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Update
Equity Research 27 May 2020
KEY STATS
Ticker EMBRAC.ST Market Nasdaq
Share Price (SEK) 109 Market Cap (MSEK) 43509 Net Debt 20E (MSEK) -700 Free Float 60 %
Avg. daily volume (‘000) 1000
BEAR BASE BULL 65.0
130.0
170.0
KEY FINANCIALS (SEKm)
FY19 FY20 FY21E FY22E FY23E FY24E Net sales 508 5754 7390 8721 10269 11604 EBITDA 273 1592 3210 3665 4487 5192 Oper. EBIT 202 880 1959 2403 2944 3414 EPS (adj.)
2018 2019 2020E 2021E 2022E 2023E EPS (adj.) 1.8 3.5 -0.3 1.0 2.1 3.0 EV/Sales 1.2 0.9 6.0 5.1 4.3 3.8 EV/EBITDA 13.6 13.8 13.8 12.1 9.9 8.5 EV/Op. EBIT 24.3 24.3 22.6 18.4 15.0 13.0
ANALYSTS
Kristoffer Lindstrom [email protected] Tomas Otterbeck [email protected]
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EMBRAC OMXS30
Pipeline in Focus Redeye reiterates its positive view of Embracer Group. The Q4 report was solid, and the
update to the pipeline has not led to any significant changes to our forecasts. A substantial
amount of available capital for M&A indicates that something big could be in the making.
Embracers' quality and M&A track-record should justify a premium valuation; the company
is still valued in line with peers based on Oper. EBIT multiples. We believe that the growth
journey of Embracer Group will continue for many years more.
Solid report, focus on pipeline
Q4 was a solid report with better than expected margins. The biggest takeaway was
increased pipeline visibility; the planned release schedule indicates 2x the amount of new
release (of capital invested) we saw during FY20. Earlier expected AAA titles have been
moved to FY22; this year, we will see a multitude of mid-sized games instead. The pipeline
adjustments have only led to small forecast changes for our part.
More M&A will come
Despite the market’s “cravings” of deals, no new M&A was announced. We feel confident
that management will not stress in making acquisitions just because the market wants
them to. At the end of the quarter, the company had cash and unutilized credit facilities of
approximately SEK 5bn. In addition to this, the company raised SEK 1.6bn after the close of
the quarter through a directed share issue. The company now states that they might
consider temporary financial leverage for the right deal. Also, Embracer can issue 10% new
shares if they need to. With the current cash position, some leverage, and a share issue (to
the seller), Embracer has about SEK 10bn in available capital for M&A. Big things could be
in the making, time will tell.
A quality company at a fair price
Our Base-case of 130 SEK per share is unchanged. Embracer trades at an EV/Oper. EBIT
multiple of 23x on our FY21 estimate, in line with the median valuation for the Nordic
gaming peers. Embracer’s track-record in M&A, broad game portfolio, shareholder focus,
and growth potential deserve a premium valuation in our view. Embracer is a company that
seldom will look cheap. We regard it far better to buy quality at a fair price than a fair
company at a low price, and that is what you currently get in Embracer.
Embracer Group Sector: Gaming
REDEYE RATING
EMBRAC.ST VERSUS OMXS30
FAIR VALUE RANGE
Financials
People
Business
REDEYE Equity Research Embracer Group 27 May 2020
2
A solid report
Summary:
• Solid report with better than expected margins
• Increased pipeline visibility, the planned release schedule indicates 2x the amount of
new release (of capital employed) we saw during FY20. AAA titles likely moved to
FY22. This year we will see a multitude of mid-sized games instead
• The Saber acquisition going well and SnowRunner (the first game released as an
Embracer company) have exceeded management expectations
Embracer showed yet another stable quarter. The net sales were almost spot-on our
projections while the Operational EBIT came in 19% higher. That the company showed a
decline in net sales compared to last year was entirely in the cards; as during Q4'FY19,
Embracer had a couple of major releases. The main reason we saw a better margin than we
had expected was a far lower SG&A, probably a COVID19, and release schedule effect with
fewer gaming conferences, events, and marketing. During the period, cash flow was robust
and amounted to SEK 765.7m, fueled by both the high operating profit and reduced working
capital.
The biggest takeaway from the report was an update on the game pipeline ahead. Most
notably; we won't see a AAA game during FY21, but instead a multitude of mid-sized
releases. Still, the release schedule implies more than double capital tied up in development
will come to the market during FY'21 compared to FY'20. Embracer expects that the first AAA
game since Metro Exodus will be released in FY'22.
Estimates vs Outcome Embracer Group
MSEK
Net sales 1 631 1 339 1 310 2%
of which New releases Games 781 345 250 38%
Backlog Games 254 559 584 -4%
Partner Publishing/Film 596 436 476 -9%
Gross profit 889 673 706 -5%
EBITDA 619 495 444 11%
Operational EBIT 396 286 241 19%
Revenue growth 158% -18% -20%
Gross profit margin 55% 50% 54%
EBITDA margin 38% 37% 34%
Opr. EBIT margin 24% 21% 18%
Source: Redeye Research
FY19-
Q4*
FY20-
Q4
FY20-
Q4EDiff %
*FY19-Q4 w as the f ith quarter of the extended year 19/20, but for
easier comparison, w e call it Q4.
dsfdsf REDEYE Equity Research Embracer Group 27 May 2020
3
Games
The sales within the Games area exceeded our expectations, fueled by a higher new release
revenue, which came in at SEK 345m. The most significant contributors to new release
revenue were Darksiders Genesis, Metro DLC, Metro Redux, Hunt: Showdown, and a couple of
smaller titles. During the quarter, Embracer recorded SEK 165m in finalized development. The
sale return landed at a high level of 2.1x, likely driven by the high market demand for gaming
content.
The backlog sales, which amounted to SEK 559m, were in line with our projections and saw a
stable development during the period. Key franchises like Metro Exodus (release on steam),
Embracer: New release sales, Finalized dev. & Sales return
Source: Redeye Research
30 15 34
190246
98 117
321
781
117
261291
345
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
0
100
200
300
400
500
600
700
800
900
Sale
s r
etu
rn
mS
EK
New releases per quarter Finalized development Sales return New releases to fin. dev.
Embracer: Backlog sales, Finished Games asset & sales return
Source: Redeye Research
5271
5165
145
386
259232
254
524555 545
559
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
0
100
200
300
400
500
600
x s
ale
s r
etu
rn
mS
EK
Backlog Finished Games asset % return on released dev asset -1Q
dsfdsf REDEYE Equity Research Embracer Group 27 May 2020
4
Kingdom Come: Deliverance, Wreckfest, and Milestone games. Update III of Satisfactory
(Coffee Stain) was well received, and the business unit had its strongest quarter ever.
Digital sales reached record levels and amounted to 78% of game sales. That the digital
share continued to climb is an effect of consumer behavior of buying digital goods, which has
increased even further with the COVID-19 outbreak. An enhanced digital sales are beneficial
for Embracer’s gross profit margin.
Amplifier
Amplifier continues there work with establishing new studios and conduct smaller game
investment. During the quarter, the unit set up a new game studio in Gothenburg called
RiverEnd Games lead by industry veterans. They also increased their stake in Misc Games to
55% from 45% and acquired a small indie studio in Italy named DESTINYbit.
Partner Publishing
The business unit had net sales of about 9% below our projections. Partner Publishing is the
segment within the Group that has been affected the most by COVID-19 in a negative way.
Physical store sales have gone down dramatically, but most consumers then shifted to e-
tailers instead. Still, Partner Publishing’s logistic hubs have remained operational.
Embracer: Sales development Games & sales mix
Source: Redeye Research
82 86 85
255138 146 124
352
143 185
330 333 307119178
326
142 342 338
252
187
794
373
442 467 515
98
83
4536
82
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
200
400
600
800
1000
1200
% o
f s
ale
s
Ne
t s
ale
s (m
SE
K)
THQ Nordic Deep Silver Coffee Stain Own IPs % sales Digital % sales
dsfdsf REDEYE Equity Research Embracer Group 27 May 2020
5
Update on the pipeline We find that the most interesting info in the report was related to the pipeline in the coming
years. We have previously expected to see two AAA games come to market during FY’21 (this
financial year), now the company indicates that the first AAA release after Metro will take
place in FY22. In isolation, that would mean less new release income then we previously
expected. However, at the same time, the management states that the value of completed
games (reported as finalized development during the quarter) will more than double from
SEK 589m during FY’20 to SEK 1200-1400m in FY21. We regard a AAA game a title with a
development budget above USD 30m. The pipeline during FY’21 will be filled with a sizeable
amount of midsized games rather than a few big ones. In a way, this reduces the title risk
with more income streams but also reduces the blockbuster potential to some degree. During
the past twelve months, the Game Capex has amounted to SEK 1385m. The game
investment is a key driver of growth, and we expect it to continue.
Embracer owns 160+ IPs and is currently working on 103 game projects, of which 43 are
announced. Some notable releases during FY21 are:
• SnowRunner
• Biomutant
• Saints Row the Third
Remastered
• Spongebob Battle for Bikini
Bottom
• Destroy All Humans
• Desperados III
• RIDE4
• Wasteland 4
• And many more…
Embracer: Net sales, Game CAPEX and Development projects
Source: Redeye Research
302 341 374 380508
817
1214
1506
1803
24472604
3044
33283196
135 180 208 251 291 397546
701887
10191168
1277 1347 1385
0
20
40
60
80
100
120
0
500
1000
1500
2000
2500
3000
3500
LTM net sales LTM Game CAPEX Development projects
dsfdsf REDEYE Equity Research Embracer Group 27 May 2020
6
We now model that the finalized development will land at SEK 1234m during FY21. We
expect to see the most significant pipeline roll-out in Q2 and Q3 (calendar Q4 and high-
season for games). To be conservative, we assume a diminishing return on new releases. Our
estimates translate to a new release revenue of SEK 1852m during FY21, which amounts to
annual growth of 83%. Embracer will likely continue to invest heavily in their pipeline during
the year; looking at the current development recognized (SEK 2118m at FY year-end) on the
balance sheet, more than 50% will come to market during FY21.
As there will be a substantial new release revenue expansion, so will also the backlog (more
games in the market generating revenue). We believe Embracer will produce a backlog sales
of SEK 2551m during the year. We model lowered sales return compared to last year as
Metro Exodus has contributed to extremely high return levels, and that effect should plan out
during this year.
Embracer: LTM new release sales, LTM finalized dev. & Sales return
Source: Redeye Research
782
1317 13361480 1450
1014
1248
16001731
1852
383480
601 655 644 589654
896
10421234
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
0
500
1000
1500
2000
Sale
s r
etu
rn
mS
EK
LTM new release sales LTM finalized dev. Sales return New releases to fin. dev.
Projections
Embracer: LTM backlog sales, Sum game asset LTM & Sales return
Source: Redeye Research
10211130
1268
1565
1878
2183 2235 22912411
2551
839
1033
1254
14721624 1668 1725
1948
2246 2672
0.0x
0.2x
0.4x
0.6x
0.8x
1.0x
1.2x
1.4x
0
500
1000
1500
2000
2500
3000
Sale
s r
etu
rn
mS
EK
LTM backlog sales Sum of game asset LTM Sales return backlog
Projections
dsfdsf REDEYE Equity Research Embracer Group 27 May 2020
7
Up for leverage in an M&A deal No new M&A deal announced. We know that the market almost craves new deals from
Embracer. However, we feel confident that management will not stress making acquisitions
just because the market wants them to. Embracer’s success thus far is only to make great
deals, and we believe they will continue on that road. The company continues to state that
they are in multiple discussions with attractive targets that might form a new operating unit.
The management also means that the current COVID-19 environment has not affected the
deal-flow, but that they rather have seen it increase since the Saber acquisition.
At the end of the quarter, the company had cash and unutilized credit facilities of
approximately SEK 5bn. In addition to this, the company raised SEK 1.6bn after the close of
the quarter through a directed share issue. Embracer has always intentionally decided not to
leverage its operation and take on debt to finance an acquisition. But as the current pipeline
now will unfold in the coming years, the management expects to see a notable improvement
in free cash flow that view has changed somewhat. The company states that ambition is still
to keep a net cash position, but for the right inorganic (M&A) opportunities, they might
consider temporary financial leverage. Embracer also has the authorization by the general
meeting to use about 10% new shares if they find the right target, which translates to about
SEK 4.2bn. With the current cash position, some leverage, and a share issue Embracer has
about SEK 10bn in available funds for M&A. We believe the now stated possible intention of
using leverage for M&A could imply an even larger deal then Saber Interactive in the making,
time will tell.
Projections We have only made some minor forecast adjustments in this report. We still see healthy
growth and expanding margins in the coming years. As always, our projections do not
account for any future M&A deals, that certainly will happen.
Estimate adjustments
Period
Net sales 7 393 8 724 10 272
Old net sales 7 844 9 493 10 632
% change -6% -8% -3%
Oper. EBIT 1 959 2 404 2 944
Old oper. EBIT 2 010 2 573 2 924
% change -3% -7% 1%
Source: Redeye Research
FY21E FY22E FY23E
dsfdsf REDEYE Equity Research Embracer Group 27 May 2020
8
Q1 estimates
For Q1, we expect to see net sales in the region of SEK 1567m with an Operational EBIT of
SEK 363m. We believe that Q2 will be the slowest quarter in terms of new releases, and in
that sense the “low” quarter of the year.
Games:
New releases: We expect that about 11% of the development game asset will be released, so
the finalized development will amount to SEK 233m. We expect that the new release sales
amount to SEK 351m with a sales return of 1.5x. Some of the more notable releases include:
• MotoGP 20 from Milestone
• Huntdown and the full version of Deep Rock Galactic also came to market after the
quarter ended, from Coffee Stain Publishing.
• Saints Row the Third Remastered released by Deep Silver
• Spongebob Battle for Bikini Bottom Rehydrated (Arrr you ready kids?) and
Desperados 3 will be released from THQ Nordic
Saber Interactive: We expect Saber Interactive to have net sales of about SEK 261m with
healthy profitability, the company was consolidated from the first of April. The main driver
during Q1 will be backlog and the release of SnowRunner. The game IP is owned by Saber
(Embracer) but published by Focus Home. SnowRunner has shown a strong reception with
over 1 million copies sold on all formats since the release on the twenty-eighth of April.
Backlog: We expect to see a continued stable performance of the backlog with a net sales of
SEK 576m. This translates to a 1.3x return on completed games asset that was recorded at
SEK 484m at the end of FY’20. The sales return is roughly the same as the level we have seen
during the previous two quarters
Partner Publishing: There are no significant releases during Q1; however, there are multiple
smaller ones. We are likely in for an ok quarter in terms of business volumes, but not more
than that. We project net sales of SEK 376m during Q1.
Profitability: Thanks to the consolidation of Saber and high share of game revenue the
margins will increase compared to Q4. We expect to see an Operational EBIT of SEK 362m.
Detailed estimates Embracer Group
Period FY21-Q1E FY21-Q2E FY21-Q3E FY21-Q4E FY21E FY22E FY23E
Net sales 1564 1947 2065 1815 7390 8721 10269
Of w hich New releases games 351 613 422 466 1852 2222 2778
Backlog games 576 611 665 699 2551 3061 3734
Partner Publishing/Film 376 510 639 457 1982 2181 2355
Saber Interactive 261 213 338 193 1006 1257 1402
Other income 264 317 366 398 1345 1412 1483
CoS -644 -826 -930 -754 -3154 -3633 -4026
Gross profit 919 1121 1135 1061 4237 5088 6243
Other OPEX -188 -234 -248 -236 -905 -1134 -1335
Staff cost -360 -370 -392 -381 -1503 -1744 -1951
EBITDA 636 834 861 842 3173 3622 4439
Depreciation -274 -321 -320 -300 -1214 -1219 -1496
Op. EBIT 362 513 541 543 1959 2403 2944
Amortization -507 -512 -497 -522 -2038 -1870 -1848
EBIT -145 1 44 21 -79 533 1096
Gross profit margin 59% 58% 55% 58% 57% 58% 61%
EBITDA margin 41% 43% 42% 46% 43% 42% 43%
Op. EBIT margin 23% 26% 26% 30% 27% 28% 29%
EBIT margin -9% 0% 2% 1% -1% 6% 11%
Source: Redeye Research
Yearly projectionsQuarterly projections
REDEYE Equity Research Embracer Group 27 May 2020
9
Valuation We reiterate our Base-case valuation of 130 SEK per share. The current market valuation translates to an EV/Oper.
EBIT multiple of 23x on our FY21 estimate, in line with the median valuation for the Nordic gaming peers. We regard
Embracer as much a quality company as one can get and believe that their track-record in M&A, broad game
portfolio, shareholder focus, and growth potential deserve a premium valuation. Embracer is a company that
seldom will look cheap. We regard it far better to buy quality at a fair price than a fair company at a low price, and
that is what you currently get with an investment in Embracer.
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) FY21E FY22E FY21E FY22E 18-21E FY21E FY22E
Nordic Gaming
Stillfront 24 961 6.4x 5.4x 16.1x 13.3x 58% 40% 40%
Paradox Interactive 24 080 13.5x 12.4x 30.3x 31.6x 20% 44% 39%
Remedy 2 608 6.6x 5.6x 25.4x 20.9x 18% 26% 27%
EG7 1 568 2.2x 2.0x 29.0x 23.4x 143% 8% 9%
G5 Entertainment 1 401 1.1x 0.9x 14.6x 12.2x 9% 7% 8%
Atari 781 2.3x 2.1x 18.2x 14.6x 24% 13% 14%
Median 2 088 4.4x 3.7x 22x 18x 22% 19% 20%
International Gaming
Tencent 5 098 336 7.9x 6.5x 26.7x 22.1x 31% 30% 30%
Activision 512 663 7.5x 7.0x 20.4x 17.4x 9% 37% 40%
Nintendo 437 328 3.7x 3.7x 13.1x 13.8x 6% 28% 27%
EA 289 703 5.3x 5.0x 16.4x 14.8x 12% 32% 33%
Take-Two 136 734 5.3x 4.1x 27.6x 16.9x 17% 19% 24%
Bandai Namco 98 981 1.4x 1.4x 12.4x 11.5x 8% 11% 12%
Ubisoft 96 011 3.6x 3.4x 17.9x 16.2x 14% 20% 21%
CD projekt 88 899 11.6x 17.3x 16.1x 27.7x 84% 72% 62%
Median 213 218 5.3x 4.5x 17x 17x 13% 29% 28%
Peer Group median 107 653 4.8x 4.1x 19x 17x 17% 24% 24%
Embracer Group 44 209 6.0x 5.1x 23x 18x 15% 20% 27%
Source: Bloomberg & Redeye Research
EV/Sales EV/(Op.)EBIT EBIT margin
REDEYE Equity Research Embracer Group 27 May 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 27 May 2020
11
PROFITABILITY FY19 FY20 FY21E FY22E FY23E ROE 11% 5% -2% 6% 11% ROCE 17% 5% -1% 7% 15% ROIC 129% 12% -1% 7% 17% EBITDA margin 28% 35% 43% 42% 44% EBIT margin 10% 7% -1% 6% 11% Net margin 6% 6% -2% 4% 8%
Please comment on the changes in Rating factors……
INCOME STATEMENT FY19 FY20 FY21E FY22E FY23E
Net sales 5,754 5,250 7,390 8,721 10,269 Total operating costs -4,162 -3,428 -4,180 -5,056 -5,782 EBITDA 1,592 1,822 3,210 3,665 4,487 Depreciation -23 -30 -37 -43 -48 Amortization -995 -1,446 -3,252 -3,089 -3,344 Impairment charges 0 0 0 0 0 EBIT 575 345 -79 533 1,096 Share in profits 0 0 0 0 0 Net financial items -33 57 -37 -43 -49 Exchange rate dif. 0 0 0 0 0 Pre-tax profit 542 403 -116 490 1,047 Tax -183 -110 -9 -123 -262 Net earnings 359 293 -125 368 785
BALANCE SHEET FY19 FY20 FY21E FY22E FY23E Assets Current assets Cash in banks 2,929 2,510 739 872 2,754 Receivables 1,297 1,468 1,478 1,744 2,054 Inventories 323 353 443 523 205 Other current assets 0 0 0 0 0 Current assets 4,549 4,331 2,661 3,139 5,013 Fixed assets Tangible assets 156 185 213 239 264 Associated comp. 0 0 0 0 0 Investments 0 0 0 0 0 Goodwill 0 0 0 0 0 Cap. exp. for dev. 1,887 3,065 5,741 3,871 2,023 O intangible rights 1,820 2,806 3,484 4,273 4,929 O non-current assets 196 251 251 251 251 Total fixed assets 4,059 6,307 9,688 8,634 7,466 Deferred tax assets 0 0 0 0 0 Total (assets) 8,608 10,637 12,349 11,773 12,479 Liabilities Current liabilities Short-term debt 0 1,491 2,029 621 0 Accounts payable 2,018 1,288 2,587 3,052 3,594 O current liabilities 0 0 0 0 0 Current liabilities 2,018 2,779 4,616 3,673 3,594 Long-term debt 0 0 0 0 0 O long-term liabilities 211 222 222 222 222 Convertibles 0 0 0 0 0 Total Liabilities 2,229 3,001 4,838 3,895 3,816 Deferred tax liab 0 0 0 0 0 Provisions 667 1,241 1,241 1,241 1,241 Shareholders' equity 5,712 6,395 6,270 6,638 7,423 Minority interest (BS) 0 0 0 0 0 Minority & equity 5,712 6,395 6,270 6,638 7,423 Total liab & SE 8,608 10,637 12,349 11,773 12,479
FREE CASH FLOW FY19 FY20 FY21E FY22E FY23E Net sales 5,754 5,250 7,390 8,721 10,269 Total operating costs -4,162 -3,428 -4,180 -5,056 -5,782 Depreciations total -1,018 -1,476 -3,289 -3,132 -3,391 EBIT 575 345 -79 533 1,096 Taxes on EBIT 0 0 0 0 0 NOPLAT 575 345 -79 533 1,096 Depreciation 1,018 1,476 3,289 3,132 3,391 Gross cash flow 1,592 1,822 3,210 3,665 4,487 Change in WC 310 -930 1,197 120 550 Gross CAPEX -4,504 -3,724 -6,671 -2,077 -2,224 Free cash flow -2,601 -2,832 -2,264 1,707 2,813 CAPITAL STRUCTURE FY19 FY20 FY21E FY22E FY23E Equity ratio 66% 60% 51% 56% 59% Debt/equity ratio 0% 23% 32% 9% 0% Net debt -2,929 -1,019 1,290 -252 -2,754 Capital employed 2,783 5,376 7,560 6,386 4,669 Capital turnover rate 0.7 0.5 0.6 0.7 0.8 GROWTH FY19 FY20 FY21E FY22E FY23E Sales growth 1,034% -9% 41% 18% 18% EPS growth (adj) 100% -76% -140% -394% 114%
DATA PER SHARE FY19 FY20 FY21E FY22E FY23E EPS 3.50 0.83 -0.34 0.99 2.11 EPS adj 3.50 0.83 -0.34 0.99 2.11 Dividend 0.00 0.00 0.00 0.00 0.95 Net debt -28.58 -2.89 3.47 -0.68 -7.40 Total shares 102.49 352.43 372.35 372.35 372.35
SHARE INFORMATION Reuters code EMBRAC.ST List Share price 241.2 Total shares, million 372.4 Market Cap, MSEK 89811.4 MANAGEMENT & BOARD CEO Lars Wingefors CFO Johan Ekström 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 13.3 % 3 month 0.0 % Operating profit adj � 12 month 9.3 % EPS, just � Since start of the year 0.0 % Equity 4.8 %
SHAREHOLDER STRUCTURE % CAPITAL VOTES Lars Wingefors 29.0 % 42.2 % S3D Media Inc 10.8 % 14.6 % Cbny-Citibank N.A.-Private Bank 8.6 % 4.7 % Swedbank Robur Fonder 7.1 % 3.9 % Erik Stenberg 6.3 % 9.1 % Handelsbanken Fonder 4.3 % 3.0 % Didner & Gerge Fonder 3.1 % 1.7 % Första AP-fonden 2.9 % 1.6 % State Street Bank And Trust co 2.3 % 1.2 % CMB Holding AB 2.2 % 3.1 %
DCF VALUATION CASH FLOW, MSEK WACC (%) 9.0 % NPV FCF (2020-2021) 5535 NPV FCF (2022-2028) 13029 NPV FCF (2029-) 29996 Non-operating assets 2510 Interest-bearing debt -1491 Fair value estimate MSEK 49579 Assumptions 2020-2026 (%) Average sales growth 13.6 % Fair value e. per share, SEK 130 EBIT margin 15.8 % Share price, SEK 108
REDEYE Equity Research Embracer Group 27 May 2020
12
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 27 May 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
Oskar Vilhelmsson
Viktor Westman
Editorial Eddie Palmgren
Mark Siöstedt
Life Science Team Gergana Almquist
Oscar Bergman
Anders Hedlund
Arvid Necander
Erik Nordström
Klas Palin
Jakob Svensson
Ludvig Svensson
Niklas Elmhammer
Mats Hyttinge
REDEYE Equity Research Embracer Group 27 May 2020
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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 (2020-05-27)
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 14 11 4 3p - 4p 105 81 30 0p - 2p 7 34 92 Company N 126 126 126
CONFLICT OF INTERESTS
Kristoffer. Lindström owns shares in the company Embracer Group: Yes Tomas. Otterbeck. owns shares in the company Embracer Group: Yes Redeye performs/have performed services for the Company and receives/have
received compensation from the Company in connection with this.