in Mobile Gaming

#G5 Entertainment: Large upside to fair value

G5 Entertainment’s CEO Vlad Suglobov has been clear about this since a while back: The company targets revenues SEK 300m and an EBIT of SEK 100m in “a couple of years”. Furthermore, management aims to keep the group’s long-term average revenue growth at 2010/2011 levels going forward.

So what does the company’s target imply for 2013 earnings? Assuming 90% growth p.a. (in-line with recent history) in combination with an assumed 30% EBIT margin, we believe G5 will be able to realize an EPS of SEK 5.21 in 2013. To illustrate our thinking we have made the following sensitivity analysis:

We also continue to argue that a company that grows at the pace that G5 is doing and with such a profitability level should be trading at at least 15-20x 12-months forward looking earnings. This would imply a reasonable share price of SEK 75 – 100 based on expected 2013 earnings. As you can see in the graph above, applying a PE-ratio of 15x on the expected EPS level of SEK 5.21 implies a fair share price of SEK 78.

Let’s do  a sanity check whether a PE-ratio of 15x is reasonable for a company like G5. Besides the regular gaming peers, we have also included a smörgåsbord of well-known companies from different sectors in order to highlight one fact: G5 Entertainment is extremely undervalued at today’s levels. With an expected EPS growth of >60% in 2013, multiples of >20x should not be a problem. The issue remains the listing on niche-list “Aktietorget”. Once management decides to move to Nasdaq OMX, a multiple expansion would be a fact.

Oh yeah, and there is that thing with the historical share price pattern. The G5 Entertainment stock has always started to trade significantly higher in January of each year (it doubled both at the beginning of 2011 and at the beginning of 2012). The company always issues a preliminary quarterly result statement a few days after the actual end of each quarter (i.e. around January 3rd). So at the beginning of each year, investors get to hear that G5 has actually achieved its targeted revenue and earnings levels and the market starts to focus on the coming year. Furthermore, the holidays are THE most important part of the year for app sales in general. People unwrap their new smartphones and tablets and start to fill them with content. This goes usually along with very positive newsflow around the app industry in total and G5 Entertainment in particular.

Nordic Investor

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