Stillfront: Gradually moving towards organic growth

Research Update

2023-05-04

07:57

Redeye updates on Stillfront following the company's Q1-results which were in line with our expectations. The company leaves its outlook is unchanged and while we have slightly lowered near term organic growth we still expect it to sequentially improve over the coming quarters.

Hjalmar Ahlberg

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Q1-results in line with expectations

Stillfront reported revenue of SEK1,758m and EBITDAC of SEK415m which was largely in line with our expectations. Organic growth was slightly lower than expected, while the impact from currency benefitted growth more than expected.

Growth outlook unchanged

Commenting on the outlook for 2023, the company reiterates that it expects Stillfront and the market to return to organic growth during H2 2023 while also highlighting that market visibility is lower than usual. We have slightly trimmed our organic growth forecasts for 2023 while our growth forecasts for 2024-25E are largely unchanged.

Limited changes to estimates

With the Q1-results coming in close to our expectations and the outlook remains unchanged, we have made limited changes to our estimates (2023-25E EBITDA is trimmed c1-2%). Our valuation range is left unchanged where our base case stands at SEK33 which implies an EV/EBITDA of c8x for 2023E while the share currently trades at c5x EV/EBITDA 2023E.

Key financials

SEKm	2021	2022	2023e	2024e	2025e
Revenues	5,456.0	7,057.0	7,187.6	7,564.3	8,002.6
Revenue Growth	36.7%	29.3%	1.9%	5.2%	5.8%
EBITDA	2,125.0	2,595.0	2,670.3	2,847.4	3,016.8
EBIT	1,804.0	2,004.0	1,913.6	2,044.2	2,168.8
EBIT Margin	33.1%	28.4%	26.6%	27.0%	27.1%
Net Income	597.0	546.0	490.7	723.1	816.6
EV/EBITDA	10.4	4.8	4.9	4.1	3.3
EV/EBIT	12.2	6.2	6.8	5.7	4.6

Q1-results in line with forecasts

Stillfront reported revenue of SEK1,758m for Q1 2023 which was in line with our expectations. Organic growth was -5% while we had expected -2% while acquired growth was as expected (+3%) and currency impacted more positively than expected (+7% vs our estimate of +3%). The company reported an EBITDAC of SEK415m which was largely in line with our forecast of SEK419m. The net result was below our forecast due to larger net financials (impacted by earnout provisions and currency) and higher tax rate which can fluctuate between quarters but is more stable on an annual basis.

Looking at the performance per game genre, the Strategy portfolio performed close to our expectations while Simulation, RPG & Action was stronger and Casual & Mash-up was weaker. The strong performance in Simulation, RPG & Action was driven by Albion online which launched its dedicated Asia Pacific server (Albion East) in March resulting in growth above 100% in the quarter. In Casual & Mash-up growth was negatively impacted by the close of Moonfrog’s operations in Bangladesh and soft advertising revenue.

Results outcome
SEKm	Q1 22	Q2 22	Q3 22	Q4 22	Q1 23E	Q1 23A	Diff, %
Sales	1,677	1,811	1,788	1,781	1,758	1,758	0%
Work for own use	137	151	160	162	158	158
Other income	7	6	8	7	0	10
Total Revenue	1,821	1,968	1,956	1,950	1,916	1,926

Direct costs	-370	-439	-439	-426	-404	-392
Gross profit	1,307	1,372	1,349	1,355	1,354	1,366	1%
Gross margin, %	78%	76%	75%	76%	77%	78%

UA costs	-469	-474	-429	-439	-444	-473
Personnel expenses	-277	-303	-307	-307	-309	-312
Other costs	-89	-115	-111	-106	-110	-109
Total opex	-835	-892	-847	-852	-864	-894	3%

Adj EBITDAC	361	388	413	437	419	415	-1%
Adj EBITDAC margin, %	22%	21%	23%	25%	24%	24%

EBIT	271	255	252	71	237	214	-10%

Net income	142	115	86	203	121	61	-50%

Source: Redeye Research

Bookings and UAC
SEKm	Q1 22	Q2 22	Q3 22	Q4 22	Q1 23E	Q1 23A	Diff, %
Active portfolio, SEKm	1,596	1,713	1,694	1,693	1,683	1,653	-2%
Strategy	527	605	599	586	590	586	-1%
Simulation, Action & RPG	385	383	372	383	368	400	9%
Casual & Mash-up	684	725	723	724	724	667	-8%

Other, SEKm	80	92	78	67	75	92	23%

UA Costs	465	469	427	437	444	466	5%
Strategy	166	154	165	162	162	145	-11%
Simulation, Action & RPG	106	92	85	83	83	113	36%
Casual & Mash-up	193	223	177	192	199	208	4%

Source: Redeye Research

Growth outlook unchanged

Stillfront reiterates its outlook where it expects the company and the market to return to organic growth in the second half of the year, while it also states that market visibility remains lower than usual. We think the outlook for improved organic growth is supported by the positive development of Stillfront's key franchises in the Strategy and Action segments while the Casual segment should also see easier comps going forward. Though we have slightly trimmed our near-term organic growth expectations, we expect organic growth to improve from negative 2% during 2023 to c-5-6% in 2024-25E. We also continue to forecast an improvement in the EBTIDAC-margin over 2023-25E on the back of the company's increased focus on synergies and more efficient game development.

Stillfront: Revenue, organic growth and EBITDAC-margin

Limited changes to estimates

Overall, we make limited changes to our estimates with 2023-25E EBITDA trimmed c1-2% on the back of slightly lower growth assumptions. The table below summarises quarterly financials for Q1-Q4 2023 and annual financials for 2021-25E.

Stillfront financials, SEKm
SEKm	2021	2022	Q1 23	Q2 23E	Q3 23E	Q4 23E	2023	2024	2025
Sales	5,456	7,057	1,758	1,804	1,757	1,869	7,188	7,564	8,003
Growth, %	37%	29%	5%	0%	-2%	5%	2%	5%	6%
Organic	-8%	-2%	-6%	-3%	-2%	5%	-2%	5%	6%
Acquired	49%	20%	3%	0%	0%	0%	1%	0%	0%
FX/Other	-4%	11%	8%	3%	0%	0%	3%	0%	0%

Work for own use	463	610	158	162	158	168	647	681	720
Other income	19	28	10	0	0	0	10	0	0
Total Revenue	5,938	7,695	1,926	1,966	1,915	2,037	7,844	8,245	8,723

Direct costs	-1,224	-1,674	-392	-415	-404	-430	-1,641	-1,702	-1,801
Gross profit	4,232	5,383	1,366	1,389	1,353	1,439	5,547	5,862	6,202
Gross margin, %	78%	76%	78%	77%	77%	77%	77%	78%	78%

UA costs	-1,407	-1,811	-473	-467	-405	-478	-1,824	-1,880	-1,975
Personnel expenses	-889	-1,194	-312	-313	-319	-327	-1,271	-1,356	-1,451
Other costs	-293	-421	-109	-110	-110	-110	-439	-460	-480
Total opex	-2,589	-3,426	-894	-890	-835	-915	-3,533	-3,696	-3,905

Capitalised dev	-621	-996	-224	-235	-228	-243	-930	-946	-960
% of sales	-11%	-14%	-13%	-13%	-13%	-13%	-13%	-13%	-12%

Adj EBITDAC	1,504	1,599	416	427	448	449	1,740	1,902	2,056
Adj EBITDAC margin, %	28%	23%	24%	24%	25%	24%	24%	25%	26%

Non-recurring	-104	-226	-20	0	0	0	-20	0	0

EBITDA	2,021	2,369	620	662	676	692	2,650	2,847	3,017
EBITDA margin, %	37%	34%	35%	37%	38%	37%	37%	38%	38%

D&A	-985	-1,520	-407	-410	-409	-411	-1,637	-1,683	-1,728
ow PPA	-664	-929	-220	-220	-220	-220	-880	-880	-880

EBIT	1,036	849	213	252	267	282	1,014	1,164	1,289
EBIT margin, %	19%	12%	12%	14%	15%	15%	14%	15%	16%

Net finance	-242	-97	-107	-75	-75	-75	-332	-200	-200

PTP	794	752	106	177	192	207	682	964	1,089
Tax	-197	-206	-47	-44	-48	-52	-191	-241	-272
Tax rate, %	-25%	-27%	-44%	-25%	-25%	-25%	-28%	-25%	-25%

Net income	597	546	59	133	144	155	491	723	817

EPS	1.5	1.1	0.1	0.3	0.3	0.3	1.0	1.4	1.6

Source: Redeye Research

Valuation

With limited changes to estimate, we leave our valuation range unchanged where the base case stands at SEK33 while the bull case is SEK49 and the bear case SEK26.

As illustrated by the charts below, Stillfront trades at c5x NTM EV/EBITDA, which is at the lower end of its 2018-23 range and below the average of c9x. On our base case of SEK33, the share would be valued at 8x 2023-24E EBITDA.

Investment thesis

Case

Diversified gaming portfolio with focus on high return on UA investments

We believe Stillfront has an attractive and diverse gaming portfolio with a large number of games focusing on several different genres creating a low dependence on individual games. Coupled with a focus on strong returns on user acquisition we believe the company is well positioned to deliver profitable growth over the coming years. With a highly fragmented gaming market, the company is also likely to continue growing by M&A albeit with smaller impact than historically due to its increased size. Overall, this should yield continued earnings growth in Stillfront supporting our positive view on the company.

Evidence

Solid profitability and cash generation supports business model

Stillfront’s focus on directing UA investments to the games and channels that yields best returns are seen in its solid profitability and cash generation. With EBITDA-margins of around 35-40% the company has higher profitability than free-top-play sector peers. With a focus on long-life games it also has limited investment requirements which can be seen in a solid cash conversion (historically around 40-50% FCF/EBITDA excluding acquisitions).

Challenge

High competition for M&A and mixed track record

Stillfront has mainly grown its business through M&A having carried through more than 20 acquisitions since 2016. While most acquisitions have been done at attractive valuations and performed well, there are examples of weaker performance as well as high valuations which creates uncertainty of the potential for future M&A. High valuations are also an indication of another challenge for Stillfront where competitors also aim to consolidate the industry creating upwards pressure on valuations which also lowers the potential returns from M&A.

Valuation

Base case DCF supported by strong profitability and cash generation

We find a base case valuation of SEK33 per share Stillfront which is derived from a DCF-valuation. The base case implies an EV/EBITDA multiple of 8x on our 2023E EBITDA while the share has historically traded in a range of 5x to 15x twelve months forward EBITDA. Our base case assumes growth of 5% between 2024-38E and an average EBITDA-margin margin of 39% for the same period. The terminal growth is set to 2% by 2039 with an EBITDA-margin of 37.5%.

Quality Rating

People: 3

Stillfront has a strong management team with strong insights into the free-to-play gaming sector. Insiders and founders have significant ownership that aligns incentives with other shareholders. The track record is mixed with performance being weaker than expected in 2021 while the company has seen improved performance during 2022.

Business: 3

Stillfront’s products have high gross margins and a relatively stable customer base with good leverage in the business model. The underlying growth in the gaming industry is a key driver for continued future growth for the company. We think Stillfront has good potential for both organic growth and growth fueled by acquisitions the next coming years.

Financials: 2

Stillfront’s focus on high returns on user acquisition investments means the company creates profitable growth. The company has positive cash flows and high net margins on their products. Both stability and profitability are increasing steadily. However, organic growth performance has been mixed and return on asset and equity is low. Some of the acquisitions are funded by debt, and the company keeps itself at a healthy leverage ratio with a target of below 2x net debt to EBITDA. Gaming products are somewhat differentiated and are not affected by a greater extent of the business climate in the world.

Financials

Income statement
SEKm	2021	2022	2023e	2024e	2025e
Revenues	5,456.0	7,057.0	7,187.6	7,564.3	8,002.6
Cost of Revenue	1,224.0	1,674.0	1,640.8	1,702.0	1,800.6
Operating Expenses	2,107.0	2,788.0	2,876.5	3,015.0	3,185.2
EBITDA	2,125.0	2,595.0	2,670.3	2,847.4	3,016.8
Depreciation	58.0	73.0	76.7	83.2	88.0
Amortizations	927.0	1,447.0	1,560.0	1,600.0	1,640.0
EBIT	1,804.0	2,004.0	1,913.6	2,044.2	2,168.8
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	242.0	97.0	332.0	200.0	200.0
Net Financial Items	-242.0	-97.0	-332.0	-200.0	-200.0
EBT	794.0	752.0	681.6	964.2	1,088.8
Income Tax Expenses	197.0	206.0	190.8	241.0	272.2
Net Income	597.0	546.0	490.7	723.1	816.6
Balance sheet
Assets
Non-current assets
SEKm	2021	2022	2023e	2024e	2025e
Property, Plant and Equipment (Net)	127.0	157.0	114.4	69.0	21.0
Goodwill	12,752.0	16,043.0	16,043.0	16,043.0	16,043.0
Intangible Assets	5,244.0	6,149.0	5,518.8	4,864.4	4,184.7
Right-of-Use Assets	0.00	0.00	0.00	0.00	0.00
Other Non-Current Assets	46.0	91.0	91.0	91.0	91.0
Total Non-Current Assets	18,169.0	22,440.0	21,767.3	21,067.4	20,339.7
Current assets
SEKm	2021	2022	2023e	2024e	2025e
Inventories	0.00	0.00	0.00	0.00	0.00
Accounts Receivable	747.0	697.0	862.5	907.7	960.3
Other Current Assets	0.00	0.00	0.00	0.00	0.00
Cash Equivalents	1,133.0	989.0	1,900.7	3,316.2	4,851.7
Total Current Assets	1,880.0	1,686.0	2,763.2	4,223.9	5,812.0
Total Assets	20,049.0	24,126.0	24,530.5	25,291.3	26,151.7
Equity and Liabilities
Equity
SEKm	2021	2022	2023e	2024e	2025e
Non Controlling Interest	23.0	6.0	6.0	6.0	6.0
Shareholder's Equity	9,772.0	14,237.0	14,727.7	15,450.9	16,267.4
Non-current liabilities
SEKm	2021	2022	2023e	2024e	2025e
Long Term Debt	3,950.0	4,635.0	4,635.0	4,635.0	4,635.0
Long Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Other Long Term Liabilities	3,418.0	3,274.0	3,274.0	3,274.0	3,274.0
Total Non-Current Liabilities	7,368.0	7,909.0	7,909.0	7,909.0	7,909.0
Current liabilities
SEKm	2021	2022	2023e	2024e	2025e
Short Term Debt	597.0	79.0	79.0	79.0	79.0
Short Term Lease Liabilities	0.00	0.00	0.00	0.00	0.00
Accounts Payable	1,035.0	805.0	718.8	756.4	800.3
Other Current Liabilities	1,253.0	1,091.0	1,091.0	1,091.0	1,091.0
Total Current Liabilities	2,885.0	1,975.0	1,888.8	1,926.4	1,970.3
Total Liabilities and Equity	20,048.0	24,127.0	24,531.5	25,292.3	26,152.7
Cash flow
SEKm	2021	2022	2023e	2024e	2025e
Operating Cash Flow	1,620.0	2,028.0	1,875.7	2,398.8	2,535.9
Investing Cash Flow	-4,176.0	-3,758.0	-964.0	-983.4	-1,000.3
Financing Cash Flow	2,612.0	1,463.0	0.00	0.00	0.00

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