G5 Entertainment: A solid report, but write-off mudded the waters - ABG

Sales & adj. EBIT above our expectations
We cut adj. EBIT but raise FCF on 2023e and 2024e
Buybacks to continue – 2% of shares repurchased in Q3


Underlying development stronger than expected

Sales grew 10% in Q3 (ABGSCe 7%), driven by a strong USD. Growth in the USD was -10%. In local currencies, growth was flat, which we find positive. Sherlock beat our expectations and comprised 23% of sales, up from 20% in Q2, which drove the gross margin to a new all-time high of 68%. Adj. EBIT was +29% vs. ABGSCe and +18% vs. FactSet cons., mainly due to UA/sales of 20% vs. ABGSCe of 22%. Moreover, G5 changed its model game development. The teams working on new games will be smaller, testing before scale-up will be extensive, and ideas will be rejected earlier. Because of this, it will also no longer capitalize expenses related to early-stage development. This method is more conservative and has no effect on FCF but will lower the EBIT margin. So, the capitalised balance for existing early-stage projects was written off, for a loss of SEK 73m. Hence, reported EBIT was SEK -23m.

Länk till analysen i sin helhet: https://cr.abgsc.com/foretag/g5-entertainment/Equity-research/2022/11/g5-entertainment---a-solid-report-but-write-off-mudded-the-waters/