Embracer: Beat in challenging quarter, outlook intact - ABG

Q1 adj. EBIT SEK 1,217m, +12% vs. ABG, +5% vs. cons.
We raise adj. EBIT by 5-6% for ‘21/22e-‘23/24e
EV/adj. EBIT of ~15x ‘21/22e, ~21% below 5-year avg.

Embracer reported Q1 sales of SEK 3,427m, +6% vs. ABGSCe and +3% vs. Infront consensus for a total y-o-y growth of 65.6%. Sales were driven by the Games business area, which generated 84.6% of group sales, a new record, and grew ~10% organically in a challenging quarter. Adj. EBIT was SEK 1,271m, +12% vs. ABGSCe and +5% vs. cons. Adj. EPS was SEK 2.30 per share, growing 53.7% y-o-y.

We raise our adj. EBIT estimates by 5-6% for 21/22e-23/24e, respectively. This is driven both by the Q1 beat as well as by our increasing our gross margin assumptions. The gross margin will fluctuate depending on the performance of the “low-margin” Partner Publishing segment, but following the consolidation of Gearbox, Easybrain and Aspyr, Embracer now has a quarterly back catalogue that appears to generate SEK +2bn with a high percentage of digital and owned titles sales, leading to a strong gross margin. This is partly offset by an increase in opex, e.g. Easybrain’s heavy UA investments, but still has a net positive effect on adj. EBIT. In terms of Q2’21/22e, Embracer is facing tough comparables from 2020 while at the same time having a small new game pipeline (SEK 225-275m dev. cost). We think this could lead to slightly negative growth in Q2 (we are at around ~9%), but this ramps up to +40% in Q3 and even more in Q4 (see page 7). We also think Gamescom (25-27 August) could feature a reveal of the AAA titles slated for release in Q4.

Embracer is now trading at a ‘21/22e EV/adj. EBIT of 14x on our estimates, which is ~25% below the five-year historical average, according to FactSet. This is despite Embracer having a new game pipeline with a SEK ~3bn development cost (~4x more than last year) which we think will drive ~30% organic growth in a year where peers are struggling for growth and there is plenty of M&A headroom (SEK +20bn). We also raise our SOTP fair value range to 230-355 per share.

Länk till analysen i sin helhet: https://www.introduce.se/foretag/embracer-group/Equity-research/2021/8/embracer-group---beat-in-challenging-quarter-outlook-intact/