Embracer Group - Amazon S3...2020/05/27 · Physical store sales have gone down dramatically, but...

Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: [email protected]

Update

Equity Research 27 May 2020

KEY STATS

Ticker EMBRAC.ST Market Nasdaq

Share Price (SEK) 109 Market Cap (MSEK) 43509 Net Debt 20E (MSEK) -700 Free Float 60 %

Avg. daily volume (‘000) 1000

BEAR BASE BULL 65.0

130.0

170.0

KEY FINANCIALS (SEKm)

FY19 FY20 FY21E FY22E FY23E FY24E Net sales 508 5754 7390 8721 10269 11604 EBITDA 273 1592 3210 3665 4487 5192 Oper. EBIT 202 880 1959 2403 2944 3414 EPS (adj.)

2018 2019 2020E 2021E 2022E 2023E EPS (adj.) 1.8 3.5 -0.3 1.0 2.1 3.0 EV/Sales 1.2 0.9 6.0 5.1 4.3 3.8 EV/EBITDA 13.6 13.8 13.8 12.1 9.9 8.5 EV/Op. EBIT 24.3 24.3 22.6 18.4 15.0 13.0

ANALYSTS

Kristoffer Lindstrom [email protected] Tomas Otterbeck [email protected]

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EMBRAC OMXS30

Pipeline in Focus Redeye reiterates its positive view of Embracer Group. The Q4 report was solid, and the

update to the pipeline has not led to any significant changes to our forecasts. A substantial

amount of available capital for M&A indicates that something big could be in the making.

Embracers' quality and M&A track-record should justify a premium valuation; the company

is still valued in line with peers based on Oper. EBIT multiples. We believe that the growth

journey of Embracer Group will continue for many years more.

Solid report, focus on pipeline

Q4 was a solid report with better than expected margins. The biggest takeaway was

increased pipeline visibility; the planned release schedule indicates 2x the amount of new

release (of capital invested) we saw during FY20. Earlier expected AAA titles have been

moved to FY22; this year, we will see a multitude of mid-sized games instead. The pipeline

adjustments have only led to small forecast changes for our part.

More M&A will come

Despite the market’s “cravings” of deals, no new M&A was announced. We feel confident

that management will not stress in making acquisitions just because the market wants

them to. At the end of the quarter, the company had cash and unutilized credit facilities of

approximately SEK 5bn. In addition to this, the company raised SEK 1.6bn after the close of

the quarter through a directed share issue. The company now states that they might

consider temporary financial leverage for the right deal. Also, Embracer can issue 10% new

shares if they need to. With the current cash position, some leverage, and a share issue (to

the seller), Embracer has about SEK 10bn in available capital for M&A. Big things could be

in the making, time will tell.

A quality company at a fair price

Our Base-case of 130 SEK per share is unchanged. Embracer trades at an EV/Oper. EBIT

multiple of 23x on our FY21 estimate, in line with the median valuation for the Nordic

gaming peers. Embracer’s track-record in M&A, broad game portfolio, shareholder focus,

and growth potential deserve a premium valuation in our view. Embracer is a company that

seldom will look cheap. We regard it far better to buy quality at a fair price than a fair

company at a low price, and that is what you currently get in Embracer.

Embracer Group Sector: Gaming

REDEYE RATING

EMBRAC.ST VERSUS OMXS30

FAIR VALUE RANGE

Financials

People

Business

REDEYE Equity Research Embracer Group 27 May 2020

2

A solid report

Summary:

• Solid report with better than expected margins

• Increased pipeline visibility, the planned release schedule indicates 2x the amount of

new release (of capital employed) we saw during FY20. AAA titles likely moved to

FY22. This year we will see a multitude of mid-sized games instead

• The Saber acquisition going well and SnowRunner (the first game released as an

Embracer company) have exceeded management expectations

Embracer showed yet another stable quarter. The net sales were almost spot-on our

projections while the Operational EBIT came in 19% higher. That the company showed a

decline in net sales compared to last year was entirely in the cards; as during Q4'FY19,

Embracer had a couple of major releases. The main reason we saw a better margin than we

had expected was a far lower SG&A, probably a COVID19, and release schedule effect with

fewer gaming conferences, events, and marketing. During the period, cash flow was robust

and amounted to SEK 765.7m, fueled by both the high operating profit and reduced working

capital.

The biggest takeaway from the report was an update on the game pipeline ahead. Most

notably; we won't see a AAA game during FY21, but instead a multitude of mid-sized

releases. Still, the release schedule implies more than double capital tied up in development

will come to the market during FY'21 compared to FY'20. Embracer expects that the first AAA

game since Metro Exodus will be released in FY'22.

Estimates vs Outcome Embracer Group

MSEK

Net sales 1 631 1 339 1 310 2%

of which New releases Games 781 345 250 38%

Backlog Games 254 559 584 -4%

Partner Publishing/Film 596 436 476 -9%

Gross profit 889 673 706 -5%

EBITDA 619 495 444 11%

Operational EBIT 396 286 241 19%

Revenue growth 158% -18% -20%

Gross profit margin 55% 50% 54%

EBITDA margin 38% 37% 34%

Opr. EBIT margin 24% 21% 18%

Source: Redeye Research

FY19-

Q4*

FY20-

Q4

FY20-

Q4EDiff %

*FY19-Q4 w as the f ith quarter of the extended year 19/20, but for

easier comparison, w e call it Q4.

dsfdsf REDEYE Equity Research Embracer Group 27 May 2020

3

Games

The sales within the Games area exceeded our expectations, fueled by a higher new release

revenue, which came in at SEK 345m. The most significant contributors to new release

revenue were Darksiders Genesis, Metro DLC, Metro Redux, Hunt: Showdown, and a couple of

smaller titles. During the quarter, Embracer recorded SEK 165m in finalized development. The

sale return landed at a high level of 2.1x, likely driven by the high market demand for gaming

content.

The backlog sales, which amounted to SEK 559m, were in line with our projections and saw a

stable development during the period. Key franchises like Metro Exodus (release on steam),

Embracer: New release sales, Finalized dev. & Sales return


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Embracer: Backlog sales, Finished Games asset & sales return


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4

Kingdom Come: Deliverance, Wreckfest, and Milestone games. Update III of Satisfactory

(Coffee Stain) was well received, and the business unit had its strongest quarter ever.

Digital sales reached record levels and amounted to 78% of game sales. That the digital

share continued to climb is an effect of consumer behavior of buying digital goods, which has

increased even further with the COVID-19 outbreak. An enhanced digital sales are beneficial

for Embracer’s gross profit margin.

Amplifier

Amplifier continues there work with establishing new studios and conduct smaller game

investment. During the quarter, the unit set up a new game studio in Gothenburg called

RiverEnd Games lead by industry veterans. They also increased their stake in Misc Games to

55% from 45% and acquired a small indie studio in Italy named DESTINYbit.

Partner Publishing

The business unit had net sales of about 9% below our projections. Partner Publishing is the

segment within the Group that has been affected the most by COVID-19 in a negative way.

Physical store sales have gone down dramatically, but most consumers then shifted to e-

tailers instead. Still, Partner Publishing’s logistic hubs have remained operational.

Embracer: Sales development Games & sales mix


82 86 85

255138 146 124

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THQ Nordic Deep Silver Coffee Stain Own IPs % sales Digital % sales


5

Update on the pipeline We find that the most interesting info in the report was related to the pipeline in the coming

years. We have previously expected to see two AAA games come to market during FY’21 (this

financial year), now the company indicates that the first AAA release after Metro will take

place in FY22. In isolation, that would mean less new release income then we previously

expected. However, at the same time, the management states that the value of completed

games (reported as finalized development during the quarter) will more than double from

SEK 589m during FY’20 to SEK 1200-1400m in FY21. We regard a AAA game a title with a

development budget above USD 30m. The pipeline during FY’21 will be filled with a sizeable

amount of midsized games rather than a few big ones. In a way, this reduces the title risk

with more income streams but also reduces the blockbuster potential to some degree. During

the past twelve months, the Game Capex has amounted to SEK 1385m. The game

investment is a key driver of growth, and we expect it to continue.

Embracer owns 160+ IPs and is currently working on 103 game projects, of which 43 are

announced. Some notable releases during FY21 are:

• SnowRunner

• Biomutant

• Saints Row the Third

Remastered

• Spongebob Battle for Bikini

Bottom

• Destroy All Humans

• Desperados III

• RIDE4

• Wasteland 4

• And many more…

Embracer: Net sales, Game CAPEX and Development projects


302 341 374 380508

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6

We now model that the finalized development will land at SEK 1234m during FY21. We

expect to see the most significant pipeline roll-out in Q2 and Q3 (calendar Q4 and high-

season for games). To be conservative, we assume a diminishing return on new releases. Our

estimates translate to a new release revenue of SEK 1852m during FY21, which amounts to

annual growth of 83%. Embracer will likely continue to invest heavily in their pipeline during

the year; looking at the current development recognized (SEK 2118m at FY year-end) on the

balance sheet, more than 50% will come to market during FY21.

As there will be a substantial new release revenue expansion, so will also the backlog (more

games in the market generating revenue). We believe Embracer will produce a backlog sales

of SEK 2551m during the year. We model lowered sales return compared to last year as

Metro Exodus has contributed to extremely high return levels, and that effect should plan out

during this year.

Embracer: LTM new release sales, LTM finalized dev. & Sales return


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Projections

Embracer: LTM backlog sales, Sum game asset LTM & Sales return


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Projections


7

Up for leverage in an M&A deal No new M&A deal announced. We know that the market almost craves new deals from

Embracer. However, we feel confident that management will not stress making acquisitions

just because the market wants them to. Embracer’s success thus far is only to make great

deals, and we believe they will continue on that road. The company continues to state that

they are in multiple discussions with attractive targets that might form a new operating unit.

The management also means that the current COVID-19 environment has not affected the

deal-flow, but that they rather have seen it increase since the Saber acquisition.

At the end of the quarter, the company had cash and unutilized credit facilities of

approximately SEK 5bn. In addition to this, the company raised SEK 1.6bn after the close of

the quarter through a directed share issue. Embracer has always intentionally decided not to

leverage its operation and take on debt to finance an acquisition. But as the current pipeline

now will unfold in the coming years, the management expects to see a notable improvement

in free cash flow that view has changed somewhat. The company states that ambition is still

to keep a net cash position, but for the right inorganic (M&A) opportunities, they might

consider temporary financial leverage. Embracer also has the authorization by the general

meeting to use about 10% new shares if they find the right target, which translates to about

SEK 4.2bn. With the current cash position, some leverage, and a share issue Embracer has

about SEK 10bn in available funds for M&A. We believe the now stated possible intention of

using leverage for M&A could imply an even larger deal then Saber Interactive in the making,

time will tell.

Projections We have only made some minor forecast adjustments in this report. We still see healthy

growth and expanding margins in the coming years. As always, our projections do not

account for any future M&A deals, that certainly will happen.

Estimate adjustments

Period

Net sales 7 393 8 724 10 272

Old net sales 7 844 9 493 10 632

% change -6% -8% -3%

Oper. EBIT 1 959 2 404 2 944

Old oper. EBIT 2 010 2 573 2 924

% change -3% -7% 1%


FY21E FY22E FY23E


8

Q1 estimates

For Q1, we expect to see net sales in the region of SEK 1567m with an Operational EBIT of

SEK 363m. We believe that Q2 will be the slowest quarter in terms of new releases, and in

that sense the “low” quarter of the year.

Games:

New releases: We expect that about 11% of the development game asset will be released, so

the finalized development will amount to SEK 233m. We expect that the new release sales

amount to SEK 351m with a sales return of 1.5x. Some of the more notable releases include:

• MotoGP 20 from Milestone

• Huntdown and the full version of Deep Rock Galactic also came to market after the

quarter ended, from Coffee Stain Publishing.

• Saints Row the Third Remastered released by Deep Silver

• Spongebob Battle for Bikini Bottom Rehydrated (Arrr you ready kids?) and

Desperados 3 will be released from THQ Nordic

Saber Interactive: We expect Saber Interactive to have net sales of about SEK 261m with

healthy profitability, the company was consolidated from the first of April. The main driver

during Q1 will be backlog and the release of SnowRunner. The game IP is owned by Saber

(Embracer) but published by Focus Home. SnowRunner has shown a strong reception with

over 1 million copies sold on all formats since the release on the twenty-eighth of April.

Backlog: We expect to see a continued stable performance of the backlog with a net sales of

SEK 576m. This translates to a 1.3x return on completed games asset that was recorded at

SEK 484m at the end of FY’20. The sales return is roughly the same as the level we have seen

during the previous two quarters

Partner Publishing: There are no significant releases during Q1; however, there are multiple

smaller ones. We are likely in for an ok quarter in terms of business volumes, but not more

than that. We project net sales of SEK 376m during Q1.

Profitability: Thanks to the consolidation of Saber and high share of game revenue the

margins will increase compared to Q4. We expect to see an Operational EBIT of SEK 362m.

Detailed estimates Embracer Group

Period FY21-Q1E FY21-Q2E FY21-Q3E FY21-Q4E FY21E FY22E FY23E

Net sales 1564 1947 2065 1815 7390 8721 10269

Of w hich New releases games 351 613 422 466 1852 2222 2778

Backlog games 576 611 665 699 2551 3061 3734

Partner Publishing/Film 376 510 639 457 1982 2181 2355

Saber Interactive 261 213 338 193 1006 1257 1402

Other income 264 317 366 398 1345 1412 1483

CoS -644 -826 -930 -754 -3154 -3633 -4026

Gross profit 919 1121 1135 1061 4237 5088 6243

Other OPEX -188 -234 -248 -236 -905 -1134 -1335

Staff cost -360 -370 -392 -381 -1503 -1744 -1951

EBITDA 636 834 861 842 3173 3622 4439

Depreciation -274 -321 -320 -300 -1214 -1219 -1496

Op. EBIT 362 513 541 543 1959 2403 2944

Amortization -507 -512 -497 -522 -2038 -1870 -1848

EBIT -145 1 44 21 -79 533 1096

Gross profit margin 59% 58% 55% 58% 57% 58% 61%

EBITDA margin 41% 43% 42% 46% 43% 42% 43%

Op. EBIT margin 23% 26% 26% 30% 27% 28% 29%

EBIT margin -9% 0% 2% 1% -1% 6% 11%


Yearly projectionsQuarterly projections


9

Valuation We reiterate our Base-case valuation of 130 SEK per share. The current market valuation translates to an EV/Oper.

EBIT multiple of 23x on our FY21 estimate, in line with the median valuation for the Nordic gaming peers. We regard

Embracer as much a quality company as one can get and believe that their track-record in M&A, broad game

portfolio, shareholder focus, and growth potential deserve a premium valuation. Embracer is a company that

seldom will look cheap. We regard it far better to buy quality at a fair price than a fair company at a low price, and

that is what you currently get with an investment in Embracer.

Bear Case 65.0 SEK Base Case 130.0 SEK Bull Case 170.0 SEK Key model assumptions:

CAGR of 5% during forecast period

Average Op. EBIT margin of 19%

Terminal growth 2%

Terminal Op. EBIT margin of 27%

Key model assumptions:



Terminal growth 2%


Key model assumptions:



Terminal growth 2%


Peer valuation

S. CAGR

Company EV (MSEK) FY21E FY22E FY21E FY22E 18-21E FY21E FY22E

Nordic Gaming

Stillfront 24 961 6.4x 5.4x 16.1x 13.3x 58% 40% 40%

Paradox Interactive 24 080 13.5x 12.4x 30.3x 31.6x 20% 44% 39%

Remedy 2 608 6.6x 5.6x 25.4x 20.9x 18% 26% 27%

EG7 1 568 2.2x 2.0x 29.0x 23.4x 143% 8% 9%

G5 Entertainment 1 401 1.1x 0.9x 14.6x 12.2x 9% 7% 8%

Atari 781 2.3x 2.1x 18.2x 14.6x 24% 13% 14%

Median 2 088 4.4x 3.7x 22x 18x 22% 19% 20%

International Gaming

Tencent 5 098 336 7.9x 6.5x 26.7x 22.1x 31% 30% 30%

Activision 512 663 7.5x 7.0x 20.4x 17.4x 9% 37% 40%

Nintendo 437 328 3.7x 3.7x 13.1x 13.8x 6% 28% 27%

EA 289 703 5.3x 5.0x 16.4x 14.8x 12% 32% 33%

Take-Two 136 734 5.3x 4.1x 27.6x 16.9x 17% 19% 24%

Bandai Namco 98 981 1.4x 1.4x 12.4x 11.5x 8% 11% 12%

Ubisoft 96 011 3.6x 3.4x 17.9x 16.2x 14% 20% 21%

CD projekt 88 899 11.6x 17.3x 16.1x 27.7x 84% 72% 62%

Median 213 218 5.3x 4.5x 17x 17x 13% 29% 28%

Peer Group median 107 653 4.8x 4.1x 19x 17x 17% 24% 24%

Embracer Group 44 209 6.0x 5.1x 23x 18x 15% 20% 27%

Source: Bloomberg & Redeye Research

EV/Sales EV/(Op.)EBIT EBIT margin


10

Summary Redeye Rating The rating consists of three valuation keys, each constituting an overall assessment of several factors that are rated

on a scale of 0 to 1 points. The maximum score for a valuation key is 5 points.

Rating changes in the report

People: 5

The management team of Embracer Group is by our measures highly competent with extensive experience from the Gaming

industry. The company continuously puts emphasis on a shareholder focus to generate long-term value creation by keeping to

their core strategy; acquiring IPs at the cheap and increase their value by asset care. Lars Wingefors, the CEO and co-founder, is an

entrepreneur by heart; he started his first business at the age of 13 and has been selling video games for more than 20 years. We

find the management of Embracer as trustworthy as they have never tried to misguide the market; instead, they always make

conservative statements and educate the market about their business. The ownership structure of Embracer Group is, in our view,

one of its key strengths. All the key personnel has substantial holdings in the company with the co-founder Lars Wingefors

controlling more than 50% of the votes. The significant holdings create a focus on long-term value creation and not meeting short-

term financial goals that a company led by “hired guns.” In addition to the substantial holdings of the management team, some of

the most renowned institutional owners show up on the shareholder's list of Embracer Group.

Business: 4

Embracer Group has an extensive portfolio of game franchises with multiple streams of income and a massive player base. Some

of the IPs, like Darksiders, Spellforce, Red Faction and MX vs. ATV, Saints Row, Dead Island, and Metro has a large following and

good reputation in the gamer community; this creates a pricing power and demand for new products. Following the acquisition of

Koch Media, Embracer has become a power-house, but as the gaming industry is so massive, they are still a relatively small player.

The Partner Publishing business has lower margins than “Games”, but still generates a substantial EBIT contribution and acts as a

“funnel” for further business development relationships and possible acquisitions.

Financials: 4

Embracer is a company with a strong cash position. One of the company’s core strategies is to acquire game IPs from companies

in financial distress; this has led to a conservative approach regarding putting on debt. The income streams are diversified with a

large portfolio of IPs and different games. Overall the video game industry is not sensitive to the business cycle which dampens

the financial risk of downturns. During the past years, Embracer has been growing heavily and still producing more than satisfying

margins and return on asset. The future profitability levels will vary due to game release schemes as the business model inherits a

high degree of scalability. Long-term increasing margins as the company continue to grow and the revenue streams from their

own IPs increase even further.


11

PROFITABILITY FY19 FY20 FY21E FY22E FY23E ROE 11% 5% -2% 6% 11% ROCE 17% 5% -1% 7% 15% ROIC 129% 12% -1% 7% 17% EBITDA margin 28% 35% 43% 42% 44% EBIT margin 10% 7% -1% 6% 11% Net margin 6% 6% -2% 4% 8%

Please comment on the changes in Rating factors……

INCOME STATEMENT FY19 FY20 FY21E FY22E FY23E

Net sales 5,754 5,250 7,390 8,721 10,269 Total operating costs -4,162 -3,428 -4,180 -5,056 -5,782 EBITDA 1,592 1,822 3,210 3,665 4,487 Depreciation -23 -30 -37 -43 -48 Amortization -995 -1,446 -3,252 -3,089 -3,344 Impairment charges 0 0 0 0 0 EBIT 575 345 -79 533 1,096 Share in profits 0 0 0 0 0 Net financial items -33 57 -37 -43 -49 Exchange rate dif. 0 0 0 0 0 Pre-tax profit 542 403 -116 490 1,047 Tax -183 -110 -9 -123 -262 Net earnings 359 293 -125 368 785

BALANCE SHEET FY19 FY20 FY21E FY22E FY23E Assets Current assets Cash in banks 2,929 2,510 739 872 2,754 Receivables 1,297 1,468 1,478 1,744 2,054 Inventories 323 353 443 523 205 Other current assets 0 0 0 0 0 Current assets 4,549 4,331 2,661 3,139 5,013 Fixed assets Tangible assets 156 185 213 239 264 Associated comp. 0 0 0 0 0 Investments 0 0 0 0 0 Goodwill 0 0 0 0 0 Cap. exp. for dev. 1,887 3,065 5,741 3,871 2,023 O intangible rights 1,820 2,806 3,484 4,273 4,929 O non-current assets 196 251 251 251 251 Total fixed assets 4,059 6,307 9,688 8,634 7,466 Deferred tax assets 0 0 0 0 0 Total (assets) 8,608 10,637 12,349 11,773 12,479 Liabilities Current liabilities Short-term debt 0 1,491 2,029 621 0 Accounts payable 2,018 1,288 2,587 3,052 3,594 O current liabilities 0 0 0 0 0 Current liabilities 2,018 2,779 4,616 3,673 3,594 Long-term debt 0 0 0 0 0 O long-term liabilities 211 222 222 222 222 Convertibles 0 0 0 0 0 Total Liabilities 2,229 3,001 4,838 3,895 3,816 Deferred tax liab 0 0 0 0 0 Provisions 667 1,241 1,241 1,241 1,241 Shareholders' equity 5,712 6,395 6,270 6,638 7,423 Minority interest (BS) 0 0 0 0 0 Minority & equity 5,712 6,395 6,270 6,638 7,423 Total liab & SE 8,608 10,637 12,349 11,773 12,479

FREE CASH FLOW FY19 FY20 FY21E FY22E FY23E Net sales 5,754 5,250 7,390 8,721 10,269 Total operating costs -4,162 -3,428 -4,180 -5,056 -5,782 Depreciations total -1,018 -1,476 -3,289 -3,132 -3,391 EBIT 575 345 -79 533 1,096 Taxes on EBIT 0 0 0 0 0 NOPLAT 575 345 -79 533 1,096 Depreciation 1,018 1,476 3,289 3,132 3,391 Gross cash flow 1,592 1,822 3,210 3,665 4,487 Change in WC 310 -930 1,197 120 550 Gross CAPEX -4,504 -3,724 -6,671 -2,077 -2,224 Free cash flow -2,601 -2,832 -2,264 1,707 2,813 CAPITAL STRUCTURE FY19 FY20 FY21E FY22E FY23E Equity ratio 66% 60% 51% 56% 59% Debt/equity ratio 0% 23% 32% 9% 0% Net debt -2,929 -1,019 1,290 -252 -2,754 Capital employed 2,783 5,376 7,560 6,386 4,669 Capital turnover rate 0.7 0.5 0.6 0.7 0.8 GROWTH FY19 FY20 FY21E FY22E FY23E Sales growth 1,034% -9% 41% 18% 18% EPS growth (adj) 100% -76% -140% -394% 114%

DATA PER SHARE FY19 FY20 FY21E FY22E FY23E EPS 3.50 0.83 -0.34 0.99 2.11 EPS adj 3.50 0.83 -0.34 0.99 2.11 Dividend 0.00 0.00 0.00 0.00 0.95 Net debt -28.58 -2.89 3.47 -0.68 -7.40 Total shares 102.49 352.43 372.35 372.35 372.35

SHARE INFORMATION Reuters code EMBRAC.ST List Share price 241.2 Total shares, million 372.4 Market Cap, MSEK 89811.4 MANAGEMENT & BOARD CEO Lars Wingefors CFO Johan Ekström IR Chairman Kicki Wallje-Lund FINANCIAL INFORMATION ANALYSTS Redeye AB Kristoffer Lindstrom Mäster Samuelsgatan 42, 10tr [email protected] 111 57 Stockholm Tomas Otterbeck [email protected]

SHARE PERFORMANCE GROWTH/YEAR 18/20E 1 month 0.0 % Net sales 13.3 % 3 month 0.0 % Operating profit adj � 12 month 9.3 % EPS, just � Since start of the year 0.0 % Equity 4.8 %

SHAREHOLDER STRUCTURE % CAPITAL VOTES Lars Wingefors 29.0 % 42.2 % S3D Media Inc 10.8 % 14.6 % Cbny-Citibank N.A.-Private Bank 8.6 % 4.7 % Swedbank Robur Fonder 7.1 % 3.9 % Erik Stenberg 6.3 % 9.1 % Handelsbanken Fonder 4.3 % 3.0 % Didner & Gerge Fonder 3.1 % 1.7 % Första AP-fonden 2.9 % 1.6 % State Street Bank And Trust co 2.3 % 1.2 % CMB Holding AB 2.2 % 3.1 %

DCF VALUATION CASH FLOW, MSEK WACC (%) 9.0 % NPV FCF (2020-2021) 5535 NPV FCF (2022-2028) 13029 NPV FCF (2029-) 29996 Non-operating assets 2510 Interest-bearing debt -1491 Fair value estimate MSEK 49579 Assumptions 2020-2026 (%) Average sales growth 13.6 % Fair value e. per share, SEK 130 EBIT margin 15.8 % Share price, SEK 108


12

Redeye Rating and Background Definitions Company Quality

Company Quality is based on a set of quality checks across three categories; PEOPLE, BUSINESS, FINANCE. These

are the building blocks that enable a company to deliver sustained operational outperformance and attractive long-

term earnings growth.

Each category is grouped into multiple sub-categories assessed by five checks. These are based on widely

accepted and tested investment criteria and used by demonstrably successful investors and investment firms. Each

sub-category may also include a complementary check that provides additional information to assist with

investment decision-making.

If a check is successful, it is assigned a score of one point; the total successful checks are added to give a score for

each sub-category. The overall score for a category is the average of all sub-category scores, based on a scale that

ranges from 0 to 5 rounded up to the nearest whole number. The overall score for each category is then used to

generate the size of the bar in the Company Quality graphic.

People

At the end of the day, people drive profits. Not numbers. Understanding the motivations of people behind a business

is a significant part of understanding the long-term drive of the company. It all comes down to doing business with

people you trust, or at least avoiding dealing with people of questionable character.

The People rating is based on quantitative scores in seven categories:

• Passion, Execution, Capital Allocation, Communication, Compensation, Ownership, and Board.

Business

If you don’t understand the competitive environment and don’t have a clear sense of how the business will engage

customers, create value and consistently deliver that value at a profit, you won’t succeed as an investor. Knowing

the business model inside out will provide you some level of certainty and reduce the risk when you buy a stock.

The Business rating is based on quantitative scores grouped into five sub-categories:

• Business Scalability, Market Structure, Value Proposition, Economic Moat, and Operational Risks.

Financials

Investing is part art, part science. Financial ratios make up most of the science. Ratios are used to evaluate the

financial soundness of a business. Also, these ratios are key factors that will impact a company’s financial

performance and valuation. However, you only need a few to determine whether a company is financially strong or

weak.

The Financial rating is based on quantitative scores that are grouped into five separate categories:

• Earnings Power, Profit Margin, Growth Rate, Financial Health, and Earnings Quality.


13

Redeye Equity Research team

Management Björn Fahlén

[email protected]

Håkan Östling

[email protected]

Technology Team Jonas Amnesten

[email protected]

Henrik Alveskog

[email protected]

Havan Hanna

[email protected]

Kristoffer Lindström

[email protected]

Erika Madebrink

[email protected]

Fredrik Nilsson

[email protected]

Tomas Otterbeck

[email protected]

Eddie Palmgren

[email protected]

Oskar Vilhelmsson

[email protected]

Viktor Westman

[email protected]

Editorial Eddie Palmgren

[email protected]

Mark Siöstedt

[email protected]

Life Science Team Gergana Almquist

[email protected]

Oscar Bergman

[email protected]

Anders Hedlund

[email protected]

Arvid Necander

[email protected]

Erik Nordström

[email protected]

Klas Palin

[email protected]

Jakob Svensson

[email protected]

Ludvig Svensson

[email protected]

Niklas Elmhammer

[email protected]

Mats Hyttinge

[email protected]


14

Disclaimer Important information Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary authorization). Limitation of liability This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting from the use of this analysis. Potential conflict of interest Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the objectivity and independence of its analysts. The following applies:

• For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees are not allowed to trade in financial instruments of the company in question, from the date Redeye publishes its analysis plus one trading day after this date.

• An analyst may not engage in corporate finance transactions without the express approval of management and may not receive any remuneration directly linked to such transactions.

• Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analysis, or from an underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of these reports should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report for the performance of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of the analysis.

Redeye’s research coverage Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of significant changes in market conditions or events related to the issuer/the financial instrument. Recommendation structure Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decision-making. Redeye Rating (2020-05-27)

Duplication and distribution This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other regulations. Copyright Redeye AB.

Rating People Business Financials

5p 14 11 4 3p - 4p 105 81 30 0p - 2p 7 34 92 Company N 126 126 126

CONFLICT OF INTERESTS

Kristoffer. Lindström owns shares in the company Embracer Group: Yes Tomas. Otterbeck. owns shares in the company Embracer Group: Yes Redeye performs/have performed services for the Company and receives/have

received compensation from the Company in connection with this.

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