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THQ Nordic

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THQ Nordic: Preview Q2 (Jul-Sept, 18/19), the future looks bright

THQ Nordic will present their report for the second quarter (Jul-Sept) of the split financial year of 2018/19 on the 14th of November next week. The growth compared to last year will be massive, driven by the Koch Media acquisition. Compared to proforma figures we also expect to see an uptake with higher Partner Publishing volumes and lower sales within Games. For THQ Nordic the most exciting thing is what lies ahead: with the largest game releases in the company’s history. We are of course referring to Darksiders III, Metro Exodus, Biomutant, Shenmue III and more. A strong pipeline, growing IP portfolio and with the bonus of possible value-adding M&A, we see a bright future for THQ Nordic’s and its shareholders. Our current Base-case amounts to 245 SEK per share.

THQ Nordic will present their report for the second quarter (Jul-Sept) of the split financial year of 2018/19 on the 14th of November next week. On the Group level, we predict that the net sales will reach about SEK 1076m. Compared to last year the uptake in income will be significant due to the Koch Media acquisition. We believe the sales will increase from about SEK 85m to SEK 1076m. What’s more interesting is comparing to proforma figures, see our comments for the two segments below:

Games: There haven’t been any major releases during the quarter within the segment, and for the next quarter (Q2’18/19, Jul-Sept) we expect to see net sales within the Games segment of about SEK 351m. Our estimate corresponds to a drop from the proforma levels of SEK 411m last year by -15%. Deep Silver launched Agents of Mayhem during Q2’17/18, which significantly boosted the sales despite a relatively poor reception. We believe the Backlog sales will be significant during the quarter due to promotion bundles, Game Pass inclusion, the continued success of Kingdom Come and Wreckfest that was released late in the previous quarter. It seems like Pathfinder Kingmaker, a publishing Deal within Deep Silver, has considering its budget been successful. We believe the title sold 120-160k copies during the quarter. It’s hard for us to make an exact estimate on how much Depp silver earns on this deal as the game was initially funded through a Kickstarter, but a rough estimate would be that the title created an income of SEK 15-25m

Partner Publishing/Film: The previous quarter was the low season for the Partner Publishing business. THQ Nordic stated in the interim report that the releases activity for the segment during H2 would be stronger than H1, so increasing sales levels are expected. During this quarter (Q2’18/19) some of the more notable releases are: F1 2018 (Codemasters), Yakuza Kiwami 2, Shenmue I & I, Sonic Mania Plus, Total War: Warhammer 2 (Sega), Dragon Quest IX, Shadow of the Tomb Raider, (Square Enix) and Call of Cthulhu (Focus Home Interactive). We expect to see an income level of about SEK 725m, a significant increase from the previous quarter. Our projections imply a growth of 35% from the proforma levels last year. 

Margins wise we expect to see decreasing levels; both compared to the previous quarter and the same period last year. We believe two factors will lead to a little lower gross margin.

  • Partner Publishing/Film will stand for a more significant share of the income mix; the gross margin is low in this segment
  • A large part of the sales within Games will likely be related to the publishing deal Kingdom Come Deliverance continued success and other Deep Silver related income

We expect that the gross margin will land at about 37%, assuming a continued organizational expansion lead to a projected EBIT margin of 6%. Thanks to the high sales volumes this translates to an EBIT of SEK 63m, up around 19% from the previous quarter.

A strong pipeline

Looking ahead, we have a very interesting period coming up with the largest game releases in the company’s history. We are of course referring to Darksiders III, Metro Exodus, Biomutant, Shenmue III and more. The company also have about 51 game projects in development, of which only 17 are announced. Among the unannounced titles are two AAA games from Deep Silver. We have also taken a deep look into the pipeline for Partner Publishing. We have mapped all coming games announced to date and also all release during the past two years. We notice an increased quality of larger game releases.

Waiting for the right deal

On top of a highly interesting pipeline, there is always the bonus of value enhancing M&A for THQ Nordic. In mid-June, the company successfully raised SEK 1.45bn, and there is also room for debt financing if the company decides to do that. The management of THQ Nordic has created tremendous value through smart acquisitions and purchase of companies and IP asset. Key elements that have been in common for THQ Nordics' great deals are patient and the ability to wait. As such we expect the management to continue doing that and wait for a great deal, instead of stressing M&A activity just because the market craves it. A larger M&A deal could be announced at any moment; today, in a month or a year, we do not know. But we do know that a larger deal will be announced at some point, and given the profound skills and focus of the management, we do feel confident that it will create value for the shareholders. 

 

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