Media and Games Invest (MGI) followed up a strong year-end with an even stronger Q1 in terms of growth, growing 21% organically (adjusted for fx). Sales in the quarter were primarily supported by a 30% y/y increase in software clients, increased advertising budgets from existing customers, and rising demand for ID-less solutions.

Net sales came in at EUR82.5m (68.8), 2% above our estimates of EUR80.9m. Sales increased 20% y/y, while organic growth was 21%. Looking at profitability, Adj EBITDA came in at EUR22m (19), with a margin of 27% (28). This was 3% below our estimates of EUR22.7m. Adj EBIT (excl PPA) came in at EUR16.6m (15.2), yielding a margin of 20% (22). Adj Net profit continued to be harmed by high-interest expenses and came in at EUR3.1m (3.1), below our estimates of EUR4.3m.

Overall, we consider the report to be solid, especially in terms of top-line (as expected), following the earlier announced organic growth numbers of 18% and 25% in January and February, respectively. Although Google's long-awaited cookie deprecation seems to have been postponed from H2 2024 to 2025, the long-term trend of ID-less targeting solutions has not changed, and the 30% increase in software clients indicates that MGI is at the forefront of adopting the new landscape. ATOM 3.0 (an ID-less solution for in-app advertising) was launched at the end of April, and we are excited to see what it can bring to the market.

Looking at the net expansion rate (which indicates how much sales come from existing customers compared to one year ago), it grew from 95% in Q4 2023 to 110% in Q1. This is the third quarter with a q/q uptick, and the KPI appears to have bottomed out in Q2 2023 at 82%. A figure above 100% means that existing customers are spending more compared to one year ago. Given the pent-up demand and several large events in H2 2024 (including the European Championship in football, the Olympics, and the US election), we anticipate that advertising budgets will continue to increase throughout the year.

Operating cash flow was relatively strong, coming in at EUR9.1m, while free cash flow was EUR-2.4m. The cash flow in the period was EUR2.0m, negatively impacted by interest expenses, which are included within the financing segment in the cash flow statement. MGI ended the quarter with net debt of EUR319m versus EUR295m in Q4 2023, and the net debt / Adj EBITDA ratio landed at 3.2x by the end of the quarter. The cash flow H1 is typically negatively impacted by working capital build-up. Hence, we expect to see stronger cash conversion in the second half of the year. 

After repeatedly stating that no rebound in the ad market was in sight in previous quarters, we finally received the famous words, “We now see the beginnings of a recovery of the advertising market” from the company in Q4. This was followed up in Q1 with organic growth of 21%, and we continue to see the company have a strong intake of new customers while existing ones increase their advertising budgets. The company’s FY 2024 guidance reflects the rebounding of the underlying market, particularly in the US, MGI’s largest market. The guidance anticipates revenues of EUR350m-370m and Adj EBITDA of EUR100m-110m, implying a growth rate of 9-15% and an Adj EBITDA margin of approximately 29%. These figures can be compared with our pre-report estimates of EUR359m in net sales and EUR105m in Adj EBITDA. We believe that the upper end of the range is achievable given the strong start to the year and the ongoing recovery of the advertising market.

After Q1 2024, we have made limited revisions to our estimates, leaving 2024e unchanged while reducing sales by 4% for 2025e-2026e. We currently estimate a growth of 12% in 2024e and an Adj EBITDA margin of 29%, which is the midpoint of the guidance. Given the strong start to the year, we would not be surprised if the company were to revise its guidance upwards during the year.

Peer valuation

Given that MGI’s major revenue stems from its advertising platform. We argue that globally listed ad-tech peers are the most relevant peers.

MGI trades at discounts of c60-50% versus ad-tech-related peers on EV/EBITDA multiples for 2024-2025e. The most relevant peers, in our opinion, in terms of size and niche, are Pubmatic and Magnite, both trading at multiples of c-6-9x EV/EBITDA in 2025e.

We apply a WACC of 11.5% in all DCF scenarios, derived from Redeye’s Rating model, and we use a tax rate of 20.6%. The discount analysis extends to 2038E. Below, we summarize the key financial assumptions for the scenarios. Our valuation range is between SEK12-42, and our base case stands at SEK30. Corresponding to an EV/Adj EBIT multiple of 7x in 2025e.