G5 Entertainment - Q1 in line, new MSFT store fee lifts estimates
Q1 EBIT SEK 60m, -0. 3% vs. ABG, +3. 3% vs.
cons. Estimate changes driven by lower MSFT store fee DCF fair value range SEK 415-750 (355-675) Q1’21 yield 22% growth in USD terms (ABGSCe 20. 2%) G5 Entertainment reported its Q1’21 earnings yesterday, which were in line with consensus profitability with EBIT of SEK 60m, -0.
3% vs. ABGSCe and +3. 3% vs.
consensus, corresponding to an EBIT margin of 18. 3%. The greater-than-estimated profitability was driven by both an improving revenue mix, where G5’s own games comprised 63% of revenues in Q1 (up from 45% in Q1’20) due to successful new releases, as well as lower-than-estimated User Acquisition (17.
2% of revenues vs. ABGSCe 21%), where management cites improved efficiency within the company’s UA efforts. Reported net sales were SEK 327m, -4.
8% vs. ABGSCe and -6. 2% vs.
consensus, for total y-o-y growth of 4. 7%. Given that G5 derives over ~60% of revenues from the US, revenue growth in Q1 in USD terms was actually 22% y-o-y (ABGSCe 20.
2%). Estimate changes driven by lower MSFT store fee Last week, Microsoft announced that it would lower its revenue split on its PC gaming storefront from 30% to 12%, thus following the Epic Games Store, which is also at 12%. The change will be implemented in August 2021.
This has a substantial effect on G5’s gross margin, as most of G5’s games are available on Microsoft’s store and 17 of its games are on the Top 90 grossing list in the US (according to management). We estimate that G5 generates 15-20% of revenues from this platform, which leads us to increase our EBIT estimate by 11. 5-19.
8% for ‘21e-‘23e. Raise DCF fair value to SEK 415-750 (355-675) per share Following our estimate changes, which are driven by the Q1’21 report and Microsoft lowering its store fee from 30% to 12% in August 2021, we increase our DCF fair value range to SEK 415-750 (355-675) per share, which corresponds to a ‘22e EV/EBIT of 12. 5-17.
8x. This yields a range of 11% below to 58% above the median ‘22e EV/EB.
