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Nexon IPO values company at 15 times expected 2012 earnings

Found on Reuters ths morning: “Online gaming firm Nexon Co will raise $1.2 billion after setting the price of its initial public offering at the mid-point of a pre-set range amid solid demand from investors, a source with knowledge of the matter told Reuters on Monday.

Nexon will sell shares at 1,300 yen each after sounding out institutional and retail investors for the global offering last week, settling on the middle of a tentative range of 1,200-1,400 yen, the source said. The pricing comes after U.S.-based rival Zynga, known for its success with games on Facebook, was forced to lower its expected valuation in an IPO this month, due to weak markets and macroeconomic uncertainty. While the Nexon offering was multiple times oversubscribed, a decision was made not to seek the maximum price to ensure a good mix of long-term investors and give the stock a good chance to trade higher after its listing on December 14, the source said. Nexon is due to officially announce the pricing after the stock market close in Tokyo at 01:00 a.m. EST.

At the offering price Nexon will raise about 91 billion yen ($1.2 billion), making it Japan’s largest IPO this year. It will give the company a market value of 560 billion yen, roughly the same as mobile-based gaming firm Gree Inc. Both Nexon and Zynga offer PC-based games for free, but charge small amounts for in-game virtual items, a business model analysts see as relatively recession-proof. Nexon, whose most successful offerings include role playing game MapleStory and KartRider, posted an operating profit of 30 billion yen in the year to December 2010 on sales of about 70 billion yen. At 1,300 yen Nexon would trade at about 15 times consensus earnings projections for calendar 2012, according to the source, roughly in line with Gree.

Demand for the stock was not impacted by a cyber attack in which hackers gained access to personal information on more than 13 million subscribers to MapleStory in South Korea, the source said. Unlike Sony Corp, which was forced to close its PlayStation Network for about a month following a hacking attack earlier in the year, Nexon has kept the game running. Nexon, established in South Korea in 1994, plans to use 14 billion yen of the proceeds to pay off debt, another 9 billion yen to construct a new building for its main subsidiary Nexon Korea Corporation and the remainder on upgrading games systems, including potential investments in third-party games developers.”

At 15 times 2012 earnings, our top-pick G5 Entertainment would trade at SEK 48 per share (using the company’s own 2012 EPS guidance). This implies an upside of more than 100% compared to current levels and highlights how undervalued G5 Entertainment currently is. US gaming companies such as Glu Mobile and Majesco have been rallying last week ahead of the highly anticipated Zynga IPO which is expected to increase focus on gaming companies. It is also speculated that both Zynga and Nexon might use their IPO proceeds at least partly for acquisitions of mobile gaming companies.

I am long G5 Entertainment and you should be too.

Nordic Investor

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