Here are Carnegie’s justifications for today’s buy recommendation and the target price increase to SEK 225 (previously SEK 185).
The text is interesting and also discusses the sector rotation of recent days and its actual effects or lack thereof on the gaming industry. It’s worth reading to the end, where Embracer’s strengths are summarized.
It should be mentioned that Goldman Sachs started coverage of Embracer today: buy recommendation, target price SEK 216.
Monday’s vaccine announcement was the start of a rapid sector rotation on the stock exchange, where former corona winners ended up high on the loser list. The three largest gaming companies Embracer, Paradox and Stillfront have all been traded down about 20 percent from the price peak in just a few days. Although the shares have performed strongly during the year, the rebound has been excessive and has created a good starting position. Structural trends continue to speak for gaming, economic sensitivity is low and the corona pandemic is far from over. Embracer is one of Carnegie Analysis’ two favorites in the gaming sector. We are attracted by the successful acquisition strategy and the organic growth profile in the company, given the large investments in game development and strong pipeline with new titles.
The gaming sector has emerged as a separate sector on the Stockholm Stock Exchange in recent years. Embracer, Paradox and Stillfront are the three largest gaming companies, which together have a market capitalization of just under SEK 100 billion. Embracer and Stillfront are acquisition-driven and have strong owners with extensive knowledge of the industry. The sector benefits greatly from the digitalisation trend, lower distribution costs and increased consolidation. The transition to mobile platforms, streaming and subscriptions are other structural trends that benefit the underlying growth. The gaming sector has also proven to be a clear quarantine winner, so-called Stay-at-home stocks.
Embracer Group, formerly known as THQ Nordic, is the parent company of Sweden’s largest gaming group. The share has risen 1,700 percent since the listing on First North at the end of 2016 and has doubled since we highlighted Embracer as this week’s share case in February. The CEO and main owner is Lars Wingefors, who owns 29 percent of the capital and 42 percent of the votes. Sales have rapidly risen from SEK 500 million in 2016 to SEK 8.3 billion this year according to our forecasts. The number of employees is just over 4,000, in one of the company’s 33 internal development studios in Sweden, Europe and the USA.
Embracer develops and locates PC and console games for the global gaming market. The portfolio is broad with over 170 own brands. They account for just over 70 percent of sales within the Games business area, which in turn accounts for almost 80 percent of sales in Embracer. The remaining part is the business area with publishing operations. In the games development part Games, the game platform dominates console followed by PC. The share of digital sales has climbed to just over 70 percent, which is lower than the other listed major Swedish gaming companies.
The Karlstad-based gaming company has successfully expanded through an acquisition strategy that aims to add publishers, studios and brands to increase growth and diversification. Since the company was founded in 2011, about 50 acquisitions of gaming brands or game development studios have been completed. This year, the presence has increased in, among other things, mobile games after the acquisition of Deca Games. Also in Virtual Reality through the acquisition of Vertigo Games.
After all the acquisitions, Embracer is the second largest in terms of turnover among European listed gaming companies, just behind the French game developer and distributor Ubisoft. In October, the fund was replenished with SEK 6 billion in a private placement. The acquisition journey thus has good prospects for continuing for Embracer in the gaming industry, which is growing in double digits per year.
On Carnegie Analysis’ forecasts for 2021, the share is valued at EV / EBITA 20 times, which is attractive given the gaming sector and the company’s M&A history, improved quality in title releases and well-invested pipeline of new titles. The recommendation is Buy, with a target price of SEK 225 based on cash flow valuation (DCF) and relative valuation.
Embracer - Successful acquisition strategy and attractive organic growth profile (Buy with target price SEK 225)
- The gaming sector is growing in double digits per year and is benefiting greatly from the digitalisation trend, lower distribution costs and increased consolidation
- Embracer has a successful acquisition strategy and attractive organic growth profile, given the large investments in game development and a strong pipeline with new titles
- An increased share of own brands and digital sales will gradually improve margins in the next few years
- Well-stocked cash enables continued high M&A activity
