Archive | April, 2011

G5 Entertainment: New game to be released 12 May

28 Apr

G5 Entertainment announced this morning that the sequel of its blockbuster hit “Supermarket Mania” will be released for iPhone and iPad on May 12th.  Unlike before, G5 is changing their approach and will offer Supermarket Mania 2 as free download. The players will then be able to unlock the full content from within the free game using paid in-app purchase.  I think it is too early to say what effects this change of approach will have on revenues but I am willing to trust management on this one.  I am sure they have made a thorough assessment of which concept has the best chances of maximum profitability.

The first version of Supermarket Mania was (and actually still is) a huge success for G5 Entertainment. Published in early 2009, game sales peak in March-May 2009 before settling on a stable off-peak level. In early 2011, Supermarket Mania for iPhone still generates the same level of monthly sales as in 2009 after the peak!

So good news today for all G5 shareholders and more game releases are scheduled for the near future. The stock is right now trading at SEK 21, implying a PER 0f 11x on company’s EPS guidance for 2011.

G5 Entertainment: Recent sluggish share price performance good entry point

26 Apr

The G5 Entertainment share has surely been a rocket over the last year, however, ever since it’s rapid increase at the beginning in 2011 to the SEK 23-25 levels, shareholders saw their patience tested.

Looking at the fundamentals, the stock is dirt cheap as I have argued for many times before. The problem at this point is the still too small shareholder base and the listing at small Swedish stock exchange “Aktietorget”. I hate the term “overowned” but in G5 Entertainment’s case I think it fits rather well. Everybody who is aware of the story owns the share already and general turnover in the share is low. On top of it, it seems as if several investors have recently decided to realise some of their astonishing 700% profit since the beginning of 2010, putting selling pressure on the stock.

So what will take the stock higher from the current discount levels? News, news, news. All the company can do at this point is to continue to deliver positive news including new game releases and positive profit warnings. Personally, I am convinced that one way or the other, we will see G5 Entertainment’s share at SEK 40 or higher within the coming 12 months. If the market does not gradually value the company higher, some acquirer will take advantage of the mispricing in the market.

That said, already this week, the company is likely to publish 2 new games for iphone and ipad, sequels of its blockbusters “Supermarket Mania” and “Treasure Seekers”. My guess is the stock will trade above SEK 24 by the end of this week. Here is a list of the scheduled game releases for 2011: http://www.g5info.se/spelmatrix.htm

(for my more detailed take on the G5 Entertainment case please go to www.nordicinvestor.de

seekingalpha pushing mobile gaming stocks

24 Apr

just read an interesting article on www.seekingalpha.com  by Robert Irr who is pushing mobile gaming stocks. While I do agree with his arguements about the attractiveness of the mobile gaming market as such, I am missing one name on his list of companies that benefit from these trends: G5 Entertainment. Okay it’s micro-cap and Okay it’s European, but the strong earnings growth and attractive valuation of the share make G5 Entertainment one of the most attractive investment opportunities right now. For a more thorough take on the case check out www.nordicinvestor.de

Here’s the seekingalpha article in full:

“For the past decade, the top gaming companies like Electronic Arts (ERTS) and Activision Blizzard (ATVI) operated on a very predictable formula. Ride their top gaming franchises, make small incremental improvements each year, and watch the profits roll in.

For Electronic Arts it involved updating their popular sports franchises like Madden, tweaking a few rosters, and adding a couple new game modes. Activision Blizzard stuck to their formula of gritty first-person shooters set in various wartime environments. If last year’s “Call of Duty” game was set in World War 2, change the setting to a war torn country in the Middle East. Sounds simple, right?

That model worked to perfection for several years, but the gaming industry is now rapidly changing with the rise of casual gamers and mobile gaming. Some consumers want to play a casual game on their smartphone or tablet without having to buy an expensive game console and a pricy $60 game.

According to data from IDC, the global mobile gaming market is forecasted to reach $13B in revenues by 2014. With the rise of high-functionality smartphones, more and more consumers are buying apps on their handsets. Some of the most popular apps are independently developed games like the cult-classic Angry Birds.

What’s even more surprising is that some game developers are increasingly rely on a “Freemium” model where they gave the games to consumers for free and rely on in-game ads to generate revenues. As smartphone/tablet penetration rates increase, more and more consumers will be shifting towards these casual games.

So who are the top players right now in the mobile gaming sector?

Glu Mobile Inc. (GLUU) is one of the top companies in this sector with a variety of games geared towards the iPhone and Android. The stock has rewarded investors with an eye-popping 1 year return of 278%, but more upside could be on the horizon. With the rise of the iPad and Android tablets, Glu is beginning to design games that are optimized for tablets. If Glu can execute as well in the tablet space, there is even more upside ahead for their tablet-based games. Mobile app providers like Glu are always hot acquisition targets for gaming companies looking to make inroads into mobile.

Another key player in the gaming sector is the French based gaming studio Gameloft SA (GLOFF.PK). Gameloft sells 83 different games for the iPhone/iPod touch and 36 games for the iPad touch. The majority of their games retail for $0.99 and are geared towards the casual gamer. In 2010, Gameloft’s revenues increased by 16% to ~$203M. Gameloft also recently signed a long-term agreement with Qualcomm (QCOM) to deliver games specifically optimized for Qualcom-based handsets. As the mobile penetration rate increases both in the United States and Internationally, Gameloft stands to benefit in a big way.

If you are looking to cash in on this massive and fast-growing app revolution, you definitely need to keep an eye on Glu Mobile and Gameloft.”

Feeling good about the market

8 Apr

I have to say I am feeling pretty good about the market right now. We have bounced back nicely from the Japanese disaster and the turmoil in Northern Africa. Finally we are focusing on the fundamentals again and they are looking pretty encouraging. Chinese industrial production continues to impress despite interest hikes and inflationary worries. Leading indicators in the US and Europe are still at elevated levels which indicated significant growth ahead. Naturally, all eyes will be on the Q1 reporting season soon and I am optimistic that we will see a further boost for equities from that. Yes raw material prices are high but they are so due to increased demand which is boosting margins and is more than offsetting the effects of higher input costs. I’d be looking for companies that are mainly doing B-2-B and have shown superior pricing in the past. Those are the most likely to shrug off margin worries and should see handsome reward from the stock market. Perfect examples are the Swedish capital goods giants such as Atlas Copco and SKF.

I am long and hope you are too…

(www.nordicinvestor.de)

G5 Entertainment raises outlook for Q1 2011

4 Apr

Today, G5 Entertainment raised once agains its outlook. this time for Q1 2011. Additionally, the company announced that it will publish 5 titles for Android during the second quarter of 2011. This will be the first games for Android published by G5 Entertainment.

Top-pick for 2011: G5 Entertainment

3 Apr

www.g5e.com

The company:
G5 Entertainment is a company specialised on app development with focus on casual and time-management games for the Iphone, Ipad and Mac. Apps for Android are expected to be launched during 2011.
G5 Entertainment started as one of the world’s leading mobile game development studios, developing games based on popular licenses for Electronic Arts, Disney, THQ, Konami and others. Since 2009, G5 Entertainment is developing and publishing downloadable games of iOS, PC and portable game consoles. G5′s portfolio includes popular casual games like Supermarket Mania, Virtual City, Stand O’Food and Mahjongg Artifacts. G5 also develops games based on third party licenses and publishes games developed by third party developers – in both cases on revenue share terms.

The industry:
The global app market is growing strongly both for Apple’s Iphone and Ipad but also Android. First of all this is caused by an ever growing base of devices. In a recent article, Swedish newspaper Dagens Industri wrote about a Morgan Stanley report saying that it expects the number of sold tablets to grow from 16 million in 2010 to 55 million on 2011, 85 million in 2012 and 102 million 2013. On top of that, Apple continues to sell millions of iPhone’s each month (in its Q1 2011 Apple sold 16.2 million iPhones and 7.33m iPads). So the underlying market for apps is growing steadily.

The case:
The company is still small but is growing impressively and is sitting on a net cash position. In 2010 sales reached SEK 22.75m and EBIT of SEK 9m, implying a very strong EBIT margin of some 41%. In connection with its Q4 report published in February 2011, the company guided for 2011 revenues to reach SEK 45m, i.e. an increase of almost 100% year-on-year. Management also guided for an EPS of SEK 1.9 in 2011, up from SEK 1.01 in 2010!
These goals seem ambitious at first glance, but G5 Entertainment has in the past always managed to exceed its targets and the business model gives rather good transparency making revenue development more predictable.
During 2010, G5 Entertainment released a total of 27 games, compared to only 9 games released in 2009. The group aims to release 80 more games in 2011, including games for Android. At the end of 2009, G5 Entertainment had a portfolio of 17 games. At the end of 2010 – a portfolio of 44 games. With the release of 80 games in 2011, G5′s portfolio is set to grow to over 120 games by the end of 2011.
The beauty of it: The games published 2 years ago are still generating substantial income, without adding any additional costs. In February 2009, G5 Entertainment released its first iPhone game “Supermarket Mania, which became a success on the App Store. In March-May 2009, there was a substantial peak of sales for the game, and then revenue settled on a stable off-peak level. In 2011, Supermarket Mania for iPhone generates the same level of monthly sales as in 2009 after the peak! Other products show similar patterns. G5 Entertainment capitalizes development costs during the development of new products and depreciates the cost evenly over 2-year period following the release of the game. As of Q2 2011, 100% of the revenue generated by Supermarket Mania for iPhone will contribue directly to profit, as it is no longer to be offset by depreciation of the development costs – talk about margin booster!

You can follow the rankings of G5 Entertainment’s games in the different app stores on:
www.igamestats.com/company/392-g5-entertainment.html

The valuation:
G5 Entertainment’s share is currently trading at around SEK 24 per share. The stock market is always forward-looking so we are only interested in expected earnings. Management’s current EPS guidance of SEK 1.90 per share for 2011 implies a PER of 12.6x – a bargain for a company that is growing its earnings by an expected 90%!
There are not many app developers listed on the stock exchange but we have found two of them. French Gameloft and American Glu Mobile are also developing gaming apps but their profitability is either much weaker compared to G5 Entertainment (in Gameloft’s case) or non-existing (Glu Mobile).
Nevertheless, Gameloft is currently valued at a PER of around 22x expected 2011 earnings. It is a bigger company than G5 and followed by several French analysts so estimates are readily available. Since Glu Mobile is still loss making (analysts expect this to continue into 2012) it is not possible to look at a PE-ratio. In order to also take the balance sheet into consideration we can look at EV/EBIT valuations as well. Here the market values G5 Entertainment at some 11x its expected 2011 EBIT. Analysts expect Glu Mobile to earn an EBIT of USD 8m in 2013!!!, so if we take today’s enterprise value this implies an EV/EBIT of 21x on earnings two years in the future! To sum it up: both Gameloft and Glu Mobile are valued significantly higher than G5 Entertainment.

The fair value:
We believe a fast growing company in a fast growing sector with superior profitability and a strong balance sheet should normally be valued at a 12m forward PE-ratio of 30x and upwards. We acknowledge that G5 Entertainment is still a small company with no institutional ownership and a rather short track record. This explains in our opinion the steep discount to peers and other growth cases. However, we are convinced that this discount will disappear over time as G5 Entertainment is likely to continue to beat its own targets and more and more investors will become aware of the stock. As a first step we would expect the share to trade at a PE-ratio of 20x. Applying this on the current 2011 EPS estimate of SEK 1.90 we see a short-term fair value of SEK 38 per share. Nordic Investor holds shares in G5 Entertainment. We would not be surprised if sooner or later one of the bigger software companies will put a bid for G5 Entertainment if the low valuation continues to persist. There has been some activity on the M&A front in the app market in recent months.