One day later than from us expected, G5 Entertainment released this morning its Q3 update and more importantly gave a first guidance for 2012.
The company says: “ The management announces that the group’s goal for year 2012 is 87 MKr revenue with 30 MKr operating result and EPS of 3.2 Kr. ”
EPS of SEK 3.20 next year implies earnings growth of 70% for 2012 versus 2011. G5 continues to grow fast and with stellar profitability. Revenues of SEK 87m would imply growth of 85% compared with expected 2011 levels of SEK 47m and at SEK 30m, the implied EBIT margin is 34.5% for next year (which compares to the expected 2011 level of 35%). Elsewhere, the company left the forecast for 2011 unchanged.
There are several things I’d like to comment on regardings today’s press release:
- It seems as if management sticks to its strategy to ramp up marketing and developing capacity during H2 2011 which implies increased costs in the short run. FY 2011 earnings guidance is therefore unchanged and the company is preparing for a strong 2012 to come.
- I am very pleased by the EBIT margin guidance of 34.5% for 2012, i.e. almost at the same level as for 2011. This shows that G5 does manage to keep comparable margins in its business when porting other developers games to iOS and Android compared to developing own games. CEO Suglobov has been stating this in the past but it is encouraging to get some numbers on it as well.
- The SEK 3.20 EPS guidance implies a continued low tax rate of around 15%. In our most recent Nordic Investor comment “2012 estimates” we used a more normal tax rate for Sweden of some 26%.
- Revenues of SEK 87m is in our opinion a good proof that G5 management continues to be conservative, as it has been in the past. While this would be an increase of 85% year-over-year, it would not take more than 120 new games and comparable average selling rates as in 2011 to reach that number (for my complete reasoning on this issue please see our comment from September 24th “2012 estimtates”). This can be achieved by publishing only one game per current partner studio on the iPhone, iPad, Mac and Android (i.e. 4 platforms) plus an additional 5 games on their own on all of these 4 plattforms. My guess is that we will see more than 25 partner studios towards the end of 2011… If we assume 30 partner studios publishing 1 game on 4 platforms plus 5 own games on 4 platforms and at the same time use an average download ratio per games which is almost 10% below 2011 levels, I get to a revenue number of SEK 99.5m. Applying the guided EBIT margin of 34.5% and the tax rate of 15%, the corresponding EPS would be SEK 3.65 per share
CONCLUSION:
G5 Entertainment is a great company with experienced management and the financial means to capture the opportunities they have in the fast growing mobile gaming market. I have no doubt that the company will achieve the SEK 3.20 per share next year, in fact, I am convinced it will be more than that! While I am writing this, the share is trading at SEK 22,00 implying a PER of 11.6x on 2011 earnings and a PER of 6.9x on 2012 earnings. Now, 2011 is almost over and the market is always forward looking so one can wonder how reasonable a PER of 6.9x is for a company that expects to grow its EPS by 70% next year. There might several shares these days that got beaten up and are trading at PER around 10 and below but how many of those are growing so fast? PER should always be seen in relation to the earnings growth rate.
G5 Entertainment is undervalued at these levels; nothing to argue about. Given the new guidance of SEK 3.20 per share, the share should trade at at least SEK 32. Given the fast growth a PER of 15x should be more realistic despite the fact that the general risk premium in the equity market has been increased over the last weeks and months. 15 times 3.2 is SEK 48!
Congratulations to all of you who are shareholders in this beauty!
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