Remedy: Lowered budget assumptions on key projects
Research Update
2022-12-02
07:30
Redeye keeps its valuation range and base case unchanged despite a lowered revenue and EBIT expectation in 2023. Since decreased budget assumptions only have an impact on Remedy’s short-term revenue, we are still optimistic regarding its more long-term prospects, due to the fact that a lower budget in our view increases the royalty opportunity.
TO
VL
Tomas Otterbeck
Viktor Lindström
Contents
Only short-term impact from lowered expected budgets
We have for conservative reasons lowered our revenue estimates for 2023, due to the unknown release date of Alan Wake 2 and lowered estimated budgets for Max Payne Remake and Vanguard. This has a noticeable impact on EBIT as well in our 2023 estimate, but the change is quite irrelevant to our EBIT assumption for 2024 and forward. A lower budget also increases the royalty potential we assume. In this update, we show our estimates regarding development fees for 2023-2026. It however feels convincing regarding the quality assurance regarding Alan Wake 2 that the relatively conservative CEO Tero Virtala, communicated in the Q3-comment that he is confident that Remedy will launch an excellent game in 2023.
Acquisition target – Tencent increases its stake
Recently it was announced that Tencent has increased its stake in Remedy from 3.8% of the capital to more than 5%. This of course is likely the explanation for the recent strength in the Remedy-stock, before the press release on November 28. Tencent likely bought the shares over the market pushing the share price upwards. We believe Remedy is one of the most obvious acquisition targets in the Nordic gaming industry. On the top of our buyer's list sits Epic Games followed by the three biggest players in the industry namely Sony, Tencent, and Microsoft. Interesting to know is that Tencent also owns 40% of Epic Games.
Valuation
Our base case assumes relatively successful launches of the upcoming new games based on Alan Wake, Control and Max Payne. We have lower expectations of its live-service games, due to a nonexistent track record. Our fair value range of EUR 14-55 per share with a base case of EUR 32 per share is unchanged after this research update.
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Revenues | 41.1 | 44.7 | 43.6 | 39.3 | 62.8 |
| Revenue Growth | 29.9% | 8.8% | -2.5% | -9.9% | 59.9% |
| EBITDA | 14.3 | 13.6 | 0.86 | -5.0 | 16.0 |
| EBIT | 13.2 | 12.7 | -1.1 | -7.2 | 13.3 |
| EBIT Margin | 32.1% | 28.4% | -2.6% | -18.4% | 21.1% |
| Net Income | 13.2 | 10.5 | -0.79 | -5.8 | 10.6 |
| EV/Revenue | 10.9 | 10.3 | 5.9 | 6.8 | 4.2 |
| EV/EBIT | 34.1 | 36.5 | -228 | -36.7 | 19.7 |
Case
De-risked high quality
Evidence
An "Epic" release in 2023
Supportive Analysis
Challenge
A big budget for a niched game
Challenge
Uncertain profitability in 2025
Valuation
An obvious takeover target
Game pipeline
Down below we show our assumptions regarding the pipeline of game releases. Of course, there is a big uncertainty regarding the timing of these game launches.
Both Vanguards and Condor are multiplayer online games. Vanguard is a free-to-play game that is released in collaboration with Tencent. These types of games often are released during their alpha stage in so-called “Early Access”. Condor will be a “games as a service” game, partly financed by 505 Games (Digital Bros).
Estimate changes
2022
Revenue is expected to be relatively unchanged compared to last year, meaning EUR43.6m million in revenue (the previous estimate was EUR45m). EBIT is expected to be around EUR-1.1m compared to our previous estimate of EUR-3.8m.
Q42022: Due to an unchanged revenue outlook from Remedy we have increased our revenue estimate for the last quarter of 2022. We expect revenue of EUR13.6m (EUR12m) with a positive EBIT of EUR0.9m (EUR-1.4m).
2023
We have for conservative reasons lowered our revenue estimates for 2023, due to the uncertainty of the release date of Alan Wake 2 and lowered estimated budgets for Max Payne Remake and Vanguard. We expect revenue of EUR39.3m (EUR45m) with an EBIT of EUR-7.2m (EUR-1.2m).
Remedy will co-finance (50% split) both games based on the franchise Control together with the co-publisher 505 Games. Therefore, Remedy has communicated the development budget for these two games. Control 2 will have a development budget of approximately EUR50m while Condor will have a development budget of EUR25m.
We expect Max Payne is entirely financed by Rockstar Games and around 80% of Vanguard is financed by Tencent. Both these games have been categorized as “Remedy AAA-games” which means a budget of EUR30-60m. We estimate a total development budget of EUR45m for Vanguard and EUR40m for Max Payne Remake.
The announced 50% development finance for Control 2 will generate a small amount of revenue during the year according to our estimate. However, we estimate the company will receive a lump sum from its publishing partner for all the work that has been done before the contracts were signed.
We have lowered the personnel expenses due to an earlier estimate miss regarding the impact of capitalization and external development from its relatively new IFRS reporting.
We estimate personnel costs will increase 9% during the year. External development will increase as well (around 8%) to meet the demand from the intensified projects that requires more personnel. Remedy will likely sign new projects generating development fees in 2026 and forward. However, we believe Remedy will self-finance more of its projects in the future.
2024
Remedy will acquire royalty income of EUR13m from Alan Wake 2 (released in 2023) during 2024 we assume. The majority of the revenue boost will come from this royalty according to our estimates. We also expect royalty income from Condor in 2024.
In our table above with our development fees estimates we see that both Max Payne Remake and Vanguard will be in full production in 2024 generating the majority of the income from development fees.
However, the lowered estimated budgets for Max Payne Remake and Vanguard especially have also impacted 2024. We have lowered our revenue estimate to EUR62.8m from EUR75.9m. This results in an EBIT of EUR13.3m (compared to the previous estimate of EUR14m). Due to our lowered personnel expenses, we expect a healthier EBIT margin of 21% (19%) in 2024.
The lowered budgets will as shown impact negatively in 2023, but from a more long-term perspective, the royalty potential is larger we assume.
As always, it is hard to predict the optionality in Remedy. It is, however, quite certain that Remedy will continue to make platform deals, which will lower the risk further in this already somewhat de-risked business case.
Valuation
Base Case EUR 32
CAGR of about 29% between 2023-2026 with EBIT margin expanding to 27%.
Terminal growth of 2% with terminal EBIT margin of 33%.
Our base case assumes relatively successful launches of Alan Wake, Control and Max Payne. We have lower expectations of its live-service games, due to a nonexistent track record.
Bear Case EUR 14
CAGR of about 19% between 2023-2026 with EBIT margin expanding to 18%.
Terminal growth of 2% with terminal EBIT margin of 25%.
Our bear case assumes mixed commercial results in launches of Alan Wake, Control and Max Payne. We have lower expectations of its live-service games, due to a nonexistent track record.
Bull Case 54
CAGR of about 33% between 2023-2026 with EBIT margin expanding to 35%.
Terminal growth of 2% with terminal EBIT margin of 36%.
Our bull case assumes successful launches of Alan Wake, Control and Max Payne. We also have relatively high expectations of its live-service games.
People: 4
Remedy has a good cost control that is managed in a risk-conscious manner that should benefit their shareholders in the long term. Large parts of management have been in the business since the start almost 20 years ago and have a good experience of game creation at the very highest level. Management owns 32% of the shares, which means that they have good incentives to manage the company in a shareholder-friendly manner. The Chairman of the Board has by far the largest shareholding of almost 24 percent. The CEO has more than 2 percent while the company's creative director is the next largest private shareholder of over 4% of total capital. The company's largest institutional owner is Accendo Capital, which has 15% of the total number of shares. Tencent, the largest gaming company in the world (by revenue) owns over 5% of Remedy.
Business: 3
Remedy profitability is very dependent on how successful its historically few game releases are. The company has strategic alliances with the most powerful companies in the industry. The gaming industry could be highly profitable but is also highly competitive. We however argue that Remedy’s competitive position is strengthening, with its good brand care and a growing positive reputation amongst players and industry giants.
Financials: 3
Remedy is a profitable company, but the operating profit has been volatile over the years given the company’s historical business model with long periods of game development. Remedy has a strong cash position of almost EUR57m. The balance sheet is clean, with conservative reporting standards and no aquistions.
| Income statement | |||||
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Revenues | 41.1 | 44.7 | 43.6 | 39.3 | 62.8 |
| Cost of Revenue | 1.5 | 0.02 | 12.7 | 12.2 | 12.4 |
| Operating Expenses | 25.3 | 31.1 | 30.1 | 32.0 | 34.5 |
| EBITDA | 14.3 | 13.6 | 0.86 | -5.0 | 16.0 |
| Depreciation | 0.00 | 0.07 | 0.44 | 0.39 | 0.92 |
| Amortizations | 0.00 | 0.79 | 1.5 | 1.9 | 0.92 |
| EBIT | 13.2 | 12.7 | -1.1 | -7.2 | 13.3 |
| Shares in Associates | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Interest Expenses | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Net Financial Items | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| EBT | 13.2 | 12.7 | -1.1 | -7.2 | 13.3 |
| Income Tax Expenses | 0.00 | 2.2 | -0.33 | -1.4 | 2.7 |
| Net Income | 13.2 | 10.5 | -0.79 | -5.8 | 10.6 |
| Balance sheet | |||||
| Assets | |||||
| Non-current assets | |||||
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Property, Plant and Equipment (Net) | 0.00 | 2.6 | 11.7 | 18.4 | 25.7 |
| Goodwill | 2.2 | 0.00 | 0.00 | 0.00 | 0.00 |
| Intangible Assets | 7.7 | 15.1 | 13.6 | 11.7 | 10.8 |
| Right-of-Use Assets | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Other Non-Current Assets | 0.00 | 3.6 | 3.6 | 3.6 | 2.6 |
| Total Non-Current Assets | 9.9 | 21.3 | 28.9 | 33.6 | 39.1 |
| Current assets | |||||
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Inventories | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Accounts Receivable | 14.2 | 17.1 | 15.3 | 13.8 | 15.7 |
| Other Current Assets | 0.55 | 10.1 | 8.7 | 7.9 | 6.3 |
| Cash Equivalents | 23.7 | 51.4 | 42.0 | 33.0 | 37.3 |
| Total Current Assets | 38.5 | 78.6 | 65.9 | 54.6 | 59.3 |
| Total Assets | 48.4 | 99.9 | 94.8 | 88.3 | 98.4 |
| Equity and Liabilities | |||||
| Equity | |||||
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Shareholder's Equity | 35.4 | 87.3 | 84.2 | 78.6 | 90.4 |
| Non-current liabilities | |||||
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Long Term Debt | 2.8 | 1.8 | 1.8 | 1.8 | 1.8 |
| Long Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Other Long Term Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Total Non-Current Liabilities | 2.8 | 1.8 | 1.8 | 1.8 | 1.8 |
| Current liabilities | |||||
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Short Term Debt | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Short Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Accounts Payable | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Other Current Liabilities | 10.2 | 10.7 | 8.7 | 7.9 | 6.3 |
| Total Current Liabilities | 10.2 | 10.7 | 8.7 | 7.9 | 6.3 |
| Total Liabilities and Equity | 48.4 | 99.9 | 94.8 | 88.3 | 98.5 |
| Cash flow | |||||
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Operating Cash Flow | 11.8 | 5.2 | 2.4 | -2.0 | 11.4 |
| Investing Cash Flow | -6.3 | -16.6 | -9.5 | -7.1 | -8.3 |
| Financing Cash Flow | -1.3 | 39.1 | -2.3 | 0.16 | 1.2 |
| Balance sheet | |||||
| Assets | |||||
| Non-current assets | |||||
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Property, Plant and Equipment (Net) | 0.00 | 2.6 | 11.7 | 18.4 | 25.7 |
| Goodwill | 2.2 | 0.00 | 0.00 | 0.00 | 0.00 |
| Intangible Assets | 7.7 | 15.1 | 13.6 | 11.7 | 10.8 |
| Right-of-Use Assets | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Other Non-Current Assets | 0.00 | 3.6 | 3.6 | 3.6 | 2.6 |
| Total Non-Current Assets | 9.9 | 21.3 | 28.9 | 33.6 | 39.1 |
| Current assets | |||||
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Inventories | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Accounts Receivable | 14.2 | 17.1 | 15.3 | 13.8 | 15.7 |
| Other Current Assets | 0.55 | 10.1 | 8.7 | 7.9 | 6.3 |
| Cash Equivalents | 23.7 | 51.4 | 42.0 | 33.0 | 37.3 |
| Total Current Assets | 38.5 | 78.6 | 65.9 | 54.6 | 59.3 |
| Total Assets | 48.4 | 99.9 | 94.8 | 88.3 | 98.4 |
| Equity and Liabilities | |||||
| Equity | |||||
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Non Controlling Interest | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Shareholder's Equity | 35.4 | 87.3 | 84.2 | 78.6 | 90.4 |
| Non-current liabilities | |||||
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Long Term Debt | 2.8 | 1.8 | 1.8 | 1.8 | 1.8 |
| Long Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Other Long Term Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Total Non-Current Liabilities | 2.8 | 1.8 | 1.8 | 1.8 | 1.8 |
| Current liabilities | |||||
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Short Term Debt | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Short Term Lease Liabilities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Accounts Payable | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| Other Current Liabilities | 10.2 | 10.7 | 8.7 | 7.9 | 6.3 |
| Total Current Liabilities | 10.2 | 10.7 | 8.7 | 7.9 | 6.3 |
| Total Liabilities and Equity | 48.4 | 99.9 | 94.8 | 88.3 | 98.5 |
| Cash flow | |||||
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Operating Cash Flow | 11.8 | 5.2 | 2.4 | -2.0 | 11.4 |
| Investing Cash Flow | -6.3 | -16.6 | -9.5 | -7.1 | -8.3 |
| Financing Cash Flow | -1.3 | 39.1 | -2.3 | 0.16 | 1.2 |
Disclosures and disclaimers
Contents