G5 Entertainment - Estimates down, but outlook promising - ABG

Solid report; G5 Store gaining significant traction
G5 delivered a solid Q4 report, with sales +0% and EBIT +2% vs. our estimates. As we expected, organic growth improved from -10% in Q3 to -7% in Q4, driven by new highs for Sherlock and a stabilisation of Hidden City. This is better than the underlying market growth of -10% in Q4. Encouragingly, management gave a good impression at the conference call, also saying the positive trend continued in January. It also said Q4'22 should be a good proxy for 2023. Also, on the positive side, G5 Store gained significant traction, growing 30% q-o-q in Q4, now comprising ~3-4% of sales, quickly approaching critical mass. We think the gross margin on G5 Store is >95%.

Extraordinary costs to persist a bit longer than expected
We continue to expect lower opex in the coming years from a normalisation of the USD/RUB and relocation of staff from Russia to neighbouring countries, but we delay this effect slightly in our numbers. We expect the artificially elevated opex to persist for longer; we have moved the full normalisation from '24e to '25e. Because of this, we cut '23e and '24e EBIT by 13% while keeping sales flat. We expect an EBIT margin of 13% in '23e (in line with Q4'22), increasing to 20% by '25e. The high margin is not only from lower opex, but also a higher gross margin. Now with the rapid growth of G5 Store, our conviction of a higher gross margin has strengthened.

Raised dividend and still room for more buybacks
The board proposed a dividend of SEK 8 per share (7), or SEK 64m. This corresponds to one third of '23e FCF. Hence, there will be a lot of room for continued buybacks. We stick to our fair value range of SEK 200-350 per share. The share is trading at 7.4x EV/EBIT '23e falling to 5.4x 2024e, with the 8% FCF yield in '23e increasing to 12% in '24e.

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