Remedy: Well-equipped for accelerated investments

Research Update

2023-02-13

07:30

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.

TO

DZ

Tomas Otterbeck

Danesh Zare

Contents

Investment thesis

A stable quarter from Remedy

Game pipeline

Financial projections

Valuation

Catalysts

Quality Rating

Financials

Rating definitions

The team

Download article

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.

Project “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 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.

Valuation

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.

Key financials

EURm2020202120222023e2024e
Revenues41.144.743.639.362.8
Revenue Growth29.9%8.8%-2.5%-9.9%59.9%
EBITDA14.313.61.9-4.216.0
EBIT13.212.7-0.54-6.413.3
EBIT Margin32.1%28.4%-1.2%-16.4%21.1%
Net Income13.210.5-0.64-5.110.6
EV/Revenue10.910.36.17.04.3
EV/EBIT34.136.5-495-42.720.4

Investment thesis

Case

De-risked high quality

Remedy is one of the last legendary independent game studios left in the world. The founder and top management own more than 30% of the company. The biggest gaming platforms are screaming for quality content and Remedy will continue to grasp this opportunity. The studio has therefore a lucrative risk-reward in its coming projects and is an obvious takeover target that de-risk the case further.

Evidence

An "Epic" release in 2023

In 2023 Alan Wake 2 will be released, Remedy’s strongest self-owned IP. We expect the total budget is approximately EUR 60 million (in comparison to the game Control with a budget of EUR 30 million). The higher budget, the financially strong publisher Epic Games, and the strength from the Alan Wake IP are three strong arguments that the game will likely sell at least twice as much as the game Control. For these reasons, we believe investors should have high expectations of the company’s growth prospects.

Supportive Analysis

Remedy is one of three critically acclaimed game studios that have been hand-picked by Epic Games for the first strategic “publishing push” with favorable terms almost unheard of for developers. The agreement between Epic Games and Remedy announced at the end of March 2020 is fully funded by Epic with at least a 50% profit share for Remedy and full ownership of the IP.

Challenge

A big budget for a niched game

Remedy creates relatively niched games. In its upcoming game (Alan Wake 2), which will be released in 2023 the budget is double as high as in its latest game. We estimate the game must sell 2.15 million copies before Remedy can receive a 50% profit share. For a relative niche product, this is a rather high sales number.

Challenge

Uncertain profitability in 2025

In 2024-2025 Remedy will launch two online multiplayer games according to our assumptions. This is new territory for Remedy and one of the games (Vanguard) will be free-to-play. The immediate financial impact will therefore likely be protracted, meaning lower revenue for a longer period of time for both of these live-service games. This could hurt the profitability in 2025 according to our estimates regarding the game pipeline.

Valuation

An obvious takeover target

Only a few independent major game studios are left after the recent years accelerated consolidation in the industry. We are certain that Remedy has a high position in the shopping list amongst many major players. Potential buyers are Epic Games, Tencent, Sony, Microsoft, and Take-Two Interactive we believe. This fact considerably de-risks an investment in Remedy we argue despite the relatively high valuation multiples in a short-term perspective.

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. 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).

Game pipeline

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. 

Financial projections

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.



Valuation

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.


Catalysts

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.

Quality Rating

People: 4

Business: 3

Financials: 2

Financials

Income statement
EURm2020202120222023e2024e
Revenues41.144.743.639.362.8
Cost of Revenue1.50.0211.811.412.4
Operating Expenses25.331.129.932.034.5
EBITDA14.313.61.9-4.216.0
Depreciation0.000.070.440.390.92
Amortizations0.000.791.51.90.92
EBIT13.212.7-0.54-6.413.3
Shares in Associates0.000.000.000.000.00
Interest Expenses0.000.000.000.000.00
Net Financial Items0.000.000.000.000.00
EBT13.212.7-0.54-6.413.3
Income Tax Expenses0.002.20.10-1.32.7
Net Income13.210.5-0.64-5.110.6
Balance sheet
Assets
Non-current assets
EURm2020202120222023e2024e
Property, Plant and Equipment (Net)0.002.611.718.425.7
Goodwill2.20.000.000.000.00
Intangible Assets7.715.113.611.710.8
Right-of-Use Assets0.000.000.000.000.00
Other Non-Current Assets0.003.63.63.62.6
Total Non-Current Assets9.921.328.933.639.1
Current assets
EURm2020202120222023e2024e
Inventories0.000.000.000.000.00
Accounts Receivable14.217.115.313.815.7
Other Current Assets0.5510.18.77.96.3
Cash Equivalents23.751.442.634.338.4
Total Current Assets38.578.666.655.960.4
Total Assets48.499.995.489.599.5
Equity and Liabilities
Equity
EURm2020202120222023e2024e
Non Controlling Interest0.000.000.000.000.00
Shareholder's Equity35.487.384.479.491.0
Non-current liabilities
EURm2020202120222023e2024e
Long Term Debt2.81.81.81.81.8
Long Term Lease Liabilities0.000.000.000.000.00
Other Non-Current Lease Liabilities0.000.000.000.000.00
Total Non-Current Liabilities2.81.81.81.81.8
Current liabilities
EURm2020202120222023e2024e
Short Term Debt0.000.000.000.000.00
Short Term Lease Liabilities0.000.000.000.000.00
Accounts Payable0.000.000.000.000.00
Other Current Liabilities10.210.78.77.96.3
Total Current Liabilities10.210.78.77.96.3
Total Liabilities and Equity48.499.994.989.199.1
Cash flow
EURm2020202120222023e2024e
Operating Cash Flow11.85.23.0-1.411.4
Investing Cash Flow-6.3-16.6-9.5-7.1-8.3
Financing Cash Flow-1.339.1-2.30.131.0

Rating definitions

The team

Disclosures and disclaimers

Premium Plan required to unlock

Unlock companies to access

more high quality research.

Contents

Investment thesis

A stable quarter from Remedy

Game pipeline

Financial projections

Valuation

Catalysts

Quality Rating

Financials

Rating definitions

The team

Download article