Thunderful Group’s Q4 figures aligned with preliminary numbers, and net sales for Games came in at SEK121m (199), 4% above our estimates of SEK117m. Adj EBITDA came in at SEK7m (138), with a margin of 6% (69%), negatively affected by higher royalty fees and personnel costs. Net sales for Distribution reached SEK832m (1001) and decreased -17% y/y, 11% below our estimates of SEK940m. Looking at the profitability, Adj EBITDA in Distribution reached SEK6m (57), with a margin of 1% (6%), significantly lower than our estimate of SEK76m. The negative deviation stems primarily from discounted sales in NGS but also due to some softer market for Bergsala.

In total, net sales for the group were 10% below our estimates, while Adj EBITDA for the group came significantly lower than expectations.

Although key P&L figures were already announced last week, we did not receive any cash flow figures. Cash flow from operations for the quarter seems to have held up quite well despite lower profitability, coming in at SEK304m (406), positively affected by working capital changes. Free cash flow reached SEK244m, and Thunderful Group ended the period with a Net debt of SEK402m (down from SEK522 in the previous quarter), which equals a Net debt / Adj EBITDA ratio of 1.7x on an LTM basis. The cash balance, including unutilized credit facilities, amounted to SEK320m at the end of the quarter.

Net sales for Games came in at SEK121m (199), 4% above our estimates of SEK117m. Steamworld Build was the major release in the quarter, and sales from new releases amounted to SEK24m, up from SEK19m in Q3 2023. This was lower than our estimates of SEK36m, and the company stated that Steamworld Build performed somewhat below expectations during the quarter.

In terms of profitability, we were surprised by the lower margin in the quarter, and Adj EBITDA for Games came in at SEK7m (138), a margin of 6% (69), negatively affected by higher royalty fees. Our understanding is that the high royalties are related to Lego Bricktales VR, which was launched in the quarter, whereas both META, Lego, and the developer incur royalty fees. Hence, we expect royalties to come down in Q1.

In terms of pipeline, the company has put the development of Steamworld Headhunter on hold as is now not expected to be launched in 2025. According to the company, a big part of the write-down of capitalized game development was related to the game. Moreover, it seems that another Steamworld game has been postponed from H1 to H2 2024.

Net sales for Distribution reached SEK832m (969) and decreased 14% y/y, 10% below our estimates. Looking at the profitability, Adj EBITDA reached SEK6m (57), for a margin of 1% (6). Significantly lower than our estimate of SEK76m. The negative deviation mainly stems from the poor performance of NGS, coupled with weaker performance in Bergsala. The inventory sell-off in NGS boosted sales in the quarter but dampened the margins due to significant discounts on the sold inventory. Bergsala's weaker performance was attributed to lower Switch hardware sales, a trend expected to persist as Nintendo is not expected to release its new console until 2025. Although Amo Toys roughly met expectations, adjusted EBITDA margins declined by 7pp sequentially.

The inventory in relation to distribution sales decreased from 29% in Q3 to 26% in Q4. This aligns with the historical seasonality pattern, where inventory is built up before the strong period in Q4. The company stated on the conference call that it sees potential for further reducing inventory levels going forward.

By incorporating receivables and accounts payables into inventory, we get a core net working capital metric (assuming that the majority of receivables and accounts payables are associated with the distribution segment). The EBITA/Core NWC ratio peaked at 45% in Q2 2020 and hit a low in Q4 2022 at 11%. Since then, a positive trend has emerged, and in Q4 2023, it reached 15%, indicating an improvement in the segment. However, we believe that 15% is still too low for the segment to achieve robust cash generation, and we see potential for further improvements.

Given Thunderful Group’s cash position of SEK37m at the end of Q3, the primary focus for the quarter was on cash flow, and on that note, the company delivered. Cash flow from operations amounted to SEK304m (406), while free cash flow reached SEK244m. The company ended the period with a Net debt of SEK402m (down from SEK522 in the previous quarter), which equals a Net debt / Adj EBITDA ratio of 1.7x on an LTM basis. The cash balance, including unutilized credit facilities, amounted to SEK320m at the end of the quarter.

Typically, Q1 is a strong cash flow quarter due to the release of receivables. However, at the end of Q4, receivables were 16.6% of sales, compared to historical Q4 levels of 23%. This indicates that Thunderful has been paid earlier than usual; therefore, we do not expect a similar positive contribution as in the past. Instead, we estimate that the company will have a positive contribution from lower inventory levels, as the management stated that they still believe the inventory is high in some parts of the distribution segment. On the negative side, we anticipate some one-offs from the restructuring program to have a negative impact on the cash flow in Q1.

Looking ahead, we expect cash flow to follow historical patterns with negative numbers in Q2 and Q3, followed by a solid cash conversion in Q4. We also estimate that the current earn-out consideration of SEK98m will be paid off in H2 2024. All in all, we think that no capital injection is needed in 2024, although we acknowledge that it will be tight in Q3 in conjunction with the inventory build-up ahead of the busy season in Q4. Given the challenges of estimating cash flow on a quarterly basis, we will continue to monitor the cash flow closely in the coming quarters.

We take a more conservative view regarding sales on the back of the restructuring program, postponed game launches, and somewhat lower traction from new releases in the quarter. We especially estimate a lower contribution from new releases in H1, given that several titles have been postponed to H2.

• Sales lowered by 5% for 2024e and 10% 2025e-2026e.
• Adjusted EBITDA lowered by 12% for 2024e and 20-12% 2025e-2026e

On the back of the lower-than-expected sales in Bergsala and no new console from Nintendo expected until 2025, we take down our sales estimates for Bergsala. Given the weak performance in NGS, we take down our assumption for 2024 and then expect growth from a lower baseline. We leave our estimates for AMO toys roughly unchanged.

• Sales lowered by 15% for 2024e and 7% 2025e-2026e.
• Adjusted EBITDA lowered by 39% for 2024e and 7% 2025e-2026e.

Peer valuation

DCF valuation

Following the Q4 2023 report and our revised estimates, we update our valuation range. Our new valuation range is SEK4-19 (10-28), with a base case of SEK8(15). We apply a WACC of 12% in all scenarios.