We will adjust our projections upwards following the report due to the continued rise of the backlog and the new acquisitions, which are directly value-adding according to us. Our current, before any changes, Base-case valuation stands at 275 SEK per share.
On the report
THQ Nordic showed, yet again, a strong quarter. There was no significant new release during the quarter, and despite that, the Group showed a net sales uptake of 36%, mainly fueled by a considerable increase in Backlog revenue. The company also states that the releases Fade to Silence has performed below expectations, so still producing growth in new releases was impressive. We have highlighted before the importance of THQ Nordic’s growing IP portfolio, and this quarter is a great example of why the monetization of the back catalog is a true strength of the Group. The main drivers of the steady sale of catalog games where Metro Exodus, Outward, Kingdom Come and Coffee Stain’s Satisfactory. Satisfactory had some significant content updates during the quarter, which fueled the sales figures.
Margin wise the Gross profit margin came in at a high figure of 54%. The main driver of the healthy margin was that the significant portion of backlog sales, which is also digital. Digital sales summed up to 71% of the Games revenue, to be compared to the TTM (trailing twelve months) figure of 58%. The income mix was also favorable as Partner Publishing stood for a smaller portion of the Group sales. The Operational EBIT came in 9% higher than our estimate. Staff related cost was somewhat higher than we thought, likely driven by the new cost structure after the latest acquisitions. We will look into that further in our upcoming research update. We want to highlight yet again that THQ Nordic have roughly SEK 120m in acquisition-related amortization as they follow the K3 accounting standard. If IFRS reporting had been implemented, the EBIT would be more or less equal to Operational EBIT. Investment into game projects continued at a record pace and amounted to SEK 356m during the quarter; the new game projects, of course, be a driver of growth for many years.
THQ Nordic presenter no less than six acquisitions in conjunction with the report. The biggest one was the acquisition of the racing focused developer and publisher Milestone. Gunfire Games, the developer of Darksiders III and other notable IPs, was also brought into the family. THQ Nordic acquired Goodbye Kansas Game Invest, which is an investment vehicle previously owned by the Goodbye Kansas Group. The royalty contract for Biomutant was also included in the deal. Both Milestone and Gunfire have a game that will be released during August; as such, we will have to adjust our projections for new releases for the next quarter upwards. We will dig into the acquisitions further in the upcoming research update. Links to the presentations for Milestone, Gunfire and GBKGI.
The Group also acquired three more companies. Two; Gaya Entertainment and Game Outlet Europe, previously owned or controlled by the Group CEO Lars Wingefors, and were bought at very low prices. The purchase price amounted to 10 MSEK and 1 euro for the two business that together produced roughly SEK 150m in sales during 2018. The Film leg within the Partner Publishing business also acquired KSM, a leading provider of anime film in Germany. Foxglove, the free-to-play focused mobile studio within the Group, has been sold to the employees for a nominal amount.
Lars Wingefors states that the pipeline of M&A objects is “solid” and they are both looking at bolt-on acquisitions of studios and publishers but also adding a fourth “leg” to the Group. As of 30 Jun 2019, the company had cash and cash equivalents of SEK 3 159m. Available liquidity including credit facilities was SEK 4 671m, to there is still room for more significant deals.
Other then the acquisitions some more exciting news was presented. The Parent company will change its name to Embracer Group. Previously, some miscommunications within the Group has occurred because both the Parent and the subsidiary in Vienna was been named THQ Nordic. The name change will not affect the subsidiaries or their branding.
The company now have confirmed that the Deep Silver studio Volition is working on a new Saints Row game, which is currently "deep" into development. THQ Nordic also states that they plan to release two AAA titles during FY21, where the new Saints Row likely is one. Dambuster is now leading the development of Dead Island 2. Fishlabs has started working on a new IP and Steve Ellis the co-creator of TimeSplitters has joined Deep Silver. Exciting times ahead to say the least!
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