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.

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.

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.

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.

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.

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.