G5 Entertainment - Heading into tough comparables in Q2e - ABG

ABGSC Q2’21e EBIT at SEK 62m, +14.5% vs. cons
We keep estimates intact
Maintaining DCF fair value of SEK 415-750 per share

We expect Q2’21 to be another solid quarter for G5, where we estimate sales of SEK 357m, for -5.0% y-o-y growth; however, when adjusting for FX, we reach organic growth of 3.0%, mainly due to the weak USD. Looking at the gross rankings of G5’s games on iOS and Google Play, we find that the new generation of games continues to perform well, for instance, Sherlock: Hidden Match-3 Cases has continued to perform strongly in Q2, especially on iPad, while Hidden City has continued to decline slightly (in line with G5’s new UA strategy). This continues to improve the revenue mix and boost the gross margin. We expect UA levels to somewhat normalise in Q2’21e, where we forecast 21.0% of net sales, whereby we reach our EBIT estimate of SEK 62m, which is up 38.2% y-o-y, for a margin of 17.3%.

We keep our estimates intact after revisiting the performance of G5’s games in Q2’21e.

We maintain our DCF fair value range of SEK 415-750 per share since we keep our estimates intact. We note that following the recent share price decline (-35% since the peak on 3 May) G5 is now trading at a f12m EV/EBIT of 11.3x, according to FactSet consensus, which is 0.9% above the six-year historical average. On ’22e, this declines to a single-digit EV/EBIT and a FCF yield of ~7%. We acknowledge that investor sentiment towards gaming has soured during the last few months, as gaming companies face tough COVID-19-boosted comparables in Q2/Q3’21e. However it is worth noting that G5 currently has several tailwinds owing to the following: 1) Windows lowering its store fee from 30% to 12% will kick in during Q3’21e and drive the gross margin and 2) G5’s new generation of games continues to perform well in terms of gross rankings, further boosting the gross margin.

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