G5 Entertainment reported a strong set of results this morning. Consolidated revenue for Q1 2012 was 17 388 KSEK, up 82% compared to 9 548 KSEK for the same period of 2011. This was 1% above the recently hiked guidance of 17.2 MSEK.
Operating result for the period came in at 5 753 KSEK, up 49% compared to 3 858 KSEK for the same period of 2011. This result was 3% better than the recently hiked guidance of 5.6 MSEK. Earnings per share for the period were 0.58 SEK. Management confirmed the previously announced goal for the period January-December 2012 of 87 MSEK revenue and 30 MSEK operating result with EPS of 3.2 SEK. Given the strong performance in Q1 and the strong rankings so far in Q2, we believe there is clear upside potential to the company’s FY 2012 guidance but we like management’s conservative approach to keep it untouched at this point.
Interestingly, G5 Entertainment is even reporting strong cash flow, despite the fact that the company is in a strong product expansion period with associated development costs. Even after these development costs, cash flow was 1 108 KSEK, further contributing to the already strong cash position of now 18 518 KSEK.
The highlight in today’s report was nevertheless another fact, namely that management now officially announced its goal to turn G5 into a company with 300 MSEK annual revenue and 100 MSEK operating result in a couple of years. Going forward, the management aims to keep the group’s long term average revenue growth at 2010/2011 levels. In connection with this announcement the management is changing its quarterly forecast update policy and will not be providing quarterly guidance or updates in the future.
CEO Vlad Suglobov has previously envisaged the mid-term goal of reaching revenues of SEK 300m and an EBIT of SEK 100m. Now the company is making this an official goal. This is remarkable and given the growth opportunities going forward for both the market in general and G5 in particular, its seems fully realistic that these goals could be reached by the end of 2014. This has naturally huge implications for the company’s share price going forward.
In order to arrive at an implied EPS at the new target stage (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 a 12m-forward PE-ratio in-line with current levels of around 12 times, this would mean that the G5 Entertainment share should trade at close to SEK 130 at the beginning of 2014. More reasonable multiples for a high growth story such as G5 of around 15-20 times forward looking earnings, imply share price levels of around SEK 160 -210.
We are long G5 Entertainment and you should be too!