G5 Entertainment: Big investments in Q2 to yield in H2 - ABG

Q2 report due on 11 August
We cut ‘22e-‘24e EBIT by 17%, 5%, and 4%
14% FCF yield with positive growth outlook in ’23e-‘24e

Q2 expectations: -9% organic sales growth but +10% from FX
In Q2’22e, we expect sales of SEK 340m for a y-o-y growth of 1% (-9% organic and +10% FX) and EBIT of SEK 15m, for an EBIT margin of 4.4% (12.8%). The margin is significantly below the adjusted EBIT margin of 20% printed in Q1’22 because of significantly higher UAC. The company has guided that it will raise UAC to 35% of sales in Q2’22e vs. 20% in previous quarters. The reason for this is to scale up its new flagship game Sherlock, which comprised 17% of sales in Q1’22 and we expect this to increase to 27% by Q4’22e, when it would surpass Hidden City as G5’s largest game. We expect Sherlock to grow by ~10% q-o-q in Q2’22e, but that growth will accelerate in H2’22e as it takes a couple of months to monetise the new players. For Hidden City, which comprised 30% of Q1’22 sales, we expect a continued q-o-q decline of ~6%, corresponding to a slight acceleration of the y-o-y decline. According to G5, the game has seen the effects of a weaker gaming market in Q2. Although Hidden City has matured and is in a declining phase, we expect it to stabilise in H2’22e. Furthermore, we expect the rest of G5’s games, including the Jewels of family and old games like Mahjong Journey and Secret Society, to be stable q-o-q.

Estimates: we account for higher costs in 2022e
We make slight negative revisions to growth for Sherlock in 2022e. In addition, we raise depreciations and UAC in 2022e and overall opex slightly for ‘22e-‘24e. This results in negative revisions of 17%, 5% and 4% to 2022e, 2023e, and 2024e EBIT, respectively.

New fair value range of SEK 260-440 per share
Because of the uncertainty around Hidden City declining slightly faster than expected, and as the increased monetization of Sherlock is taking longer than we expected, we reduce our fair value range to SEK 260-440 (280-520) but maintain our
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