Thunderful Group: Distribution saves the day

Research Update

2023-11-16

06:15

Redeye provides an update on Thunderful Group following its Q3 2023 report, showing a softer topline than expected but outperforming on profitability, owing to Amo Toys and Bergsala in Distribution. Following the Q3 2023 report and continued momentum for Amo Toys and Bergsala while factoring in higher risks of potential game delays, we revise our estimates and valuation.

Viktor Lindström

Anton Hoof

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Distribution behind the stronger Adj EBITA than expected in Q3 2023

Thunderful Group delivered weaker sales than expected in Q3 2023 but outperformed on Adj EBITA. In total, Adj EBITA came in 49% ahead of our estimates, whereas Distribution (Amo Toys and Bergsala) delivered clearly above expectations margin-wise. Supported by enhanced gross margins from a favorable product mix and recent cost initiatives. We expect the accelerated earnings momentum in Distribution to continue and forecast Distribution’s Adj EBITDA to be up 33% y/y in Q4 2023e.

Weaker profitability in Games

Adj EBITA margins in Games reached 9% (43) and was weak as expected, given the few game releases in the quarter. It should also be noted that an impairment of cSEK4m was done in Games. The coming notable release, Steamworld Build, seems promising, and given that it is a Gamepass deal, it mitigates some of the project risks. We also expect the potential cannibalization from the Gamepass deal to be lower, given that the game is released on multiple platforms. Despite the release of Steamworld Build and a typically seasonally strong quarter, we still expect sales and Adj EBITA in Games to be down y/y based on tough comparable figures, where the acquisition of Jumpship contributed with cSEK70m in Q4 2022.

Estimate changes and valuation

On the back of the Q3 2023 report, continuing solid momentum for Amo Toys and Bergala into Q4 2023e while penciling in some risks of coming game delays in 2024e, we revise our estimates. For 2023e, we raise Adj EBITA by 14%, while for 2024-2025e, we lower Adj EBITA by 6%. Our new valuation range is SEK8-26 (9-28), with a base case of SEK13(15). Our base case of SEK13 corresponds to an EV/Adj EBITA multiple of 5.6x(24e).

Key financials

SEKm	2021	2022	2023e	2024e	2025e
Revenues	3,140.7	3,030.7	2,953.0	3,096.5	3,104.3
EBITDA	335.7	370.1	361.1	384.2	408.8
EBIT	208.7	195.9	146.6	179.8	203.9
Net Income	132.1	126.6	32.0	126.2	145.3
EBIT Margin	6.6%	6.5%	5.0%	5.8%	6.6%
EV/EBITDA	13.2	3.7	2.6	2.1	1.7
EV/EBIT	21.2	7.1	6.5	4.4	3.4

Q3 2023 review

Thunderful Group delivered net sales of SEK626m (703), which was 11% below our estimates. However, profitability came in much stronger than expected, where Adj EBITDA and Adj EBITA were 35% and 49% ahead of our estimates. The positive deviation clearly stems from much stronger margins than expected in Amo Toys and Bergsala.

Net sales for Games came in at SEK90m (118), 9% above our estimates of SEK82m. Q3 saw only one major release, Viewfinder. New releases contributed with SEK19m in the quarter. The limited number of releases and lower contribution from co-development and partners explain the organic decline of -25% y/y. Adj EBITA for Games came in at SEK8.5m (51), for a margin of 9% (43), negatively affected by lower sales from new releases, which did not fully compensate for the related D&A, as well as from lower sales within the co-development and partners. It should also be noted that an impairment of cSEK4m was made in Games during the quarter.

Net sales for Distribution reached SEK536m (586) and decreased -6% y/y, slightly below our estimates. Looking at the profitability, Adj EBITDA in Distribution reached SEK53.3m (18.5), for a margin of 10% (3.2). Beating our estimate of SEK25m. The positive deviation stems from much stronger profitability levels in Amo Toys, yielding an Adj EBITDA margin of 17.5% (1.5). Bergsala also delivered stronger margins than expected, owing to a favorable product mix and recent cost initiatives. Amo Toys saw stronger demand related to Squishmallows, while Bergsala benefited from a higher share of software-related sales and accessories. We expect the accelerated earnings growth in Distribution to continue into Q4 2023e and forecast Adj EBITDA to be up c33% y/y.

Deviation table:

Thunderful estimate vs outome
(SEK m)	Q1'22	Q2'22	Q3'22	Q4'22	Q1'23	Q2'23	Q3'23a	Q3'23e	Diff %	Diff abs
Net sales	546	581	703	1,201	555	697	626	701	-11%	-75
Games	82	115	118	199	107	120	90	82	9%	8
Distribution	464	466	586	1,001	448	577	536	619	-13%	-83
O/W Bergsala	184	223	288	599	205	374	260	345
O/W NGS	164	139	161	235	130	104	101	137
O/W AMO Toys	116	104	137	167	114	99	175	137

Adj. EBITDA	43.7	69.3	77.4	185.2	72.7	95.5	83.2	61.6	35%	22
Games	32.8	67.1	63.0	138.3	57.8	66.9	36.9	42.8	-14%	-6
Distribution	14.6	7.8	18.5	57.0	19.3	34.6	53.3	24.8	115%	28
O/W Bergsala	8.7	12.1	17.8	60.7	10.0	33.7	28.8	20.7
O/W NGS	0.8	2.6	-1.3	-4.2	0.3	-2.1	-6.1	0.7
O/W Amo Toys	5.1	-6.9	2.0	0.5	9.0	3.0	30.6	3.4
Other	-3.7	-5.6	-4.1	-10.1	-4.4	-6.0	-7.0	-6.0

Adj. EBITA	27.3	31.5	60.3	165.7	51.7	71.8	48.9	32.8	49%	16
Games	21.0	34.6	51.3	124.4	44.1	43.8	8.5	14.7	-42%	-6
Distribution	10.1	2.5	13.2	51.4	12.0	34.0	47.5	24.1	97%	23
Other	-3.8	-5.6	-4.2	-10.2	-4.4	-6.0	-7.1	-6.0

Adj. EBITDA margin	8.0%	11.9%	11.0%	15.4%	13.1%	13.7%	13.3%	8.8%
Games	39.9%	58.4%	53.5%	69.4%	54.0%	56.0%	41.0%	52.0%
Distribution	3.1%	1.7%	3.2%	5.7%	4.3%	60.0%	9.9%	4.0%
O/W Bergsala	4.7%	5.4%	6.2%	10.1%	4.9%	9.0%	11.1%	6.0%
O/W NGS	0.5%	1.9%	-0.8%	-1.8%	0.2%	-2.0%	-6.1%	0.5%
O/W Amo Toys	4.4%	-6.6%	1.5%	0.3%	7.9%	3.0%	17.5%	2.5%

Adj. EBITA margin	5.0%	5.4%	8.6%	13.8%	9.3%	10.3%	7.8%	4.7%
Games	25.5%	30.1%	43.5%	62.4%	41.2%	36.7%	9.4%	17.9%
Distribution	2.2%	0.5%	2.3%	5.1%	2.7%	5.9%	8.9%	3.9%
Source: Redeye research

Cash flow from operations for the quarter was soft and came in at SEK-62m (-54), negatively affected by working capital changes and inventory build-ups of SEK127m. Free cash flow reached SEK-145m, while Adj EBITDA-Capex came in at cSEK0m (23.5), although above our estimates of SEK-10.3m. The investment phase has been high recently, and this is a topic management will spend much time on going forward.

Thunderful ended the period with a Net debt of SEK558m, which equals a Net debt / Adj EBITDA ratio of 1.2x on an LTM basis. The cash balance stands at SEK37m, but it has unutilized credit facilities of cSEK74m, yielding a total available cash of SEK110.6m. However, the fourth quarter is the seasonally strongest quarter for Distribution, and we expect a much-improved cash flow in Q4 2023e.

Room for improvement going forward

In connection with the Q3 2023 report presentation, the new CEO, Martin Walfisz shared some reflections on what type of actions could and hopefully will be made across the organization to improve growth, profitability, and cash flow going forward.

Overall, the new management shares our view that the recent investment pace has been high and not at a sustainable rate at current levels. It will be crucial to balance the risk profile between IP-building and Co-development going forward. In addition, the portfolio strategy can be clarified and optimized regarding production processes. We also believe that focusing on releasing DLCs and additional content for its existing game portfolio could be low-hanging fruit to improve back catalog sales and enhance the efficiency and revenue per employee across its internal game studios.

In Distribution, there are possibilities to enhance and leverage synergies between purchasing, logistics, and sales. This could optimize inventory and payment terms, improving cash flow generation. Overall, there could be improvement regarding internal reporting and forecasting. Post the Q4 2023 report, the company sold some of NGS's portfolio, which could be a first step to improving efficiency and cash flow generation.

Estimate changes

Thunderful Group		New Estimates			Old Estimates			Diff (%)
SEKm	2023e	2024e	2025e	2023e	2024e	2025e	2023e	2024e	2025e
Net sales	2,953	3,097	3,104	3,194	3,467	3,484	-8%	-11%	-11%
Games	421	471	523	414	509	555	2%	-7%	-6%
Distribution	2,532	2,625	2,581	2,742	2,853	2,799	-8%	-8%	-8%
O/W Bergsala	1,468	1,526	1,465	1,667	1,750	1,680	-12%	-13%	-13%
O/W NGS	481	498	503	557	577	582	-14%	-14%	-14%
O/W AMO Toys	584	601	613	519	526	537	13%	14%	14%

Adj. EBITDA	369	384	409	338	413	438	9%	-7%	-7%
Games	219	236	261	228	260	289	-4%	-9%	-9%
Distribution	176	174	172	136	178	175	30%	-3%	-1%
O/W Bergsala	129	118	117	122	135	126	5%	-13%	-7%
O/W NGS	-16	5	6	-1	14	16	1003%	-65%	-63%
O/W Amo Toys	63	51	49	15	29	32	328%	77%	52%
Other	-26	-25	-25	-25	-25	-25

Adj. EBITA	253	266	291	222	285	311	14%	-6%	-6%
Games	122	121	146	126	135	163	-3%	-10%	-11%
Distribution	157	171	170	121	175	172	29%	-3%	-1%
Other	-26	-25	-25	-25	-25	-25
Source: Redeye research

Financial estimates

Thunderful
SEK m	Q1'22	Q2'22	Q3'22	Q4'22	Q1'23	Q2'23	Q3'23	Q4'23e	2021	2022	2023e	2024e	2025e
Net sales	546	581	703	1,201	555	715	626	1,056	3,141	3,031	2,953	3,097	3,104
Games	82	115	118	199	107	107	90	117	354	514	421	471	523
Distribution	464	466	586	1,001	448	608	536	940	2,787	2,516	2,532	2,625	2,581
O/W Bergsala	184	223	288	599	205	409	260	593	1,308	1,293	1,468	1,526	1,465
O/W NGS	164	139	161	235	130	98	101	153	985	699	481	498	503
O/W AMO Toys	116	104	137	167	114	101	175	193	494	524	584	601	613

Adj. EBITDA	44	69	77	185	73	83	83	130	357	376	369	384	409
Games	33	67	63	138	58	65	37	59	185	301	219	236	261
Distribution	15	8	19	57	19	27	53	76	189	98	176	174	172
O/W Bergsala	9	12	18	61	10	35	29	56	104	99	129	118	117
O/W NGS	1	3	-1	-4	0	-5	-6	-5	54	-2	-16	5	6
O/W Amo Toys	5	-7	2	1	9	-2	31	25	30	1	63	51	49
Other	-4	-6	-4	-10	-4	-9	-7	-6	-17	-24	-26	-25	-25

Adj. EBITA	27.3	31.5	60.3	165.7	51.7	50.1	48.9	101.8	298.8	284.8	252.5	266.5	290.8
Games	21.0	34.6	51.3	124.4	44.1	37.7	8.5	31.9	139.7	231.3	122.2	121.0	145.8
Distribution	10.1	2.5	13.2	51.4	12.0	21.3	47.5	75.9	176.7	77.2	156.7	170.5	170.0
Other	-3.8	-5.6	-4.2	-10.2	-4.4	-8.9	-7.1	-6.0	-17.6	-23.8	-26.4	-25.0	-25.0
		37%
Adj. EBITDA margin	8.0%	11.9%	11.0%	15.4%	13.1%	11.6%	13.3%	12.3%	11.4%	12.4%	12.5%	12.4%	13.2%
Games	39.9%	58.4%	53.5%	69.4%	54.0%	60.5%	41.0%	51.0%	52.3%	58.6%	52.0%	50.0%	50.0%
Distribution	3.1%	1.7%	3.2%	5.7%	4.3%	4.5%	9.9%	8.1%	6.8%	3.9%	7.0%	6.6%	6.7%
O/W Bergsala	4.7%	5.4%	6.2%	10.1%	4.9%	8.4%	11.1%	9.4%	8.0%	7.7%	8.8%	7.7%	8.0%
O/W NGS	0.5%	1.9%	-0.8%	-1.8%	0.2%	-5.4%	-6.1%	-3.0%	5.5%	-0.3%	-3.3%	1.0%	1.2%
O/W Amo Toys	4.4%	-6.6%	1.5%	0.3%	7.9%	-1.9%	17.5%	13.0%	6.1%	0.1%	10.8%	8.5%	8.0%

Adj. EBITA margin	5.0%	5.4%	8.6%	13.8%	9.3%	7.0%	7.8%	9.6%	9.5%	9.4%	8.6%	8.6%	9.4%
Games	25.5%	30.1%	43.5%	62.4%	41.2%	35.2%	9.4%	27.4%	39.5%	45.0%	29.1%	25.7%	27.9%
Distribution	2.2%	0.5%	2.3%	5.1%	2.7%	3.5%	8.9%	8.1%	6.3%	3.1%	6.2%	6.5%	6.6%
Source: Redeye research

Valuation

Peer valuation

			EV/S			EV/EBITDA			EV/EBIT
Company	EV SEK m	2023	2024	2025	2023	2024	2025	2023	2024	2025

Nordics
Embracer	42,421	1.1x	1.0x	0.9x	5.1x	4.0x	3.4x	6.7x	5.8x	5.1x
Paradox	23,366	11.8x	9.2x	8.2x	17.2x	14.4x	11.8x	26.1x	29.9x	21.7x
EG7	1,318	0.7x	0.6x	0.6x	2.7x	2.4x	2.6x	3.4x	3.0x	3.5x
Remedy	4,077	8.3x	10.9x	5.3x	>100	neg	20.3x	neg	neg	30.2x
Stillfront	10,514	1.5x	1.5x	1.5x	4.1x	3.9x	3.7x	5.3x	5.8x	5.3x
G5 Entertainment	940	0.6x	0.7x	0.7x	3.3x	3.1x	3.1x	6.1x	6.3x	5.9x
MTG	7,662	1.4x	1.3x	1.2x	5.9x	5.3x	5.1x	12.9x	8.5x	8.6x

Median	7,661.59	1.4x	1.3x	1.2x	4.6x	3.9x	3.7x	6.4x	6.0x	5.9x

International Mobile / Casual
11 Bit Studios	3,291	18.6x	14.0x	3.8x	53.8x	52.3x	5.3x	70.6x	64.3x	6.2x
Team 17	5,656	3.2x	3.0x	2.8x	9.0x	8.5x	7.8x	10.5x	9.8x	8.9x
KeyWords Studios	16,472	2.1x	1.8x	1.6x	10.6x	9.1x	8.3x	12.7x	12.4x	11.4x
Frontier Developments	1,166	0.8x	0.8x	0.8x	2.5x	71.8x	8.4x	neg	neg	neg
Activision	690,147	7.6x	na	na	22.0x	na	na	21.1x	na	na
EA	380,993	5.1x	4.7x	4.4x	15.0x	13.9x	12.7x	16.7x	15.4x	13.8x
Take Two	303,165	5.4x	5.2x	3.6x	81.5x	34.1x	15.9x	35.9x	37.5x	17.0x
CD Project	28,565	12.7x	9.9x	13.6x	23.8x	18.4x	30.3x	31.9x	25.4x	45.6x
Ubisoft	56,117	2.9x	2.3x	2.1x	6.8x	5.0x	4.4x	neg	13.2x	10.9x
TinyBuild	48	0.1x	0.1x	0.1x	0.2x	0.8x	0.8x	0.2x	1.4x	2.0x

Median	22,518.5	4.1x	3.0x	2.8x	12.8x	13.9x	8.3x	18.9x	14.3x	11.1x

Tabletop Games & Ips
Nintendo	424,477	3.5x	3.7x	3.8x	10.9x	11.0x	14.0x	11.1x	11.2x	13.1x
DistIT	466	0.2x	0.2x	0.2x	11.9x	8.1x	4.6x	34.2x	29.0x	6.8x
Hasbro	107,493	1.8x	2.0x	1.9x	8.8x	11.1x	9.3x	11.2x	14.7x	11.8x
Mattel	95,671	1.7x	1.6x	1.6x	9.6x	9.4x	8.8x	13.5x	13.1x	11.8x
Dustin	6,424	0.3x	0.3x	0.3x	5.4x	7.1x	6.4x	8.0x	10.6x	9.7x
Logitech	130,995	2.8x	2.9x	2.8x	20.7x	19.5x	16.7x	21.6x	22.8x	19.2x

Median	101,582	1.7x	1.8x	1.8x	10.2x	10.2x	9.1x	12.3x	13.9x	11.8x

Peer Group Median	22,518	1.7x	1.8x	1.8x	10.2x	10.2x	8.3x	12.3x	13.9x	11.1x

Thunderful	897	0.3x	0.3x	0.3x	2.4x	2.4x	2.1x	4.5x	5.8x	4.3x
Discount / Premium (-) / (+)		-83%	-84%	-84%	-76%	-77%	-74%	-63%	-58%	-61%
Source: Factset, Redeye research

We note that Thunderful Group trades at a c40-60% discount versus our broader selected peer group based on EV/EBIT in 2023-2025e.

DCF valuation

Following the Q3 2023 report and our revised estimates, we update our valuation range. Our new valuation range is SEK8-26 (9-28), with a base case of SEK13(15). Our base case of SEK13 corresponds to an EV/Adj EBITA multiple of 5.6x(24e). We apply a WACC of 12% in all scenarios.

Investment thesis

Case

Organic growth at slightly lower risk

Thunderful Games has a solid pipeline of games and has built a strong network with platform owners. Thus, we believe Thunderful Games will manage to grow sales by 15% YoY and reach EBIT margins in excess of 30% in the medium term. Large investments are made to capitalize on future opportunities, which should be bolstered by newly released premium games and attractive exposure to the VR market. Additionally, the distribution unit's market position within its respective niece provides healthy cash flows. This could be reinvested into the games segment. Thus, we gradually expect the game's ratio of sales and earnings to grow. Leading to higher margins and, in our opinion, a higher motivated multiple for the company. We forecast Adj EBITA to reach SEK291m in 2024.

Evidence

Long history of game development and distribution

Thunderful’s internal development studios have long experience in creating successful games. Its high-quality development capacity has enabled platform deals with Meta, EA, and Microsoft. This reduces the game segment's risk as it provides stable cash flow at high margins. Bergsala has had a relationship with Nintendo since 1981 and has been one of Nintendo’s best-performing markets across Europe.

Challenge

Limited M&A experience and poor reception from latest game releases

Thunderful’s latest internal game releases have received a poor reception from users and have not lived up to expectations. While this is clearly negative for the investment case, we still believe the key upcoming internal games deserved a chance as the other ones were developed and financed by external publishers. Thunderful made three acquisitions last year, and it still remains to be seen how good the capital allocation is.

Valuation

Multiple expansion expected

We derive our base case on the back of a DCF model, blended with an earnings multiple approach. We apply an EV/EBITA multiple of 8x for games, and 5x for distribution. All in all, the weighted multiple should increase going forward as games become larger in terms of the entire group.

Quality Rating

People: 3

Business: 3

Financials: 2

Financials

Rating definitions

The team

Disclosures and disclaimers

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