The Q4 2011 result reporting season is coming to an end but one of the highlights for us is still to come: G5 Entertainment will release its interim report for the period January-December 2011 on Friday, 24th February 2012.
As usual, the actual report will be less of a surprise as G5 has, in its typical fashion, already commented on the numbers in its mid-quarter update, published on January 4th, 2012. For the period of January-December 2011, the management confirmed its previously communicated forecast of SEK 47m revenue, SEK 16.5m operating result and earnings per share of SEK 1.90. This corresponds to achieving 106% revenue growth and 88% operating result growth compared to the same period of 2010. The total number of G5 game downloads on iOS and Android surpassed 33 million as monthly download numbers continued to grow in December 2011.
Furthermore, G5 commented that with the start of the holiday period, the group’s daily sales grew 70% from pre-holiday average in December 2011. The increased level of daily sales continued into January 2012. Vlad Suglobov, CEO, added: “We benefited from these holidays as the increased number of users unpacked their new smartphones and tablets, and went into the digital stores to purchase content for their new exciting gadgets. With the portfolio of over 100 games on iOS, Android, and Kindle Fire, G5 offers a great choice of family-friendly entertainment that equally appeals to people of all ages. G5 has been growing rapidly in 2011, and the management is focused on continuing the group’s high pace of growth into 2012.” According to a recent update on the company’s website, G5 aims to grow its game portfolio to over 300 apps by the end of 2012, compared to over 120 apps at the end of 2011, i.e. an increase of some 180 apps.
The events during Q1 2012 so far included positive news both from the underlying markets (i.e. smartphones and tablets) and G5 company specific developments. For example, studies showed that the number of Americans owning a tablet doubled over the holiday season (see: http://nordicinvestor.net/2012/01/23/number-of-americans-owning-a-tablet-doubled-over-holidays/). Apple blew market expectations away with a monster Q1 result selling more than 37m iPhones and more than 15m iPads during the quarter (http://nordicinvestor.net/2012/01/25/apple-monster-q1-result-stuns-the-market/). Several competitors to G5 Entertainment, such as Glu Mobile, Gameloft and Zynga reported numbers that beat expectations and most importantly confirmed in their comments that the mobile gaming market is set to grow for many years to come. Company specifically, G5 Entertainment was successful at the bestappever awards 2011, with four of their games finishing among the top three in their respective categories (http://nordicinvestor.net/2012/01/28/g5-entertainment-successful-at-bestappever-awards-2011/). The company also announced that it will enter Nook platform, Barnes&Noble’s tablet device which has been gaining market share ever since its launch in November 2011 (http://nordicinvestor.net/2012/02/17/g5-entertainment-entering-the-nook-platform/). Last but not least, CEO Suglobov visited Stockholm at the beginning of the year and once again conveyed a confidend message to investors (http://nordicinvestor.net/2012/01/12/g5-entertainment-ceo-full-of-confidence-at-stockholm-meetings/).
All in all, a lot of encouraging and comforting newsflow for G5 Entertainment shareholders and we at Nordic Investor think this is particularly promising as it increases the likelihood that the company will deliver on its communicated 2012 targets of revenues of SEK 87m and an EPS of SEK 3.20. We do not expect the company to make any changes to the 2012 targets at this point. Overall, we do not expect the Q4 2011 report to be the source of any major news as such, rather a confirmation of the positive trends. Given the strong share price run over recent weeks, we would not be surprised if the absence of a target hike was to lead to an initial sell-off on the day of the report. However, we would view such a sell-off as the ideal opportunity to increase our exposure in G5 even further.
The positive events have not gone unnoticed by the stock market and the G5 Entertainment share enjoyed an overdue revaluation at the beginning of 2012 from the low SEK 20 -levels to currently SEK 45. Despite this impressive run, the company is only trading at a 12-months forward PE-ratio of 14x, hardly a reasonable multiple for a company with such high earnings growth and the track record that G5 has. CEO Vlad Suglobov has previously envisaged the mid-term goal of reaching revenues of SEK 300m and an EBIT of SEK 100m. If the company can manage to capture the growth opportunities going forward as well as it has done in the past, these goals could almost be reached by the end of 2014. What this would mean for the share price is best shown with a back-on-the-envelope calculation:
- The market is currently valuing G5 Entertainment at a 12m-forward PE-ratio of 14x.
- In order to arrive at an implied EPS under the “mid-term scenario” (i.e. revenues of SEK 300m and an EBIT of SEK 100m), we make the following assumptions: a) a financial net of zero, which is conservative since G5 Entertainment has actually a net cash position and b) a tax rate of 15%, i.e. in-line with current levels. This leads us to a net profit of SEK 85m under the “mid-term scenario”, which implies an EPS of SEK 10.6
- Applying the same 12m-forward PE-ratio than today, this would mean that the G5 Entertainment share should trade at close to SEK 150 at the beginning of 2014, i.e. in two years time.
Interestingly, at SEK 150 we are still using a PE-ratio of only 14x, which seems hardly fair for a fast growing, profitable company. If the mid-term scenario was to materialize we expect the market to be willing to pay higher multiples by then. A PE-ratio of 20x would imply a fair share price of around SEK 210 by 2014.