Verve Group

* Lack of a diversified and wide revenue base, potentially exposing the company to risks associated with market fluctuations or customer loss.
* Possible cyclical nature of the advertising business, which could impact financial performance during economic downturns.

* Strong recurring revenue model based on advertising volumes, enhancing business stability and predictability.
* Asset-light business model allowing for efficient scaling with high incremental returns and minimal reinvestment needs.
* Clear competitive moat through extensive database and market leadership in the in-app advertising market.

* Lack of consistent earnings growth, with EPS growth not exceeding historical averages or maintaining stability over longer periods.
* Net debt exceeds two times operating cash flow, potentially indicating challenges in debt management.
* Absence of dividend payments or growth, limiting appeal for income-focused investors.
* Return on Equity (ROE) has not consistently reached 20% over the last five years, indicating potential room for improvement in capital utilization.

* Strong profitability with gross profit margin exceeding 40% and operating margin above 20%, indicating pricing power and competitive advantage.
* Consistent revenue growth above industry average over the last five years, suggesting market share gains and strong demand.
* High operating cash flow conversion (above 80%) over the past five years, demonstrating ability to generate real cash profits.

* EPS growth has been dampened by high debt and interest costs, potentially impacting overall financial performance.
* Lack of clear information about sustainability-related performance incentives in executive compensation plans.
* Insufficient information available to assess the CEO evaluation process and succession planning.

* Visionary CEO with long-term perspective and deep industry knowledge, consistently delivering on promises and creating shareholder value.
* Strong commitment to innovation and strategic planning, focusing on ID-less solutions and niche market segments.
* Clear and consistent investor communication, emphasizing long-term business value and transparency about mistakes.
* Founder-CEO owns a significant stake (c25%) in the company, aligning management interests with shareholders.

Estimates vs. outcome
<img class="alignnone size-full wp-image-809971" src="https://res.cloudinary.com/redeye/w_368,h_206,c_fill,dpr_2.0/cms/app/uploads/2021/04/mgi-q1.png" alt="" width="368" height="206" />
<ul>
<li>Net sales grew 96% year-over-year and amounted to EUR 51.9m (26.5), driven by organic growth of 38% and M&amp;A-driven growth of 58%.
<ul>
<li>Gaming segment revenues amounted to EUR 27.4m (13.9), growing 97%. Representing 53% (52%) of MGI&#8217;s total revenues. With an adjusted EBITDA margin of 40%.</li>
<li>Media segment revenues amounted to EUR 24.5m (12.6), growing 94%. Representing 47% (48%) of MGI&#8217;s total revenues. With an adjusted EBITDA margin of 11%.</li>
</ul>
</li>
<li>OPEX (excluding D&amp;A) increased 73% and amounted to EUR 46m (26.6),</li>
<li>Adjusted EBITDA amounted to EUR 13.5m (5.9), an increase of 127%, due to strong organic growth and EBITDA contribution from KingsIsle.</li>
<li>Adjusted EBIT amounted to EUR 9.3m (3.4), an increase of 173%, the adj. EBIT margin improved to 18% (13%) due to depreciation in relation to revenues decreasing and due to the business being scalable.</li>
<li>Leverage ratio of 2.7, on the higher side of MGI&#8217;s net leverage target ratio of 2-3x.</li>
</ul>
MGI&#8217;s Q1 2021 financial performance vastly exceeded our estimates, and the company&#8217;s ability to execute continues to impress us. Net sales grew 96%, and adjusted EBIT increased a whopping 173%. We are pleased to note that organic growth amounted to 38% during the quarter, well above our estimates for MGI&#8217;s organic growth.
Bow to the King(sIsle)
MGI acquired the very profitable gaming company KingsIsle Entertainment during Q1 2021. The transaction closed on 25 January 2021. We can only assume KingsIsle did well during the quarter based on management comments and the fact that M&amp;A drove 58% of the revenue growth, even though we did not receive any details about KingsIsle&#8217;s performance. A significant contribution from KingsIsle can only explain the EBITDA growth of 127%.
Update: MGI shed some light on how KingsIsle performed during the quarter during the webcast. KingsIsle accounted for 17% of total revenues during the quarter. KingsIsle&#8217;s figures were consolidated from January 1, 2021, even though the acquisition closed on January 25, 2021. Performing above MGI&#8217;s own expectations.
Media: a post-pandemic winner
Media is set to be a post-pandemic winner due to re-increased advertising budgets in conjunction with the reopening of economies, offsetting any possible post-pandemic loss from the gaming division. Thus acting as a natural hedge to the gaming division and vice versa. Comparison numbers for Q2 and onward will be tougher for the Gaming segment due to the positive effect of COVID-19 on the gaming market.
Insider purchases during the quarter &#8211; even more, &#8220;Skin in The Game.&#8221;
<ul>
<li>Board Member Tobias M. Weitzel purchased shares in MGI on January 25 and Mars 30, 2021; the total purchasing price amounted to roughly SEK 2.46m in January and SEK 350k in Mars.</li>
<li>CFO Paul Echt purchased shares worth SEK 1.12m on January 25, 2021.</li>
<li>CEO Remco Westermann purchased shares 50m shares worth SEK 1.84m after the quarter on Mars 30, 2021.</li>
</ul>
It seems that we are not alone in believing in the company&#8217;s prospects, and we are happy to see that insiders keep adding to their shares even after the stock has appreciated significantly. Insider ownership was already very significant previous to these transactions, as the CEO owned 33% of the Company.
M&amp;A Firepower
The cash and cash equivalents following the new bond prospectus amount to 51.7m, corresponding to a net leverage ratio (net interest-bearing debt divided by LTM adjusted EBITDA) of 2.7, on the higher end of the company&#8217;s outspoken target of between 2-3x leverage. If MGI were to increase its leverage ratio to 3x, the company would have room to increase the net debt by a further EUR 10.8m. KingsIsle has only contributed to one-quarter of MGI&#8217;s EBITDA, so the net leverage ratio will naturally decrease as MGI continues to report its EBITDA numbers in the future.
Conclusion
We maintain our valuation range of SEK 25-77 per share following the Q1 2021 results, with a Base-case of SEK 59 per share. The outlook for MGI is better than ever, following the announcement that MGI has the strongest organic growth pipeline to date, and we argue that the risks are lower now, when the revenue base has widened even further.
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