Stillfront Group - cheap mobile gaming?

Stocks
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Inspired by this https://www.avanza.se/placera/ovriga-nyheter/2020/03/03/stillfront-group-stillfront-group-market-turmoil-hedge.html, I delved into the company enough to buy my first batch. The share price curve shows a strong upward trend in the long run, and I dare say the same will continue this year.

My first thought when reading the Q4 report and the Storm8 acquisition announcement was, “How can this be so cheap?” I amused myself by calculating some rough pro forma figures based on September 30, 2019 (Stillfront Group acquires Storm8, Inc. and raises new financing – Stillfront Group). The EV/EBIT is something <10 and PEGY ~0.5, depending on the chosen figures. The company’s goal is to achieve 4 billion SEK in revenue by 2022, of which 2.9 billion has been accumulated by September 30, 2019.

When costs are reduced through synergies and game development is improved (the Capital Markets Day 2019 report had some interesting plans related to this), what bad do you other forum members find in this? Mobile games certainly have their risks, but this address offers about 40 different ones, and more are coming. A widespread collapse in revenues seems quite unlikely, especially now that many people are forced to spend time indoors in quarantine.

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Thanks for this. Hopefully, this company will bring some more quality to the portfolio; Bublar hasn’t quite convinced me yet. Though its potential is still ahead.

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A Swedbank fund manager (I’m not entirely sure what “förvaltare” means in this context) has recommended the stock in today’s Dagens Industri. https://shareville.se/aktier/stillfront-group-ab/kommentarer/henrietta-theorell-forvaltare-pa-swedbank-robur-rekommende-79466281. “The pricing is like skim milk, even though revenue is growing at over 50% annually.” According to her, the stock is a gold nugget, corona-resistant, and a very good investment case.

CEO Jörgen Larsson was also interviewed at the end of the year; the video can be found on Google. In it, he seemed really enthusiastic and confident about continuous growth, which is also beneficial in the industry as an intrinsic value. He also mentioned that the revenue target for 2024 is SEK 6 billion, which is about 4 times the amount reported last year and about double what can be expected this year due to acquisitions.

I still see almost nothing bad here. Acquisitions will surely continue. There is a fair amount of debt, but it’s a manageable amount. Lower interest rates should benefit indebted companies as long as the business flows well, right? I’ll probably have to place another order.

A stock split would, in my opinion, be worth considering soon.

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Stillfront released revenue and adjusted EBIT figures for April-May, reporting strong player activity and successful marketing. I calculated that the annualized EV/EBIT would be around 13.5, but this is based on two exceptional months, so it’s not worth extrapolating too far. The latest acquisition (Candywriter) was, to my understanding, consolidated only from May, so if it’s not fully included in the figures, the actual earnings level would have been even higher.

There will be a webcast later in the evening; the Q&A sections, in particular, have been interesting to listen to.

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Great that Stillfront has its own thread :smiley:. The company does an excellent job of reporting on sales development during the Covid period. I personally interpreted yesterday’s announcement as a positive earnings surprise, and at least three analysis firms raised their target price, with the recommendation remaining “buy” (köp). I added 720 SEK this morning.

STOCKHOLM (Nyhetsbyrån Direkt) Stillfront’s net sales in April and May amounted to 851 million Swedish kronor with an adjusted EBIT result of 310 million.

12.6:

Kepler Cheuvreux raises its target price for Stillfront to 750 Swedish kronor (670), reiterates buy.

Nordea raises its target price for Stillfront to 815 Swedish kronor (660), reiterates buy - BN

STOCKHOLM (Nyhetsbyrån Direkt) Pareto Securities raises its target price for Stillfront to 814 Swedish kronor from 697 Swedish kronor. The buy recommendation is reiterated.

Carnegie 840 SEK (690).

And also Redeye:

Redeye’s positive view of Stillfront’s is enhanced further following the trading update for April to May. The company has seen a solid return on marketing campaigns during April and May, and despite having steep expectations on Q2, the preliminary figures exceed those. We adjust our Q2 and full-year estimates upwards and raise our Base-case valuation.

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Good article in Swedish about Stillfront and also touching upon Embracer
https://twitter.com/pareto_sverige/status/1272896462750449665?s=21

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And then there was the directed share issue, which is certainly aimed at the next acquisition. Interesting times…

Press release
Stockholm 2020-06-16

Stillfront Group AB (publ) (“Stillfront” or "Company”) intends to raise proceeds through a directed share issue to provide the Company further financial strength and flexibility to be able to act swiftly on potential future acquisitions and growth opportunities. In light of this, Stillfront has appointed Nordea Bank Abp, filial i Sverige and Joh. Berenberg, Gossler & Co. KG as Joint Global Coordinators and Joint Bookrunners, and Swedbank AB (publ) as Joint Bookrunner (jointly, the “Managers”), in connection with the Directed Share Issue of approximately SEK 1,000 million in gross proceeds (the “Directed Share Issue”) through an accelerated bookbuilding procedure, (the “Bookbuilding”).

“Following the successful acquisitions of Storm8 and Candywriter we still see good opportunities ahead. The directed share issue enables us, in a time and cost-effective manner, to act on more opportunities, accelerate Stillfront´s growth and thereby create value for all shareholders”, comments Jörgen Larsson, CEO of Stillfront.

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Do you want Kimi to summarize the main points of Pareto’s video? You can’t put the video into Google Translate yet :slight_smile:

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Could that targeted share issue have motivated last week’s mini-dip :grinning_face: we’ll get a slightly smaller dilution with a better price. With the Storm8 acquisition, the share issue announcement came on the same day as the acquisition announcement, so we’ll stay tuned to see when the next deal is announced.

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Here’s what I got down (main points):
He talks about low marketing costs, people are home playing, fantastic growth opportunities

Both engagement ratio and ARPU are high.

The engagement rate has been higher than normal due to the corona pandemic, but will normalize once the pandemic subsides.

Many new players have joined due to the pandemic, including paying ones. They will continue to pay and play even after the pandemic subsides, but perhaps a little less frequently on a weekly basis. In any case, they will play and remain committed to Stillfront’s games.

New games will bring sales; 10-11 new games are in the pipeline and in a strong development phase.

Although the stock price has developed strongly, he still sees that it will rise in the long term.

Stillfront will continue with acquisitions. Many discussions are underway, and something will happen by autumn at the latest. The latest acquisitions have been quickly integrated into Stillfront’s organization/structure.

Embracer focuses on console games etc., and its valuation levels have been higher. Perhaps it has been easier to form an idea of its value. But he wants to compare Stillfront to Zynga. He compares it to Zynga in terms of how it rapidly expanded through acquisitions and how the company’s value grew quickly (Zynga’s value increased 20-fold in a short time).

Stillfront is the second-largest listed mobile-games-focused company in the world after Zynga.

Swedes hold large positions as shareholders in Stillfront, and the shareholders are mostly Swedish, but he sees that it will gain international owners and will develop into an internationally owned company (the shareholder base will become international).

If he had to choose between Embracer and Stillfront, which one? He doesn’t want to choose just one, but wants to own both.

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The subscription was completed and the discount to yesterday’s closing price was 1.4% :slightly_smiling_face: the issue was quickly oversubscribed and the goal was also to attract an international investor base/institutions.

Since this was executed in such a targeted and rapid manner, I would be very interested to know which institutions/individually selected parties subscribed to the shares. Or will they remain in nominee accounts?

The Board of Directors of Stillfront has, with the support of an authorization from the Annual General Meeting held on May 14, 2020, decided on a directed new issue to Swedish and international institutional, as well as other qualified investors, of 1,558,441 new shares at a subscription price of SEK 770.0 per share (the “Directed New Issue”). Stillfront raised capital through the Directed New Issue in order to enable further financial strength and flexibility to act quickly and efficiently in potential future acquisition and growth opportunities.

The subscription price corresponds to a discount of 1.4 percent compared to the closing price of SEK 781.0 on June 16, 2020, and a premium of 7.8 percent compared to the volume-weighted average share price for the past 10 trading days.

The Board of Directors of Stillfront notes that the interest in the Directed New Issue was strong as it was heavily oversubscribed shortly after yesterday’s announcement by both new and existing reputable Swedish and international institutional, as well as other qualified, investors.

Jörgen Larsson, CEO, comments: “We are very pleased with the response from both new and existing shareholders. Our ambition is to continue to develop Stillfront into a leading free-to-play powerhouse in game development, and we see this as proof that investors have great confidence in our growth agenda.”

The reasons for deviating from the shareholders’ pre-emptive rights are primarily to diversify the shareholder base among Swedish and international institutional, as well as other qualified investors, and at the same time carry out the capital raise in a time and cost-efficient manner.

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Today, a new acquisition:

Next week will be Stillfront’s CMD, which will include a deep dive into the acquisitions made earlier this year. I’m very interested in seeing how well the acquisitions succeed after joining Stillfront, and generally, it will be interesting to see the entrepreneurs present themselves!

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The CEO said today that acquisitions could still continue and the scale of the Nanobit deal is not an obstacle. It will indeed be an interesting day next week. I added more last week when it dipped around 900 SEK, probably due to the decline in US tech stocks.

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Here’s an interesting interview from March. In the video, Stillfront’s COO Alexis Bonte talks about Stillfront’s operating philosophy.

There’s a strong track record of acquisitions, and I believe it will continue. With the increase in share value, the size of acquisitions can be increased without significant dilution. Additionally, equity financing has been obtained from the market at a low discount. Since acquisitions are made at radically lower multiples than Stillfront’s own valuation, shareholder value increases in an arbitrage-like manner (as long as the acquired companies’ earnings continue/improve).

Because of this, the biggest question mark and risk I see is how long the entrepreneurs associated with Stillfront will continue to push forward with the same passion. So far, it looks good. But what happens when earn-outs close and the group’s size grows even further? It’s difficult to assess how much of the studios’ success depends on entrepreneur-led management. For this reason, it will be interesting to observe the habitus of the Storm8 & Candywriter entrepreneurs next week.

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At least the management of the acquired companies has been committed by paying part of the purchase price with SF shares. Considering Nanobit’s country of origin, I believe its management will have enough energy for a long time to develop the company and thus enrich themselves. I am interested to see if the acquired companies will produce such strong professionals that a “fist”/management team will be formed to drive development forward. SF’s operating model is very similar to Embracer’s, but it is extremely interesting as it is focused on the mobile gaming market.

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Redeye had commented and I painted something from it:

Explosive Growth due to a newly released game: Nanobit generated net sales of USD 33m during 2019. We expect top-line growth of around 150% during 2020 mainly due to the successful release of the new game Tabou. Tabou launched in January 2020 is a record hit, after just four months the game was Nanobit’s largest game. For 2020 we expect that Tabou stands for about 45% of revenue. Despite extreme growth during 2020. The margins have been strong, showing high marketing efficiency.

We have updated our estimates due to the acquisition of Nanobit. The company will be consolidated in the group on October 1, 2020.

Estimate changes: In Q4 we estimate net revenue of SEK 1,784 million (SEK 1,531 million). Adjusted EBIT of SEK 641 million (SEK 599 million).

FY 2020: Net revenue of SEK 4,957 million (SEK 4,704 million).

We have increased our fair value range to SEK 750-1400 (580-1100) with a base case of SEK 1130 per share (SEK 860).

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Compared to the Q4/20E adjusted EBIT (SEK 641 million), the market cap (SEK 38 billion) still looks cheap, considering the company’s track record of strong earnings growth with relatively small dilution.

Analysts’ forecasts do not, as a rule, take into account future acquisitions, but in Stillfront’s case, they are very likely to happen, and usually the dilution percentage is significantly smaller than the earnings growth percentage.

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The new financial goal naturally also means the continuation of acquisitions, hopefully reasonably priced acquisition targets will still be found, and that the effect of dilution will remain at a good level in relation.

stillfront aims for a turnover of SEK 10 billion in 2023 (previous goal SEK 4 billion in 2022) with an adjusted EBIT margin of approx. 35%.

Hold on to the shares and we’ll see…

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A year ago, the goal was indeed “tripling in five years”, now it seems to be “tripling in four years”. What a ride it is.

And as for dilution, the most important thing is relative valuation, meaning the higher the valuation Stillfront itself gets in the market, the easier it is to snap up companies valued cheaper than itself. These M&A + dilution-growing companies have that interesting feature that if the market believes the story, they become a “self-fulfilling prophecy” when stock can finance purchases so cheaply :smiley:

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A long and in-depth article about Stillfront’s operating model, strengths, and potential weaknesses. Definitely suitable for anyone interested in game companies in general.

https://elitegamedevelopers.com/stillfront-group/

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