G5 Entertainment: FCF outlook strengthened after Q2 - ABG
Sales and adj. EBIT a tad weaker, but FCF strongerWe cut EBIT but raise FCF on lower capexShare trading at 9x P/E with 9% buyback/div. yield
Sales and underlying EBIT just below expectations
Despite beating FactSet consensus EBIT forecast by 5% and ABGSCe by 11%, the underlying Q2 performance was in line or to the softer side. Organic growth was -10% vs. ABGSCe -8.5%, mainly related to softer development of the New Gen games (Sherlock and Jewels family). Hidden City was in line with our forecast. Overall, G5 is slightly underperforming the underlying market, which decreased 2% in Q2 according to Sensor Tower. Gross profit was -1% vs. ABGSCe while opex was in line. Other income (FX gains) of SEK 7m made up more than the entire EBIT beat. Mgmt. forecast stable performance in the coming quarters with a slight boost from seasonality mainly in Q4, in line with our forecast. Additional upside could come from new releases; mgmt. expect 1-2 new global releases in H2. We see relatively flat sales in the coming quarters but improved org. growth due to easier comps and an improved EBIT margin on a higher gross margin and a tad lower opex.
We cut EBIT but raise '23e FCF by 8%
The Q2 report leads us to cut '23e-'25e EBIT by 1%. In addition, we are a bit more cautious on the R&D capitalisation, and cut '24e and '25e by additional 6% and 5%. That said, lower-than-expected capex mean we raise 2023e FCF by 8% despite weaker EBIT. Capex as a percentage of sales is now 7.5% vs. the five-year average of 10%, showing that it is successfully compensating for the lower EBIT margin due to lower capitalisation of R&D.
Expected to maintain high capital redistribution
In the past four quarters, SEK 140m (9% of market cap) has been distributed to shareholders through SEK 65m in dividends and SEK 105m inbuybacks. The y-o-y dividend growth was 20% this year. With SEK 163m FCF in '23e and SEK 170m net cash currently, there is opportunity for even higher capital repatriation.
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