G5 Entertainment: Favourable outlook for H2’21e - ABG

Q2 EBIT of SEK 43m, -30% vs. ABGSCe, -20% vs. cons.
Estimate changes on Q2 report & lower Q3e growth
DCF fair value range of SEK 400-730/share (415-750)

G5 Entertainment reported its Q2’21 figures, which were below cons. but still featured slightly positive organic growth in a quarter with challenging comparables. EBIT was SEK 43m, -30.4% vs. ABGSCe and -20.0% vs. consensus, corresponding to an EBIT margin of 12.8%. Net sales were SEK 337m, -5.6% vs. ABGSCe and -4.8% vs. cons., for a total y-o-y growth of -10.4%, but a positive growth of ~3% in USD terms. We consider this a strong performance in the quarter, facing the toughest comparables from the COVID-19 boosted Q2’20, and when peers are showing low growth. This speaks to the success of G5’s internally developed games, which grew 23% y-o-y and +5% q-o-q in USD terms. The growth in G5’s internally developed games further strengthens the gross margin, which is set to further improve in Q3 when Windows will lower its store fee from 30% to 12%. We factor in G5 generating ~25% of revenues from the Windows store, which improves the gross margin by ~4%, as management has guided for an improvement of “a few percentage points” as a result of the change.

Following our estimate changes, we revise our DCF fair value range to SEK 400-730 per share (415-750). G5 is now trading at a f12m EV/EBIT of 11.6x according to FactSet consensus, which is 3% above its 6-year historical average. However, we note the success of G5’s new generation of games, that Windows is soon to lower its store fee and a normalization of marketing conditions on iOS. We also note an FCF yield of ~6% on ‘22e, where G5 has tended to trade in the 3-4% range over the last five years.

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