Embracer: Plenty to like despite negative sentiment - ABG

ABGSC Q1e adj. EBIT SEK 1,137m, -9% vs. consensus
Raising adj. EPS by 1-5% ’21/22e-’23/24e on M&A
Raising fair value to SEK 225-350 (225-345) per share

For Q1’21/22e, we factor in sales of SEK 3,249m (-2.3% vs. FactSet consensus), for total y-o-y growth of 57.1%, but organic growth of 19.5% when adjusting for M&A and FX. We consider this a strong performance in the 2021 quarter facing the toughest COVID-19-boosted comparables. The largest revenue driver in the quarter is Biomutant by our estimate, where we factor in ~1.4mn copies sold across all platforms. Given the economics of the game (internally developed & published on an own IP) this yields net sales of ~SEK 314m with a gross margin of 90.2%. Other notable drivers include Metro Exodus Enhanced edition on PC and next-gen consoles, and SnowRunner on Steam/Switch. Overall, we estimate that Games will generate 80.9% of sales, driving a strong gross margin of 59.8% in the quarter. We estimate adj. EBIT of SEK 1,137m (-9.6% vs. FactSet consensus), for 59.7% y-o-y growth and a margin of 35.0%. Ultimately, we reach adj. EPS of SEK 1.87 in Q1, up 24.5% y-o-y.

Following the recently announced acquisitions (8 in total), we raise our sales estimates by 7-14% for ’21/22e-‘23/24e, where the largest contributor is Crazy Labs, which has been added to the DECA Games segment. After accounting for the dilution of the transactions (upfront + earnouts) ,we raise our adj. EPS estimates by 1-5% for ’21/22e-’23/24e.

We adjust our fair value range to SEK 225-350 per share following our estimate changes. Embracer is currently trading at an f12m EV/adj. EBIT of 15.6x, according to FactSet consensus, which is 18% below the five-year average. This is despite Embracer having its largest new game pipeline ever this fiscal year, with a SEK 2.8-3.3bn development cost (recent not M&A included), plenty of M&A headroom even after the latest acquisitions (~SEK 20bn) and estimated 30% organic growth (ABGSCe) in a year where most gaming companies are struggling with growth.

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