The Q2 2012 is slowly but steadily coming to an end but before, our top-pick G5 Entertainment will present its Q2 report on Wednesday, August 15th. Frequent readers of our thoughts and shareholders know that the actual numbers are not that much in focus since G5 always releases preliminary numbers a few days after the quarter has ended. This time was no exception and on July 5th, G5 released the following statement: ”
“G5 Entertainment announces preliminary results for January-June 2012. Revenue during the period is estimated to be 35 MSEK (19.1 MSEK in Jan-Jun 2011), operating results: 9 MSEK (7.8 MSEK in Jan-Jun 2011). This corresponds to about 83% revenue growth and about 16% operating result growth compared to the same period of 2011. The management keeps earlier communicated goal for full year 2012 of 87 MSEK revenue and 30 MSEK operating result. The group has a mid-term goal to achieve annual revenue of 300 MSEK and operating result of 100 MSEK in the next few years.”
As we have already commented in July, this statement implies Q2 revenues of around SEK 17.6 m and an EBIT of 3.3m, implying a margin of 18.4%, i.e. significantly below the 33% recorded in Q1.
CEO Vlad Suglobov was kind enough to share his thoughts about the numbers with Nordic Investor: “Q1 is seasonally strong every year. Q2 seems a bit sluggish when comparing to Q1 every year. This is natural and seasonal. There is simply less money being spent by users in Q2 compared to Q1, in my opinion. Q1 has boost thanks to many holidays and gifts which are often smartphones and tablets which people are eager to user after they receive such gifts.
Regarding the margin, while revenue stayed around the same, we continued to build the company for the long term. That’s why there’s pressure on margin. We should see further growth in revenue in 2nd half of the year which should offset the expenses and we should be back to “normal” margin of around 30%. Comparing Jan-Jun 2012 to Jan-Jun 2011 is especially difficult since in Jan-Mar 2011 G5 had initial big success in Q1 with its games without increased investment in building the company further which only started at the end of Q2 2011. That’s why margin in Jan-Jun 2011 was around 40%, so we are comparing to very high base. To get back to our “normal” margin, we only need certain growth of revenue, which we plan to achieve with all the projects we have coming out in the 2nd half of the year.”
On Wednesday, we will certainly be looking out for further comments around the margin development. We will closely examine where the cost increase took place and what will be said about further growth initiatives. We are convinced that the app market is strong indeed and G5 has an attracitve position/niche in this market. CEO Suglobov has shown in the past that he knows how to maneuver in this fast changing industry and we are confident that he will reach his mid-term goal of SEK 300m in revenues and SEK 100m in EBIT. Other app developers such as Glu Mobile, Gameloft and Electronic Arts highlighted in their recent Q2 reports that their mobile gaming business is flourishing. Looking at our regular ranking checks, we can note that G5 Entertainment is not only holding its positions but rather gaining ground in the top grossing games charts.
As so many times before, the stock market is living its own life and investors sold down the G5 share more than 20% since the release of the preliminary numbers in July. The share closed yesterday at SEK 33.50, at a PE-ratio of 10.5x 2012 earnings. In fact, it seems much more relevant to start looking at 2013 earnings and we believe an 2013 EPS in the region of SEK 5 does not seem impossible at all. This would imply a valuation of below 7x 2013 earnings. As a comparison, Glu Mobile, the only other listed pure play on the mobile gaming market, is currently valued at 30x expected 2013 earnings. This gap seems very unreasonable and we expect it to be closed in favour of G5 sooner rather than later.
Finally, here is this week’s ranking check:
G5 Entertainment games among the top grossing game charts for iOS:
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