G5 Entertainment: Report on the weak side, and outlook cut - ABG

Sales in line, but profitability and outlook worse

‘22e, ‘23e & ‘24e adj. EBIT cut by 7%, 7%, & 8%

New fair value range: SEK 230-390 per share (260-440)

Profitability hurt by FX, outlook for Sherlock impaired
G5 delivered Q2 sales of SEK 344m (+1% vs. ABGSCe, 0% vs. Infront cons.), for y-o-y growth of 2%, of which -13% organic. Sherlock was the primary growth driver, as expected, now comprising 20% of sales, up from 17% in Q1’22. Surprisingly, mgmt. decided not to extend the programme it initiated for Sherlock in May, to boost growth. We view this as negative but mgmt. reassured that the return profile still looks good for the game and that an investment programme for Sherlock could be reinitiated in the future. The main issue right now seems to be that mgmt. is worried about the trend of the overall market, more so than the KPIs for Sherlock, which is encouraging. Hidden City surprised positively, with flat sales q-o-q in USD, and slightly up in SEK terms. This, coupled with a higher share of Sherlock sales on iOS and Android, led to a lower gross margin of 66% vs. ABGSCe of 67%. Opex was higher than expected, SEK 226m vs. ABGSCe 215m, mainly due to higher FX. Because of this, EBIT was SEK 1m vs. ABGSCe SEK 15m and Infront consensus SEK 16m.

We cut the growth expectations for Sherlock
We make a couple of changes to estimates. We add the higher opex in Q2’22, and account for slightly higher opex in H2’22e as well, mainly due to FX and lower capitalisation. This effect is somewhat mitigated by lower UAC/sales in H2’22e. We leave 2022e sales relatively flat. For 2023e and 2024e we reduce our expectations for Sherlock following the announcement that UAC/sales will return to normal levels from August; we had previously expected the investment to have a thicker tail, fuelling more growth. Because of this, we cut ‘22e-‘24e adj. EBIT by 7%, 7%, and 8%.
We cut our fair value range to SEK 230-390 (260-440)
With lower expectations for Sherlock, we cut our fair value range to SEK 230 ...
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