Media and Games Invest – Gained market shares

Research Update

2023-12-01

07:30

Redeye updates its view on Media and Games Invest (MGI) following its Q3 2023 report, showing stronger sales and profitability than expected, even when excluding the positive effects of releasing earnouts during the quarter. We make limited estimate revisions post the report but reduce our valuation range based on increasing our risk-free rate, which implies a higher WACC.

VL

AH

Viktor Lindström

Anton Hoof

Contents

Q3 2023 review

Deviation table

Outlook

Estimate changes

Financial estimates

Valuation

DCF valuation

Investment thesis

Quality Rating

Financials

Rating definitions

The team

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Q3 2023 delivering stronger than expected

Net sales decreased 11% y/y but grew 1% organically (excl fx and divestments) and reached EUR78m (88), beating our estimates by 1%. The cost savings program (cEUR10m annually in 2024e) started to yield some effects already in Q3, paving the way for a 12% Adj EBIT beat. MGI stated that CPM levels were down by 20-30 % y/y in core markets but that the visibility into Q4 2023e has improved, which should support sequential topline growth of 3% and an Adj EBIT margin of 27% in Q4 2023e.

Cash flow a tad soft despite releasing earnouts

Both operating cash flow and free cash flow were solid in the quarter. However, paid earnouts, high-interest costs, and bond buybacks held back the cash flow for the period. Leaving MGI at a net debt / Adj EBITDA of 3.2x. Management guides for further free cash flow improvement in Q4 2023e based on stronger seasonality, no earnout payments, less Capex, and positive working capital effects. Something that should reduce the net debt ratio below 3.0x by FY 2023e.

Estimate changes and valuation

On the back of the Q3 2023 report and improved visibility in Q4 2023e, we raise 2023e Adj EBIT by c5%. For 2024-2025e, we make limited estimate revisions to Adj EBIT. We have raised our risk-free rate from 2.5% to 3%, which implies a higher WACC. Negatively impacting our DCF valuation. Our new valuation range is SEK10-SEK38 (11-42), with a base case of SEK27 (30). Our base case of SEK27 corresponds to 8.5x EV/Adj EBIT in 2024e, a c20% discount versus ad-tech peers.

Key financials

Key Financials

EURm202120222023e2024e2025e
Revenues252.2324.4303.8333.0376.0
Revenue Growth79.9%28.7%-6.4%9.6%12.9%
EBITDA65.084.8126.4103.0118.6
EBIT36.826.696.169.286.9
EBIT Margin14.6%8.2%31.6%20.8%23.1%
Net Income16.1-20.443.623.136.3
EV/Revenue3.11.61.41.21.0
EV/EBIT21.220.14.45.64.2
P/E23.812.99.64.23.4

Q3 2023 review

Media and Games Invest (MGI) delivered a decent report in our view, growing 1% organically (adjusted for fx and divestments) in a challenging market. It should also be noted that the company benefited from positive one-off effects of cERU63m in the quarter, related to releasing earnouts for its previous acquisition of AxesInMotion. Thus, investors should focus on Adj numbers in the Q3 2023 report.

Net sales in Q3 2023 came in at EUR78.3m (87.6), above our estimates of EUR77.6. Sales decreased 11% y/y (including fx headwinds and recent divestments) and grew c3% q/q in line with seasonal patterns. Segment-wise, DSP accounted for 11% of sales, and the SSP accounted for 89%.

Despite CPM levels being down by 20-30% y/y in key markets, the small positive organic growth is a testament that MGI is grasping market share. Increasing the number of software clients by 9% y/y and maintaining a net expansion rate of 93% (existing customers' net spend) yielded an 8% y/y increase in the number of ad impressions. Mitigating lower CPM levels.

According to Pixelate, a market-leading analytic platform in the US for Connected-TV and mobile advertising, MGI (Verve Group) was the market leader in the US in Q3 2023 for the mobile in-app SSP segment on both IOS and Android devices. Capturing a market share of c28% on IOS devices and 11% on Android. In Europe, the market share currently stands at 15% on Android devices and 9% on IOS devices, according to Pixelate's Q3 2023 report.

The gained market share is predominantly from gearing up further publishers and demand partners into its advertising platform. Driven by its recent investments in the mobile and CTV segments. Enabling advertisers and publishers to promote across devices. In addition, the benefits of its investments in contextual targeting (Using AI to verify consumer identities without cookies) are starting to yield results, which is one reason why MGI signed new partners in the quarter.

Deviation table

Media and Games Invest (MGI)
(EUR m)Q1'22Q2'22Q3'22Q4'22Q1'23Q2'23Q3'23aQ3'23eDiff %Diff (Abs)
Net Sales65.978.187.692.968.876.278.377.61%0.7
Total Operating costs-49.0-58.0-66.2-66.4-51.3-56.2-14.6-56.8
Adj EBITDA17.621.123.031.519.021.323.120.811%2.3
EBITDA16.920.021.426.517.420.063.720.8206%42.9
D&A -7.1-8.1-8.1-34.9-6.4-7.2-8.3-6.8
D&A less PPA-4.0-4.7-4.5-3.5-3.9-4.7-4.7-4.3
Adj EBIT13.616.418.528.115.116.618.416.512%1.9
EBIT9.812.013.3-8.411.012.855.414.0296%41.4
Net financials-6.6-7.7-8.8-14.8-10.5-12.7-12.8-13.2
Net Profit2.53.03.1-29.10.41.539.20.411043%38.9
Adj Net Profit6.47.58.42.33.14.04.42.956%1.6
Adj EPS0.040.050.050.010.020.020.030.0256%
Source: MGI (Historical data), Redeye Research (Forecasts)

Looking at profitability, Adj EBITDA came in at EUR23.1m (23), for a margin of 29.5% (26). This was 11% above our estimates of EUR20.8m. Adj EBIT (excl PPA) was also stronger than our estimates and came in at EUR18.4m (18.5), yielding a margin of 23% (21). Positively impacted by the realization of its cost-saving programs, which should yield annual cost savings of EUR10m, with full effect in FY 2024e.

Adj Net profit continued to be harmed by high-interest expenses and came in at EUR4.4m (8.4), which is still ahead of our estimates of EUR2.9m. Note that we exclude the positive realization of earnouts here, while MGI does not in its quarterly report.

Operating cash flow was solid and came in at EUR27.8m, while free cash flow reached EUR17.5m in the quarter. Still, the cash flow in the period was EUR2.8m as interest expenses are included within the financing segment in the cash flow statement. During the quarter, cEUR5m was paid in earnouts, and cEUR1.5m was used to buy back bonds. Thus, MGI ended the quarter with a net debt of EUR303m versus EUR306m in Q2 2023. Hence, the net debt / Adj EBITDA ratio remains at 3.2x by the end of the quarter. However, when now entering the seasonally strong Q4, management expects improved cash conversion from lower Capex levels and no further earnout payments. Expecting the net debt /Adj EBITDA ratio to come down below 3.0x by the end of 2023e.

Outlook

MGI reiterated its guidance for FY 2023e, indicating sales of cEUR303m and Adj EBITDA of EUR93m. The fourth quarter is the seasonally strongest quarter for MGI, as the majority of the advertising budgets are spent in Q4 2023. Supported by Black Friday and holiday seasons. The CPM levels correlate with demand, and MGI states that it has seen some light of the tunnel regarding CPM levels, especially in some segments. However, considering its larger exposure to the gaming market, and particularly the mobile gaming market (hyper-causal segment), we take a slightly more conservative view, especially regarding profitability, as we fear a less favorable product mix (higher share of CTV and mobile games) could dilute margins.

We forecast MGI to deliver sales and Adj EBITDA of EUR304m and EUR90m in 2023e, respectively. For 2024e, we anticipate the advertising market to rebound in H2’2024e and to support accelerated sales growth. We expect sales to grow by 2% y/y in H1’2024e and by 16% y/y in H2’2024e, further supported by growth in new verticals such as CTV. For 2025e, we believe the market will be back to normal, and MGI will be able to grow at double-digit levels.

Estimate changes

Following the Q3 2023 report beat, recently gained market share, and somewhat improved visibility in the CPM levels into Q4 2023e, we raise Adj EBIT in 2023e by 5%. For 2024-2025e, we make minor negative revisions on sales, as we fear weaker macroeconomics could hold back advertising budgets and CPM levels further. However, this is compensated by its recent cost-saving program, which is why we make limited estimate changes to Adj EBIT in 2024-2025e.

New estimates Old estimates Diff (%)
EURm2023e2024e2025e2023e2024e2025e2023e2024e2025e
Net Sales3043333763033393860%-2%-3%
Total Costs-177-230-257-221-236-269-20%-3%-4%
Adj EBITDA90103119861031175%0%2%
EBITDA1261031198310311752%0%2%
D&A -30-34-32-27-29-3111%18%3%
D&A less PPA-18-19-21-17-19-193%2%7%
Adj EBIT7284986885975%-1%1%
Amortization (PPA)-12-15-11-10-10-1224%48%-5%
EBIT96698756758673%-7%1%
Net financials-50-38-38-50-37-370%2%2%
EBT47314963748684%-16%1%
Net Profit44233652837775%-19%-1%
Adj Net Profit17384715384810%-1%-2%
Adj EPS0.10.20.30.10.20.310%-1%-2%
Source: MGI (Historical data), Redeye Research (Forecasts)

Financial estimates

Financial estimates
EURmQ1'22Q2'22Q3'22Q4'22Q1'23Q2'23Q3'23Q4'23e202120222023e2024e2025e
Net Sales6678889369767881252324304333376
Total Costs-49-58-66-66-51-56-15-55-187-240-177-230-257
Adj EBITDA1821233219212326719390103119
EBITDA17202126172064256585126103119
D&A -7-8-8-35-6-7-8-8-28-58-30-34-32
D&A less PPA-4-5-4-3-4-5-5-5-16-17-18-19-21
Adj EBIT14161828151718225577728498
o/w PPA00000000-12-41-12-15-11
EBIT101213-8111355173727966987
Net financials-7-8-9-15-10-13-13-14-22-38-50-38-38
EBT344-231043315-11473149
Net Profit333-290239216-20442336
Adj Net Profit678234272821173847
Adj EPS0.040.050.050.010.020.020.010.050.190.130.100.240.30
Segments
Net Sales DSP58101068992032324047
Net Sales SSP6170788363687071232292271293329
Margins
Adj EBITDA margin %26.7%27.1%26.2%34.0%27.7%28.0%29.4%32.9%28.2%28.7%29.6%30.9%31.6%
Adj EBIT margin %20.7%21.0%21.1%30.2%22.0%21.8%23.5%27.1%21.7%23.6%23.7%25.2%26.1%
Net margin %3.9%3.9%3.6%-31.3%0.6%2.0%50.0%3.1%6.4%-6.3%14.4%6.9%9.6%
Adj Net margin %9.7%9.6%9.5%2.5%4.4%5.2%2.8%9.2%11.1%6.5%5.5%11.4%12.6%
Source: MGI (Historical data), Redeye Research (Forecasts)

Valuation

Peer valuation

Given that MGI’s major revenue stems from its advertising platform. We argue that globally listed ad-tech peers are the most relevant peers.

MGI trades at discounts of c50% versus ad-tech-related peers on EV/EBIT multiples for 2023-2025e. The most relevant peers, in our opinion, in terms of size and niche, are Pubmatic and Magnite, both trading at multiples of c30x EV/EBIT in 2025e and c25x P/E in 2025e. Since being listed on Nasdaq First North in October 2020, MGI’s median EV/Adj EBIT multiple and Adj P/E multiples have been at 10.7x and 16.9x, respectively.

EVEV/EBITDAEV/EBITP/E
Company nameEURm202320242025202320242025202320242025
Nordics
Embracer3,9634.23.63.36.15.45.013.98.66.9
Paradox1,86612.810.610.126.919.617.138.826.622.8
EG71042.12.32.02.73.12.910.29.08.1
Remedy336neg19.219.2neg29.732.5neg40.744.1
Stillfront8813.73.63.45.65.04.859.312.08.8
G5883.33.33.16.96.55.87.48.27.5
Thunderful902.72.62.55.44.84.610.73.23.0
MTG6365.04.84.58.08.17.426.017.715.3
Ad tech
Magnite1,3919.28.37.0negneg27.9negneg15.5
Apploving15,35911.69.48.529.118.916.141.722.919.2
Trade Deske31,70245.838.431.4>100>10060.3>100>10072.1
Pubmatic74311.29.77.8neg>10039.7>100>10043.1
Viant Technology1124.53.72.85.54.84.4negnegneg
LiveRamp1,62617.112.89.118.414.210.7>10076.7na
Criteo1,2274.94.74.28.07.05.98.38.17.0
MGI4134.54.13.66.05.44.942.413.07.3
Discount (-) / Premium (+) vs Median-58%-51%-51%-55%-49%-69%69%-43%-62%

DCF valuation

On the back of our revised estimates, a higher net debt position, and raising our WACC by increasing our risk-free rate, we revise our valuation accordingly. Our valuation is based on a blend of a DCF model and earnings multiple approach.

Our new valuation range is between SEK10-38 (11-42), and our base case stands at SEK27 (30). Corresponding to an EV/Adj EBIT multiple of 8.5x in 2024e. Since being listed, MGI has traded at a median EVAdj EBIT multiple of c11x. Our base case corresponds to a c20% discount versus key global ad-tech peers.

Valuation scenarios
EURBear case Base caseBull case
Valuation per share102738
Revenue CAGR 2023-20285%9%10%
Revenue CAGR 2029-20382%3%5%
EBIT-margin 2023-203818%20%22%
Terminal growth 2%2%2%
Terminal EBITDA %25%30%35%
Source: Redeye research

Investment thesis

Case

A leading ad-software platform with synergies

MGI is a leading ad-software platform enabling monetization and user acquisition for app and content developers. MGI operates in two subsegments games and media, of which the combined market is expected to grow in excess of 10% in the coming years. Furthermore, the two subsegments enable large synergies as the games could make its UA more efficient while the media platform retains a higher share of the spending. Furthermore, the games could maximize their ad revenues which come at almost 100% gross margins. In contrast, the media segment could leverage access to first-party data. Thereby, enhancing advertisers' targeting, which makes the platform more competitive. Leading the gain of market share, scale effects, and substantial network effects. We forecast a 22-25’e Adj EBITA CAGR of 11%.

Evidence

Proven scalability

MGI has transformed its business into a leading ad-software platform. In 2022, the number of ad impressions reached ~670 billion, up almost 6x compared to 2020. This is driven by innovative services that cover the customer's entire value chain. Leading to gained market share. Furthermore, the EBITDA margin increased from 10% in 2020 to 26% in 2022. Illustrating the scalable business model.

Challenge

IDFA implementations reduces market activity

Apple’s recent IDFA identifier made it harder for advertisers and game publishers to attract consumers and players. Google is planning to implement a similar standard where similar challenges could occur. Thus, this could lead to a market slowdown where MGI’s innovative solutions would not materialize in any returns.

Valuation

The media segment should drive the multiple expansion

We forecast a 22-25’e sales and adj EBITA CAGR of 10-11%, respectively. At our base case, MGI trades at 8.5x EV/adj EBITA.

Quality Rating

People: 4

Business: 3

Financials: 2

Financials

Income statement
EURm20222023e2024e2025e
Revenues324.4303.8333.0376.0
Cost of Revenue130.448.3120.8138.7
Operating Expenses109.3129.2109.2118.6
EBITDA84.8126.4103.0118.6
Depreciation3.018.019.020.7
Amortizations55.112.314.811.0
EBIT26.696.169.286.9
Shares in Associates0.000.000.000.00
Interest Expenses38.050.737.937.9
Net Financial Items-37.9-49.5-37.9-37.9
EBT-11.346.631.349.0
Income Tax Expenses9.13.08.112.7
Net Income-20.443.623.136.3
Balance sheet
Assets
Non-current assets
EURm20222023e2024e2025e
Property, Plant and Equipment (Net)5.56.36.47.7
Goodwill587.7583.9583.9583.9
Intangible Assets203.5207.3200.1199.1
Right-of-Use Assets0.000.000.000.00
Other Non-Current Assets26.825.512.512.5
Total Non-Current Assets823.6823.0802.9803.2
Current assets
EURm20222023e2024e2025e
Inventories0.000.000.000.00
Accounts Receivable71.057.763.371.4
Other Current Assets0.0037.650.565.5
Cash Equivalents150.0145.0180.2208.5
Total Current Assets221.0240.3294.0345.4
Total Assets1,044.71,063.31,096.91,148.6
Equity and Liabilities
Equity
EURm20222023e2024e2025e
Non Controlling Interest-1.20.000.000.00
Shareholder's Equity323.0366.5389.7425.9
Non-current liabilities
EURm20222023e2024e2025e
Long Term Debt389.4379.2379.2379.2
Long Term Lease Liabilities0.000.000.000.00
Other Non-Current Lease Liabilities114.164.364.364.3
Total Non-Current Liabilities503.4443.5443.5443.5
Current liabilities
EURm20222023e2024e2025e
Short Term Debt31.931.931.931.9
Short Term Lease Liabilities0.000.000.000.00
Accounts Payable68.760.866.675.2
Other Current Liabilities118.9160.6165.2172.1
Total Current Liabilities219.5253.3263.8279.2
Total Liabilities and Equity1,044.71,063.31,096.91,148.6
Cash flow
EURm20222023e2024e2025e
Operating Cash Flow134.286.999.8113.2
Investing Cash Flow-176.7-32.4-26.8-47.0
Financing Cash Flow12.3-59.4-37.9-37.9

Rating definitions

The team

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Contents

Q3 2023 review

Deviation table

Outlook

Estimate changes

Financial estimates

Valuation

DCF valuation

Investment thesis

Quality Rating

Financials

Rating definitions

The team

Download article