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Remedy: Well-equipped for accelerated investments
Redeye has postponed the expected release of the free-to-play game codenamed Vanguard in its research update. In our new assumptions Remedy will rely on premium games and one smaller game within the “games as a service” business model until 2026. This makes our estimate less uncertain during a 3-4 year period, which lowers the investment risk we ague.
A stable quarter from Remedy
Remedy reported a Q4 with revenue of EUR13.6m exactly in line with our estimates and an EBIT of EUR2.1m (above our estimate of EUR1.0m). In its outlook for 2023 Remedy expect revenue to decline from the previous year with a negative EBIT.
Ahead of the report we estimated a revenue decline of around 10% and a negative EBIT of EUR7m in 2023. Only minor changes have been made in this research update. The outlook came as no surprise to investors, as the Remedy-stock was unchanged on an otherwise negative stock market on February 10.
According to the earnings call with Remedy there are definitely synergies between both single-player Control-games and Project “Condor” which is also based on the universe of Control. The multiplayer game Condor will have much code and models from the world-building, the art, and core mechanics from Control from the start which will make this process advance faster than for example Vanguard we expect.
Our new fair value range is EUR 13-50 per share (EUR 14-54) with a Base case of EUR 30 (32). The small negative adjustment is due to a minor adjustment in our quality rating in the parameter “Financials”. Remedy´s good reputation amongst gamers and industry partners combined with its expected high pace of growth in 2024 and beyond justifies a premium to Nordic and international peers. Remedy is also an obvious takeover target due to its proven craftmanship and relative small size.
De-risked high quality
An "Epic" release in 2023
A big budget for a niched game
Uncertain profitability in 2025
An obvious takeover target
Remedy reported a Q4 with revenue of EUR13.6m exactly in line with our estimates and an EBIT of EUR2.1m (above our estimate of EUR1.0m). In its outlook for 2023 Remedy expect revenue to decline from the previous year with a negative EBIT. Remedy is investing in three of its five ongoing games, which of course is potentially good for the future profitability.
As seen in the table above our estimates for the quarter were very accurate. The only cost parameter that was significantly lower was COGS (called material and services in Remedy’s reporting) with almost a EUR1m difference.
In its guidance Remedy also wrote that the plan is to release one game each year starting now in 2023 with Alan Wake 2. The game soon moves into a polishing state as it is playable now from start to finish. We believe the game will be released during the period between August and October 2023, to prevent a potentially more competitive period closer to Christmas.
Three of its projects are still in the proof of concept stage, Control 2, and both its unannounced live-service multiplayer games. Max Payne Remake is already in the concept stage for obvious reasons (it is a remake…). In our projections regarding the pipeline, we assume that “Codename Condor” will be released in 2024, due to the fact that it has a smaller budget (shorter development time).
Changes: We have postponed the expected release of Vanguard to somewhere between H2 2026 and H1 2027 (previous H1 2025). At the same time we are feeling more convinced that Control 2 will be released in 2026 due to the fast advancement to “proof of concept phase” in its development.
Condor is expected to be released in 2024: According to the earnings call with Remedy there are definitely synergies between both single-player Control-games and Condor which is also based on the universe of Control. The multiplayer game Condor will have much code and models from the world-building, the art, and core mechanics from Control from the start which will make this process advance faster than for example Vanguard we expect.
We believe that Vanguard is the most uncertain project in Remedy’s game pipeline. The game has a different business model (free to play), it is built on a different game engine (Unreal 5), and the game development has already progressed slower than expected. On the positive side, Remedy is collaborating with the world’s biggest player within free-to-play, namely Tencent. And we also estimate that Tencent is financing at least 80% of the development which lowers the risk of the project significantly.
Our new assumptions that Remedy will rely on premium games and one smaller game within the “games as a service” (Condor) business model until 2026 make our estimate less uncertain during a 3-4 year period.
Due to the fact that it was no surprises in the year-end report we have not done any relevant changes. We only lowered our COGS-estimates somewhat in 2023 following the almost EUR1m difference between our Q4-estimate and the actual outcome. We have lowered COGS from EUR12.2m to EUR11.4m. The cautious change is due to the uncertainty of the outcome when the expected higher external development from the final phase of Alan Wake 2 will switch to higher capitalized costs from Control 2. Most people from Alan Wake 2 will work with the development of Control 2 (50% internal financing) and Max Payne in late 2023 (100% external financing).
Roughly estimates regarding development fees from all five ongoing game projects.
We have lowered our fair value range somewhat due to an increased WACC of 10% (9.5%). We have updated our quality rating. Due to profitability volatility, where EBIT in 2022 and 2023 in our financial model is negative, the parameter “Financials” scores 2 of 5 (previously 3 of 5).
Base Case EUR 30 (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 13 (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 50 (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.
Remedy is traded with a substantial premium compared to peers. The closest peers with a similar premium to the most relevant year 2024 (when Remedy potentially gets significant royalty income yet again) is CD Projekt Red and Paradox. CD Projekt Red (EV/EBIT: 29x) and Paradox (EV/EBIT: 18x) are traded around Remedy’s premium (EV/EBIT: 23x). All these three game studios own strong IPs, have a loyal customer base and are obvious takeover targets.
Alan Wake 2 is a major release
In its upcoming game (Alan Wake 2), which will be released in 2023 the budget is double as high as in its latest game called Control. We estimate the game must sell 2.15 million copies before Remedy can receive a 50% profit share. The game will start to generate royalty income in 2024 according to our assumptions. A better outcome would likely have a positive impact on the stock we believe.
Remedy is possibly acquired in 2024-2025
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, and the timing is most likely after the release of Alan Wake 2. Secondly “most likely” we believe one of the three biggest players in the industry is a potential buyer namely Sony, Tencent, and Microsoft (in that order). Thirdly on our buyer's list, we see Take-Two, the owner of the Remedy-created IP Max Payne.
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.
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.
Remedy as a developer is a strong brand itself.
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 EUR50m. The balance sheet is clean, with conservative reporting standards and no aquistions.
Good financial numbers in tha past years but weak in 2022 and 2023 results in a relativly low score.
|Cost of Revenue||1||0.02||12||11||12|
|Shares in Associates||-||-||-||-||-|
|Net Financial Items||-||-||-||-||-|
|Income Tax Expenses||-||2||0.1||(1)||3|
|Property, Plant and Equipment (Net)||-||3||12||18||26|
|Other Non-Current Assets||-||4||4||4||3|
|Total Non-Current Assets||10||21||29||34||39|
|Other Current Assets||1||10||9||8||6|
|Total Current Assets||38||79||67||56||60|
|Equity and Liabilities|
|Non Controlling Interest||-||-||-||-||-|
|Long Term Debt||3||2||2||2||2|
|Long Term Lease Liabilities||-||-||-||-||-|
|Other Non-Current Lease Liabilities||-||-||-||-||-|
|Total Non-Current Liabilities||3||2||2||2||2|
|Short Term Debt||-||-||-||-||-|
|Short Term Lease Liabilities||-||-||-||-||-|
|Other Current Liabilities||10||11||9||8||6|
|Total Current Liabilities||10||11||9||8||6|
|Total Liabilities and Equity||48||100||95||89||99|
|Operating Cash Flow||12||5||3||(1)||11|
|Investing Cash Flow||(6)||(17)||(10)||(7)||(8)|
|Financing Cash Flow||(1)||39||(2)||0.13||1|
Disclosures and disclaimers
A stable quarter from Remedy