G5 Entertainment released its preliminary Q1 2013 numbers this morning. As we had come to expect, they were somewhat shy of the company’s guidance given in connection with the Q4 2012 report. Nevertheless, Q1 2013 still marked a new record quarter for G5 Entertainment with revenues reaching around SEK 27m. Not all distribution channels have delivered their reports yet so the final outcome is likely to be somewhat higher, we believe. Adjusted for negative FX effects, we believe the y-o-y revenue growth came in at around 60% in Q1. EBIT adjusted for non-recurring items (related to the ongoing relisting to Nasdaq OMX) is expected to come in at around SEK 9.4m, which implies a margin of around 35%.
As we have mentioned in our recent ranking checks for G5 Entertainment, the second half of Q1 showed a decline in top grossing rankings which was not completely offset by a strong development for the free-to-play games, in particular Secret Society. Google Play continues to remain an area of concern for G5, judging from the top grossing positions. We eagerly await the launch of Doomsday Preppers and Secret Society for Google Play, which should lead to a major boost for the company. Also additional free-to-play titles for iOS are in the pipeline according to G5 management.
We are not surprised that G5 did not manage to report growth of around 80% y-o-y, given our recent ranking checks. That said, this certainly increases pressure on the company if they want to deliver on their target of “historical growth rates” for the full-year. While this is certainly still within reach, it is highly dependant on future game releases and the performance of its free-to-play games. G5 has increased its focus on quality over recent months, which has in our opinion caused several delays of game releases. On the other hand, this should bode well for the coming game launches and we expect more free-to-play titles to be released sooner rather than later. The significant success of Virtual City Playground and also Secret Society (which holds top 100 rankings for several weeks already in the important US iPad market) show the potential that lies within G5’s niches.
Furthermore, we argue that G5’s current valuation on the stock market is by no means in sync with its operational performance. Even at an annual growth rate of “only” 60%, G5 can easily earn an EPS of around SEK 4 (excluding non-recurring items) in 2013, which would imply a 12-months forward PE-ratio of around 13.5x. International companies with exposure to mobile gaming (but with much lower growth than G5) are currently trading at expected 2013 PE-ratios of around 25x (Gameloft) and 20x (Electronic Arts). Glu Mobile is not expected to make any profit this year (according to current consensus estimates, which we believe are too low – but that is another story…) but looking at their PE-ratio on 2014 estimates, the share is currently trading at a PE-ratio of 30x. Needless to say that we expect a signficant revaluation of the G5 Entertainment share once international investors can invest in the company when it is listed on Nasdaq OMX.
Here is the company’s press release from today:
The group has not yet received all Q1 2013 reports from all distribution channels. Based on the information available, for the period of January-March 2013, the management forecasts revenue at 27 MSEK, with operating result before extraordinary one-time items at 9.4 MSEK. Extraordinary one-time items are legal and other fees paid in connection with the start of the process to apply for a listing of the company’s shares on NASDAQ OMX Stockholm in the second half of 2013. These items are not connected in any way to the group’s game development and publishing operations.
The management forecasts operating result in accordance with IFRS (extraordinary one-time fees above included in expenses) to be 8.1 MSEK, and earnings per share to be 0.87 SEK for the period. This forecast corresponds to achieving 55% revenue growth and 41% (63% when excluding extraordinary one-time items) operating result growth compared to the same period of 2012. The group reports results in SEK, but receives virtually all of its revenue in other currencies. SEK has reached its strongest exchange levels during Q1 2013, unlike a year ago. This reduces perceived growth during the period when comparing to previous year. The group’s interim report for the period January-March 2013 is going to be released on 15th May 2013
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