G5 Entertainment announced this morning its preliminary numbers for Q2 2013 which were somewhat of a cold shower.
The numbers implied for Q2 isolated sales growth of 15% y-o-y and EBIT growth of 26% y-o-y. This was certainly on the weak side. As we have written in our regular ranking checks, G5’s game portfolio in total has had a rather pronounced decline in the top grossing rankings compared with Q1 but we hoped that the impressive performance of Secret Society would outweigh this. Unfortunately, G5 does not disclose how much Secret Society contributed to the overall revenue but we guess that our previous guestimate of around SEK 10m was too optimistic.
We reached out to G5 Entertainment’s CEO Vlad Suglobov who gave his view on the quarter:
“As usual, due to seasonality Q2 is a bit of a cold shower after Q1 powered by “digital christmas” effect, which cools off completely by the end of Q2. Same applied a year or two ago. This year we did not have outstanding unlockable game released in Q2, and unfortunately we did not manage to release new F2P games during the quarter.
With 6 months passed in 2013, we at Nordic Investor believe that it will be very challenging for G5 to reach historical growth rates of >80%. Revenues during the first half of 2013 were up 36% compared with the same period one year ago while EPS grew by 54% y-o-y. We have therefore decided to update our sensitivity analysis as you can see in the table below:
With the base assumption of 60% revenue growth and an EBIT margin of 30%, we believe that G5 should be able to reach a 2013 EPS of SEK 3.71. Given that kind of growth and profitability we believe that a reasonable PE-multiple applied to 2013 earnings should be north of 20x. Applying a PE-multiple of 19x to an estimated 2013 EPS of SEK 3.71 implies a fair share price of SEK 70.
Given that growth rates are likely to be high (i.e. above 20%) over the coming 2-4 year horizon, we expect the market to slowly but steadily start looking at 2014 earnings as we proceed through the second half of 2013. With the relisting to Nasdaq OMX approaching, we expect at least 1-3 brokerages to start covering G5 in more detail and expect them to apply PE-ratios of >15x on 2014 earnings.
Bottom line: There is significant upside in the G5 Entertainment share. Q2 was poor compared with G5’s own history but still excellent compared with general standards. As we have stated before, we do expect the share to trade higher not due to outstanding positive surprise on the operational side but rather due to a revaluation in connection with the relisting to Nasdaq OMX, i.e. higher valuation multiples which are more in-line with the valuation for other high-growth cases.
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