Stillfront: Continued soft growth outlook

Research Update

2023-10-26

07:02

Redeye updates on Stillfront following its Q3-results which came in below our expectations. While the soft Q3-report was partly driven by one-off effects, the return to organic growth looks to take more time than expected and we trim our growth forecasts.

Hjalmar Ahlberg

Anton Hoof

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Q3-results below forecasts

Stillfront’s Q3-results came in weaker than expected with topline 4% below our estimate and EBITDAC 13% lower than forecasted. The main deviation was explained by Albion Online which was hit by DDoS attacks and in-game bots resulting in negative gameplay experience. This was seen in the Simulation, Action & RPG segment which saw a large sequential decline in bookings and DAUs.

Return to organic growth pushed forward

With organic growth coming in at negative 10%, Stillfront does not believe it is likely that the company will achieve positive organic growth by the end of the year. While the company states that it has a healthy pipeline of new games that could improve growth in the coming quarters, the growth outlook remains uncertain and we have lowered our growth forecasts.

Lowered estimates and valuation range

On the back of the weaker-than-expected Q3-results coupled with lowered growth forecasts we cut our EBITDA forecasts with 5-8% for 2023-25E. We also lower our valuation range which is further impacted by an increase in our risk-free rate assumption and our new base case stands at SEK27 (SEK33). Stillfront currently trades at c3x 2024E EBITDA while our base case implies 8x 2024E EBITDA.

Key financials

SEKm	2021	2022	2023e	2024e	2025e
Revenues	5,456.0	7,057.0	6,994.1	7,106.9	7,446.3
Revenue Growth	36.7%	29.3%	-0.9%	1.6%	4.8%
EBITDA	2,125.0	2,595.0	2,561.2	2,550.6	2,666.9
EBIT	1,804.0	2,004.0	1,752.9	1,712.5	1,825.0
EBIT Margin	33.1%	28.4%	25.1%	24.1%	24.5%
Net Income	597.0	546.0	78.9	474.3	558.8
EV/EBITDA	10.4	4.8	3.9	3.4	2.7
EV/EBIT	12.2	6.2	5.8	5.1	4.0
P/E	13.7	5.1	6.1	4.6	4.3

Q3-results below forecast

Stillfront reported revenue of SEK1,671m for Q3 2023 which was c4% lower than our estimate of SEK1,733m. Adjusted EBITDAC came in at SEK409m while we had forecasted SEK470m. The main driver of the weaker-than-expected outcome was the negative performance from Albion Online which impacted revenue with cSEK80m and EBITDAC with cSEK50m. The company reports that the game saw an increase of in-game bots and DDoS attacks which impacted gameplay negatively. The issues are reported to be resolved and the company expects stronger performance from the game in the coming quarters.

Looking at the performance per game segment, Strategy and Casual & Mash-up saw bookings in line with our forecasts. Simulation, Action & RPG came in lower than expected driven by the above-mentioned impact on Albion Online. The segment saw a sequential decline in bookings and DAUs after strong performance in Q2 2023 driven by the launch of Albion East. UA costs were higher than expected, driven by Strategy and Casual while Simulation had lower UA costs.

The tables below summarize the Q3 outcome compared to our forecast.

Stillfront: Results outcome
SEKm	Q3 22	Q4 22	Q1 23	Q2 23	Q3 23E	Q3 23A	Diff, %
Sales	1,788	1,781	1,758	1,812	1,733	1,671	-4%
Work for own use	160	162	158	148	156	136
Other income	8	7	10	3	0	8
Total Revenue	1,956	1,950	1,926	1,963	1,889	1,815

Direct costs	-439	-426	-392	-394	-399	-374
Gross profit	1,349	1,355	1,366	1,418	1,334	1,297	-3%
Gross margin, %	75%	76%	78%	78%	77%	78%

UA costs	-429	-439	-473	-433	-393	-429
Personnel expenses	-307	-307	-312	-323	-321	-309
Other costs	-111	-106	-109	-104	-107	-108
Total opex	-847	-852	-894	-860	-821	-846	3%

Adj EBITDAC	413	437	416	517	470	409	-13%
Adj EBITDAC margin, %	23%	25%	24%	29%	27%	24%

EBIT	252	71	213	275	248	135	-46%

Net income	86	203	59	-54	122	-5	-104%

Source: Redeye Research

Stillfront: Bookings and UAC
SEKm	Q3 22	Q4 22	Q1 23	Q2 23	Q3 23E	Q3 23A	Diff, %
Active portfolio, SEKm	1,694	1,693	1,653	1,698	1,643	1,586	-3%
Strategy	599	586	586	554	539	542	1%
Simulation, Action & RPG	372	383	400	467	450	384	-15%
Casual & Mash-up	723	724	667	677	654	661	1%

Other, SEKm	78	67	92	112	90	77	-14%

UA Costs	427	437	466	427	388	426	10%
Strategy	165	162	145	129	121	145	20%
Simulation, Action & RPG	85	83	113	114	103	93	-10%
Casual & Mash-up	177	192	208	184	164	188	15%

Source: Redeye Research

Return to organic growth pushed forward

Stillfront reported organic growth of negative 10% in the quarter which was below our forecast of negative 4%. While the weak outcome looks to be mainly explained by the one-off effects in Albion Online, the company no longer expect to return to organic growth in Q4 2023. The company furthermore states that it can take some time before Albion Online fully recovers the negative effect of around SEK80m that impacted topline in Q3 2023. Although Stillfront sees potential to improve growth in the coming quarters from a healthy pipeline of new games, the lower run-rate results in lower topline assumptions in the coming quarters. As illustrated in the chart below, we now forecast organic growth of around 2% in 2024 (previous 4%) and 5% in 2025E (previous 5%). While the company has also taken measures to lower opex, the lower topline results in somewhat lower profitability than earlier forecasted with an EBITDAC-margin of 25% in 2024E (previous 26%) and 25% in 2025E (previous 27%).

Stillfront: Revenue, organic growth and EBITDAC-margin

Source: Redeye Research

Lowered estimates

On the back of the weaker-than-expected Q3-result outcome and a continued soft growth outlook, we lower our topline estimates with c 2-4% for 2023-25E while EBITDAC is down 5-8%. The table below summarises quarterly financials for Q1-Q4 2023 and annual financials for 2021-25E.

Stillfront: Group P&L, SEKm
SEKm	2021	2022	Q1 23	Q2 23	Q3 23	Q4 23E	2023	2024	2025
Sales	5,456	7,057	1,758	1,812	1,671	1,753	6,994	7,107	7,446
Growth, %	37%	29%	5%	0%	-7%	-2%	-1%	2%	5%
Organic	-8%	-2%	-6%	-7%	-11%	-6%	-7%	2%	5%
Acquired	49%	20%	3%	0%	0%	0%	1%	0%	0%
FX/Other	-4%	11%	8%	7%	5%	4%	6%	0%	0%

Work for own use	463	610	158	148	136	140	582	569	596
Other income	19	28	10	3	8	0	21	0	0
Total Revenue	5,938	7,695	1,926	1,963	1,815	1,893	7,597	7,675	8,042

Direct costs	-1,224	-1,674	-392	-394	-374	-403	-1,563	-1,599	-1,675
Gross profit	4,232	5,383	1,366	1,418	1,297	1,350	5,431	5,508	5,771
Gross margin, %	78%	76%	78%	78%	78%	77%	78%	78%	78%

UA costs	-1,407	-1,811	-473	-433	-430	-450	-1,786	-1,761	-1,830
Personnel expenses	-889	-1,194	-312	-323	-309	-312	-1,256	-1,317	-1,410
Other costs	-293	-421	-109	-104	-108	-110	-431	-448	-460
Total opex	-2,589	-3,426	-894	-860	-847	-872	-3,473	-3,526	-3,700

Capitalised dev	-621	-996	-224	-192	-184	-202	-802	-782	-782
% of sales	-11%	-14%	-13%	-11%	-11%	-12%	-11%	-11%	-11%

Adj EBITDAC	1,504	1,599	416	517	410	417	1,760	1,769	1,885
Adj EBITDAC margin, %	28%	23%	24%	29%	25%	24%	25%	25%	25%

Non-recurring	-104	-226	-20	-13	-27	0	-60	0	0

EBITDA	2,021	2,369	620	696	567	618	2,501	2,551	2,667
EBITDA margin, %	37%	34%	35%	38%	34%	35%	36%	36%	36%

D&A	-985	-1,520	-407	-421	-431	-429	-1,688	-1,718	-1,722
ow PPA	-664	-929	-220	-222	-218	-220	-880	-880	-880

EBIT	1,036	849	213	275	136	189	813	832	945
EBIT margin, %	19%	12%	12%	15%	8%	11%	12%	12%	13%

Net finance	-242	-97	-107	-272	-124	-85	-588	-200	-200

PTP	794	752	106	3	12	104	225	632	745
Tax	-197	-206	-47	-57	-16	-26	-146	-158	-186
Tax rate, %	-25%	-27%	-44%	-1900%	-133%	-25%	-65%	-25%	-25%

Net income	597	546	59	-54	-4	78	79	474	559

EPS	1.5	1.1	0.1	-0.1	0.0	0.2	0.2	0.9	1.1

Source: Redeye Research

Valuation

Our valuation range is also lowered owing to the estimate cuts and is further negatively impacted by an increase in Redeye’s risk-free interest rate which now stands at 3.0% compared to 2.5% previously. Our new base case is SEK27 (SEK33) while the bull case is SEK39 (SEK49) and the bear case SEK22 (SEK26). The table below summarizes the key assumptions for our valuation scenarios.

Stillfront: Fair Value Range
SEK	Bear Case	Base Case	Bull Case

Value per share	22	27	39

Revenue CAGR 2024-2028	4%	6%	9%
Revenue CAGR 2029-2038	3%	4%	5%
Growth Terminal	2%	2%	2%

EBITDA-margin 2024-2038	34%	37%	42%
EBITDA Terminal	33%	35%	40%

Source: Redeye Research

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 SEK27 per share Stillfront which is derived from a DCF-valuation. The base case implies an EV/EBITDA multiple of 8x on our 2024E EBITDA while the share has historically traded in a range of 3x 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	6,994.1	7,106.9	7,446.3
Cost of Revenue	1,224.0	1,674.0	1,563.2	1,599.1	1,675.4
Operating Expenses	2,107.0	2,788.0	2,869.7	2,957.2	3,103.9
EBITDA	2,125.0	2,595.0	2,561.2	2,550.6	2,666.9
Depreciation	58.0	73.0	75.3	78.2	81.9
Amortizations	927.0	1,447.0	1,613.0	1,640.0	1,640.0
EBIT	1,804.0	2,004.0	1,752.9	1,712.5	1,825.0
Shares in Associates	0.00	0.00	0.00	0.00	0.00
Interest Expenses	242.0	97.0	588.0	200.0	200.0
Net Financial Items	-242.0	-97.0	-588.0	-200.0	-200.0
EBT	794.0	752.0	224.9	632.5	745.0
Income Tax Expenses	197.0	206.0	146.0	158.1	186.3
Net Income	597.0	546.0	78.9	474.3	558.8
Balance sheet
Assets
Non-current assets
SEKm	2021	2022	2023e	2024e	2025e
Property, Plant and Equipment (Net)	127.0	157.0	113.5	70.8	26.2
Goodwill	12,752.0	16,043.0	16,880.0	16,880.0	16,880.0
Intangible Assets	5,244.0	6,149.0	5,337.6	4,479.4	3,621.2
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	22,422.1	21,521.2	20,618.4
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	839.3	852.8	893.6
Other Current Assets	0.00	0.00	0.00	0.00	0.00
Cash Equivalents	1,133.0	989.0	838.0	2,210.9	3,665.7
Total Current Assets	1,880.0	1,686.0	1,677.3	3,063.8	4,559.3
Total Assets	20,049.0	24,126.0	24,099.3	24,585.0	25,177.7
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	14,315.9	14,790.3	15,349.0
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	699.4	710.7	744.6
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	1,869.4	1,880.7	1,914.6
Total Liabilities and Equity	20,048.0	24,127.0	24,100.3	24,586.0	25,178.7
Cash flow
SEKm	2021	2022	2023e	2024e	2025e
Operating Cash Flow	1,620.0	2,028.0	1,519.3	2,190.3	2,273.9
Investing Cash Flow	-4,176.0	-3,758.0	-1,670.4	-817.3	-819.1
Financing Cash Flow	2,612.0	1,463.0	0.00	0.00	0.00

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