Stillfront: Trimmed growth forecast, increased EBITDAC
Research Update
2023-07-27
07:00
Redeye updates on Stillfront following the company’s Q2-results where revenue was close to our expectations while EBITDAC was stronger than expected. The growth outlook remains uncertain, and we have trimmed our growth forecast somewhat, however, EBITDAC estimates are slightly increased on the back of stronger profitability and lower capital development costs.
HA
AH
Hjalmar Ahlberg
Anton Hoof
Stillfront reported Q2 revenue in line with our forecast although organic growth was somewhat lower than our estimate. However, EBITDAC was much stronger than expected, driven by lower-than-estimated UA costs and capitalized development.
Commenting on the outlook, Stillfront states that it has seen indications of a stronger underlying market and reiterates that it will return to organic growth during H2 2023 where growth also will be supported from new games going into soft-launch. Still, with a high focus on ROI and stricter capex allocation we have slightly lowered our growth assumptions for 2023-25E.
While we have lowered our growth assumptions, we have increased our EBITDAC estimates driven by the beat in Q2 for 2023E and lowered capitalised development costs for 2024-25E. Our valuation range is unchanged where the base case of SEK33 implies an EV/EBITDA of c8x for 2023-24E while the share currently trades at c4-5x EV/EBITDA 2023-24E.
SEKm | 2021 | 2022 | 2023e | 2024e | 2025e |
Revenues | 5,456.0 | 7,057.0 | 7,123.5 | 7,383.6 | 7,734.7 |
Revenue Growth | 36.7% | 29.3% | 0.9% | 3.7% | 4.8% |
EBITDA | 2,125.0 | 2,595.0 | 2,685.8 | 2,761.3 | 2,888.4 |
EBIT | 1,804.0 | 2,004.0 | 1,900.7 | 1,960.1 | 2,043.3 |
EBIT Margin | 33.1% | 28.4% | 26.7% | 26.5% | 26.4% |
Net Income | 597.0 | 546.0 | 247.8 | 654.1 | 716.5 |
EV/EBITDA | 10.4 | 4.8 | 4.9 | 4.3 | 3.5 |
EV/EBIT | 12.2 | 6.2 | 7.0 | 6.0 | 5.0 |
Stillfront reported revenue of SEK1,812m for Q2 2023 which was in line with our estimate of SEK1,804m. Organic growth was -5% while we had forecasted -3%. The company reported strong profitability with an EBITDAC-margin of 28% while we had forecasted 24% and the EBITDAC of SEK516m was 21% above our forecast of SEK427m. The strong profitability was driven by a strong gross margin together with lower UA costs as well as lower than forecasted capitalized development costs (c11% of sales while we forecasted c13% of sales). EBIT was also above expectations coming in at SEK275m while we forecasted SEK252m. Net result was negative owing to a revaluation of earn-outs driven by Albion Online and discounting effects.
Looking at the performance per game segment, Strategy was somewhat lower than expected while Simulation, Action & RPG was stronger and Casual largely in line with our estimate. The strong performance in Simulation, Action & RPG was mainly driven by Albion Online. UA costs were lower than expected in both Strategy and Casual while it was higher in Simulation, Action & RPG.
Results outcome | |||||||
SEKm | Q2 22 | Q3 22 | Q4 22 | Q1 23 | Q2 23E | Q2 23A | Diff, % |
Sales | 1,811 | 1,788 | 1,781 | 1,758 | 1,804 | 1,812 | 0% |
Work for own use | 151 | 160 | 162 | 158 | 162 | 148 | |
Other income | 6 | 8 | 7 | 10 | 0 | 3 | |
Total Revenue | 1,968 | 1,956 | 1,950 | 1,926 | 1,966 | 1,963 | |
Direct costs | -439 | -439 | -426 | -392 | -415 | -394 | |
Gross profit | 1,372 | 1,349 | 1,355 | 1,366 | 1,389 | 1,418 | 2% |
Gross margin, % | 76% | 75% | 76% | 78% | 77% | 78% | |
UA costs | -474 | -429 | -439 | -473 | -467 | -434 | |
Personnel expenses | -303 | -307 | -307 | -312 | -313 | -323 | |
Other costs | -115 | -111 | -106 | -109 | -110 | -104 | |
Total opex | -892 | -847 | -852 | -894 | -890 | -861 | -3% |
Adj EBITDAC | 388 | 413 | 437 | 416 | 427 | 516 | 21% |
Adj EBITDAC margin, % | 21% | 23% | 25% | 24% | 24% | 28% | |
EBIT | 255 | 252 | 71 | 213 | 252 | 275 | 9% |
Net income | 115 | 86 | 203 | 59 | 133 | -54 | -141% |
Source: Redeye Research |
Bookings and UAC | |||||||
SEKm | Q2 22 | Q3 22 | Q4 22 | Q1 23 | Q2 23E | Q2 23A | Diff, % |
Active portfolio, SEKm | 1,713 | 1,694 | 1,693 | 1,653 | 1,714 | 1,698 | -1% |
Strategy | 605 | 599 | 586 | 586 | 609 | 554 | -9% |
Simulation, Action & RPG | 383 | 372 | 383 | 400 | 414 | 467 | 13% |
Casual & Mash-up | 725 | 723 | 724 | 667 | 691 | 677 | -2% |
Other, SEKm | 92 | 78 | 67 | 92 | 90 | 112 | 24% |
UA Costs | 469 | 427 | 437 | 466 | 467 | 428 | -8% |
Strategy | 154 | 165 | 162 | 145 | 152 | 129 | -15% |
Simulation, Action & RPG | 92 | 85 | 83 | 113 | 108 | 114 | 6% |
Casual & Mash-up | 223 | 177 | 192 | 208 | 207 | 184 | -11% |
Source: Redeye Research |
Stillfront reiterated its view that the company and the market will return to organic growth during H2 2023. The company further comments that it has seen improvements during Q2 with positive momentum on marketing ROI while it also sees potential for new game launches to help growth in H2 2023. However, the company also remains prudent when deploying UA and capex for growth investments for game development which partly drove the strong profitability in Q2. Overall, we believe growth is likely to be somewhat lower than we earlier forecasted and we have reduced our organic growth for 2023E to negative 3% (previous negative 2%) while the forecast for 2024E is 4% (previous 5%) and 2025E is 5% (previous 6%). The chart below illustrates revenue per genre and total organic growth for the group over 2019-2025E.
Stillfront: Revenue per genre and group organic growth
Source: Redeye Research
While we have lowered our growth forecasts this is mitigated by stronger profitability and reduced capital development costs. For 2023E our EBITDAC is increased with 7% driven by the strong beat in Q2 and slightly profitability in Q3-Q4 2023. Our 2024-25E EBITDAC is increased with 1-2% driven mainly by lower capital development. 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 23 | Q3 23E | Q4 23E | 2023 | 2024 | 2025 |
Sales | 5,456 | 7,057 | 1,758 | 1,812 | 1,733 | 1,821 | 7,124 | 7,384 | 7,735 |
Growth, % | 37% | 29% | 5% | 0% | -3% | 2% | 1% | 4% | 5% |
Organic | -8% | -2% | -6% | -7% | -4% | 2% | -4% | 4% | 5% |
Acquired | 49% | 20% | 3% | 0% | 0% | 0% | 1% | 0% | 0% |
FX/Other | -4% | 11% | 8% | 7% | 1% | 0% | 4% | 0% | 0% |
Work for own use | 463 | 610 | 158 | 148 | 156 | 164 | 626 | 665 | 696 |
Other income | 19 | 28 | 10 | 3 | 0 | 0 | 13 | 0 | 0 |
Total Revenue | 5,938 | 7,695 | 1,926 | 1,963 | 1,889 | 1,984 | 7,762 | 8,048 | 8,431 |
Direct costs | -1,224 | -1,674 | -392 | -394 | -399 | -419 | -1,603 | -1,661 | -1,740 |
Gross profit | 4,232 | 5,383 | 1,366 | 1,418 | 1,334 | 1,402 | 5,520 | 5,722 | 5,994 |
Gross margin, % | 78% | 76% | 78% | 78% | 77% | 77% | 77% | 78% | 78% |
UA costs | -1,407 | -1,811 | -473 | -433 | -393 | -465 | -1,764 | -1,820 | -1,891 |
Personnel expenses | -889 | -1,194 | -312 | -323 | -321 | -326 | -1,282 | -1,357 | -1,451 |
Other costs | -293 | -421 | -109 | -104 | -107 | -107 | -427 | -448 | -460 |
Total opex | -2,589 | -3,426 | -894 | -860 | -821 | -898 | -3,473 | -3,625 | -3,802 |
Capitalised dev | -621 | -996 | -224 | -192 | -199 | -209 | -825 | -812 | -812 |
% of sales | -11% | -14% | -13% | -11% | -12% | -12% | -12% | -11% | -11% |
Adj EBITDAC | 1,504 | 1,599 | 416 | 517 | 470 | 458 | 1,861 | 1,949 | 2,076 |
Adj EBITDAC margin, % | 28% | 23% | 24% | 29% | 27% | 25% | 26% | 26% | 27% |
Non-recurring | -104 | -226 | -20 | -13 | 0 | 0 | -33 | 0 | 0 |
EBITDA | 2,021 | 2,369 | 620 | 696 | 669 | 668 | 2,653 | 2,761 | 2,888 |
EBITDA margin, % | 37% | 34% | 35% | 38% | 39% | 37% | 37% | 37% | 37% |
D&A | -985 | -1,520 | -407 | -421 | -421 | -422 | -1,671 | -1,689 | -1,733 |
ow PPA | -664 | -929 | -220 | -222 | -222 | -222 | -886 | -888 | -888 |
EBIT | 1,036 | 849 | 213 | 275 | 248 | 246 | 982 | 1,072 | 1,155 |
EBIT margin, % | 19% | 12% | 12% | 15% | 14% | 13% | 14% | 15% | 15% |
Net finance | -242 | -97 | -107 | -272 | -85 | -85 | -549 | -200 | -200 |
PTP | 794 | 752 | 106 | 3 | 163 | 161 | 433 | 872 | 955 |
Tax | -197 | -206 | -47 | -57 | -41 | -40 | -185 | -218 | -239 |
Tax rate, % | -25% | -27% | -44% | -1900% | -25% | -25% | -43% | -25% | -25% |
Net income | 597 | 546 | 59 | -54 | 122 | 120 | 248 | 654 | 716 |
EPS | 1.5 | 1.1 | 0.1 | -0.1 | 0.2 | 0.2 | 0.5 | 1.3 | 1.4 |
Source: Redeye Research |
With small 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.
Source: Factset
Case
Diversified gaming portfolio with focus on high return on UA investments
Evidence
Solid profitability and cash generation supports business model
Challenge
High competition for M&A and mixed track record
Valuation
Base case DCF supported by strong profitability and cash generation
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.
Income statement | |||||
SEKm | 2021 | 2022 | 2023e | 2024e | 2025e |
Revenues | 5,456.0 | 7,057.0 | 7,123.5 | 7,383.6 | 7,734.7 |
Cost of Revenue | 1,224.0 | 1,674.0 | 1,603.3 | 1,661.3 | 1,740.3 |
Operating Expenses | 2,107.0 | 2,788.0 | 2,834.4 | 2,961.0 | 3,106.0 |
EBITDA | 2,125.0 | 2,595.0 | 2,685.8 | 2,761.3 | 2,888.4 |
Depreciation | 58.0 | 73.0 | 74.1 | 81.2 | 85.1 |
Amortizations | 927.0 | 1,447.0 | 1,597.0 | 1,608.0 | 1,648.0 |
EBIT | 1,804.0 | 2,004.0 | 1,900.7 | 1,960.1 | 2,043.3 |
Shares in Associates | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Interest Expenses | 242.0 | 97.0 | 549.0 | 200.0 | 200.0 |
Net Financial Items | -242.0 | -97.0 | -549.0 | -200.0 | -200.0 |
EBT | 794.0 | 752.0 | 432.7 | 872.1 | 955.3 |
Income Tax Expenses | 197.0 | 206.0 | 184.9 | 218.0 | 238.8 |
Net Income | 597.0 | 546.0 | 247.8 | 654.1 | 716.5 |
Balance sheet | |||||
Assets | |||||
Non-current assets | |||||
SEKm | 2021 | 2022 | 2023e | 2024e | 2025e |
Property, Plant and Equipment (Net) | 127.0 | 157.0 | 118.7 | 74.4 | 28.0 |
Goodwill | 12,752.0 | 16,043.0 | 16,043.0 | 16,043.0 | 16,043.0 |
Intangible Assets | 5,244.0 | 6,149.0 | 5,376.7 | 4,580.8 | 3,745.0 |
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 | 21,629.3 | 20,789.2 | 19,907.0 |
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 | 854.8 | 886.0 | 928.2 |
Other Current Assets | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
Cash Equivalents | 1,133.0 | 989.0 | 1,797.0 | 3,285.9 | 4,877.7 |
Total Current Assets | 1,880.0 | 1,686.0 | 2,651.8 | 4,172.0 | 5,805.8 |
Total Assets | 20,049.0 | 24,126.0 | 24,281.1 | 24,961.2 | 25,712.8 |
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 | 14,484.8 | 15,138.8 | 15,855.3 |
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 | 712.4 | 738.4 | 773.5 |
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 | 1,882.4 | 1,908.4 | 1,943.5 |
Total Liabilities and Equity | 20,048.0 | 24,127.0 | 24,282.1 | 24,962.2 | 25,713.8 |
Cash flow | |||||
SEKm | 2021 | 2022 | 2023e | 2024e | 2025e |
Operating Cash Flow | 1,620.0 | 2,028.0 | 1,668.4 | 2,338.1 | 2,442.6 |
Investing Cash Flow | -4,176.0 | -3,758.0 | -860.4 | -849.1 | -850.8 |
Financing Cash Flow | 2,612.0 | 1,463.0 | 0.00 | 0.00 | 0.00 |
Disclosures and disclaimers