Kicki Wallje-Lund FINANCIAL INFORMATION ANALYSTS Redeye AB Kristoffer Lindstrom Mäster Samuelsgatan 42, 10tr [email protected] 111 57 Stockholm Tomas Otterbeck [email protected]
SHARE PERFORMANCE GROWTH/YEAR 18/20E 1 month 0.0 % Net sales 217.8 % 3 month 0.0 % Operating profit adj 12.5 % 12 month 25.6 % EPS, just -48.1 % Since start of the year 0.0 % Equity 193.1 %
SHAREHOLDER STRUCTURE % CAPITAL VOTES Lars Wingefors 34.6 % 51.1 % Swedbank Robur Fonder 8.6 % 4.9 % Erik Stenberg 7.5 % 11.1 % Handelsbanken Fonder 6.4 % 3.6 % Första AP-fonden 4.8 % 2.7 % Didner & Gerge Fonder 3.5 % 2.0 % CMB Holding AB 2.6 % 3.8 % State Street Bank And Trust co 1.6 % 0.9 % Skandinaviska Enskilda Banken S.A 1.5 % 0.9 % Dan Sten Olsson med familj och stiftelse 1.2 % 0.7 %
DCF VALUATION CASH FLOW, MSEK WACC (%) 9.0 % NPV FCF (2020-2021) 2870 NPV FCF (2022-2028) 10837 NPV FCF (2029-) 25867 Non-operating assets 2929 Interest-bearing debt 0 Fair value estimate MSEK 42503 Assumptions 2020-2026 (%) Average sales growth 18.1 % Fair value e. per share, SEK 1301 EBIT margin 15.5 % Share price, SEK 94
REDEYE Equity Research Embracer Group 9 March 2020
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Redeye Rating and Background Definitions Company Quality
Company Quality is based on a set of quality checks across three categories; PEOPLE, BUSINESS, FINANCE. These
are the building blocks that enable a company to deliver sustained operational outperformance and attractive long-
term earnings growth.
Each category is grouped into multiple sub-categories assessed by five checks. These are based on widely
accepted and tested investment criteria and used by demonstrably successful investors and investment firms. Each
sub-category may also include a complementary check that provides additional information to assist with
investment decision-making.
If a check is successful, it is assigned a score of one point; the total successful checks are added to give a score for
each sub-category. The overall score for a category is the average of all sub-category scores, based on a scale that
ranges from 0 to 5 rounded up to the nearest whole number. The overall score for each category is then used to
generate the size of the bar in the Company Quality graphic.
People
At the end of the day, people drive profits. Not numbers. Understanding the motivations of people behind a business
is a significant part of understanding the long-term drive of the company. It all comes down to doing business with
people you trust, or at least avoiding dealing with people of questionable character.
The People rating is based on quantitative scores in seven categories:
• Passion, Execution, Capital Allocation, Communication, Compensation, Ownership, and Board.
Business
If you don’t understand the competitive environment and don’t have a clear sense of how the business will engage
customers, create value and consistently deliver that value at a profit, you won’t succeed as an investor. Knowing
the business model inside out will provide you some level of certainty and reduce the risk when you buy a stock.
The Business rating is based on quantitative scores grouped into five sub-categories:
• Business Scalability, Market Structure, Value Proposition, Economic Moat, and Operational Risks.
Financials
Investing is part art, part science. Financial ratios make up most of the science. Ratios are used to evaluate the
financial soundness of a business. Also, these ratios are key factors that will impact a company’s financial
performance and valuation. However, you only need a few to determine whether a company is financially strong or
weak.
The Financial rating is based on quantitative scores that are grouped into five separate categories:
• Earnings Power, Profit Margin, Growth Rate, Financial Health, and Earnings Quality.
REDEYE Equity Research Embracer Group 9 March 2020
13
Redeye Equity Research team
Management Björn Fahlén
Håkan Östling
Technology Team Jonas Amnesten
Henrik Alveskog
Havan Hanna
Kristoffer Lindström
Erika Madebrink
Fredrik Nilsson
Tomas Otterbeck
Eddie Palmgren
Magnus Skog
Oskar Vilhelmsson
Viktor Westman
Linus Sigurdsson (Trainee)
Editorial Eddie Palmgren
Mark Siöstedt
John Hintze
Johan Kårestedt (Trainee)
Life Science Team Gergana Almquist
Oscar Bergman
Anders Hedlund
Arvid Necander
Erik Nordström
Klas Palin
Jakob Svensson
Ludvig Svensson
REDEYE Equity Research Embracer Group 9 March 2020
14
Disclaimer Important information Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary authorization). Limitation of liability This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting from the use of this analysis. Potential conflict of interest Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the objectivity and independence of its analysts. The following applies:
• For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees are not allowed to trade in financial instruments of the company in question, from the date Redeye publishes its analysis plus one trading day after this date.
• An analyst may not engage in corporate finance transactions without the express approval of management and may not receive any remuneration directly linked to such transactions.
• Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analysis, or from an underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of these reports should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report for the performance of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of the analysis.
Redeye’s research coverage Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of significant changes in market conditions or events related to the issuer/the financial instrument. Recommendation structure Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decision-making. Redeye Rating (2020-03-09)
Duplication and distribution This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other regulations. Copyright Redeye AB.
Rating People Business Financials
5p 11 12 4 3p - 4p 93 70 30 0p - 2p 10 32 80 Company N 114 114 114
CONFLICT OF INTERESTS
Kristoffer. Lindström. owns shares in the company Embracer: Yes Tomas. Otterbeck. owns shares in the company Embracer: Yes Redeye performs/have performed services for the Company and receives/have
received compensation from the Company in connection with this.