Media and Games Invest (MGI) delivered a strong year-end, growing 16% organically (adjusted for fx and divestments) while continuing to take market share. The company states that the growth is primarily driven by new software clients (which were up 19% y/y), new product releases, and a somewhat better underlying ad market.

Net sales in Q4 2023 came in at EUR98.7m (92.9), 23% above our estimates of EUR80.6. Sales increased 6% y/y (including fx headwinds and recent divestments). On a segment basis, DSP accounted for 5% of sales, and the SSP accounted for 95% of sales.

Regarding profitability, Adj EBITDA came in at EUR31.7m (31.5), with a margin of 32% (34). This was 20% above our estimates of EUR26.5m. Adj EBIT (excl PPA) was also stronger than our estimates and came in at EUR26.8m (28.1), yielding a margin of 27% (30).

While CPM rates have remained muted throughout 2023, MGI has persisted in investing in new products, enhancing SPO (supply-path optimization), streamlining operations, gaining market shares, and investing in AI and data in anticipation of a more ID-less future. All of these efforts should become more visible in the P&L in the times ahead. With a rebound in the ad market and further cost streamlining (the company mentioned in the report that it sees even more room for cost optimization due to further platform integrations), the company should be able to grow with strong margins going forward.

All in all, with the strong Q4 numbers, we can conclude that MGI exceeded its revised FY23 guidance in both revenues and Adj EBITDA. We are especially impressed by the high organic growth in the quarter of 16%, primarily driven by increased software clients (the number of software clients increased by 19% y/y), product releases, and a somewhat better advertising market. Looking at the net expansion rate (which indicates how much sales come from existing customers compared to one year ago), it grew from 93% in Q3 2023 to 95% in Q4 2023. This is the second quarter with a q/q uptick, and the KPI appears to have bottomed out in Q2 2023 at 82%. The strong organic growth in the quarter has continued into 2024, with an 18% organic sales growth in January 2024, and the management states that it expects to return to double-digit organic growth in 2024.

Operating cash flow was strong as expected and came in at EUR42m, positively affected by changes in working capital of EUR24m, while free cash flow reached EUR34m. The cash flow in the period was EUR14.2m, negatively impacted by interest expenses which are included within the financing segment in the cash flow statement. MGI ended the quarter with a net debt of EUR295m versus EUR305m in Q3 2023. Hence, the net debt / Adj EBITDA ratio remains at 3.1x by the end of the quarter. We expect MGI to continue to have a solid cash conversion going forward and take down the debt level from current levels.

After repeatedly stating that no rebound in the ad market was in sight in previous quarters, we finally received the famous words, “We now see the beginnings of a recovery of the advertising market” from the company. The recovery is particularly evident in MGI’s largest market, the US, which represents approximately 70% of the company’s total revenues. This is in line with peers who have also reported strong Q4 numbers while communicating a somewhat improved outlook. Given the US election and major sports events such as the Summer Olympics, the underlying market should experience even further tailwinds throughout the year.

Since we have already passed February, the company possesses good visibility into Q1 2024. On that note, we are encouraged to see a positive outlook as the company has started the year strongly with an 18% organic growth in January. Moreover, the company expects to return to double-digit organic growth during the year, surpassing both Redeyes and consensus estimates. All in all, we believe the highlight of the report is the long-awaited affirmation mentioned above. Given MGI’s operational enhancements throughout the year, we anticipate the company is set for a strong 2024.

Following the Q4 2023 report beat and management’s positive outlook, we have made upward revisions to our sales estimates, increasing sales by 7% 2024e and 9-10% 2025e-2026e. We take a somewhat conservative short-term view and estimate a sales growth of 12% in Q1 compared to the 18% organic growth in January. Despite the Adj EBITDA margin coming in at 32% in Q4, the management emphasized their intention to invest in growth over maximizing margins and expressed satisfaction with a margin of approximately 30%. Consequently, we are making limited changes to our margin assumptions. In terms of net financials, we are revising our cost assumptions upward for 2024e due to the higher interest rates.

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 c60-50% versus ad-tech-related peers on EV/EBIT multiples for 2024-2025e. The most relevant peers, in our opinion, in terms of size and niche, are Pubmatic and Magnite, both trading at multiples of c-10x EV/EBITDA in 2025e and c20-35x P/E in 2025e.

We apply a WACC of 11.5% in all DCF scenarios, derived from Redeye’s Rating model, and we use a tax rate of 20.6%. The discount analysis extends to 2038E. Below, we summarize the key financial assumptions for the scenarios. Our new valuation range is between SEK12-42 (10-38), and our base case stands at SEK30 (27). Corresponding to an EV/Adj EBIT multiple of 7x in 2025e.