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#G5 Entertainment: Q2 2013 preview

newlogoOn Thursday, August 15th G5 Entertainment will report its Q2 2013 report. As usual, the preliminary numbers are already known (announced on July 3rd). The market sold the G5 share down from its peak of around SEK 55 in early June to currently around SEK 47 as a consequence of the surprisingly weak Q2 numbers.

The preliminary Q2 sales growth of 15% y-o-y and EBIT growth of 26% y-o-y, although still impressive, mark a deceleration of the historical growth rates shown by G5. This was all the more surprising as G5’s game Secret Society is the most successful ever for the company. Our regular ranking checks have shown, however, that the overall game portfolio is steadily trending downwards in the top grossing charts. Unfortunately, G5 does currently not disclose how much Secret Society contributes to the overall revenue. What’s positive is that the game continues to be ranked around #50 in the top grossing charts for iPad in the USA, so the revenue flow from Secret Society continues to be good also in Q3 so far. On a negative tone, a recent update of Virtual City Playground has not had a significant impact on the game’s top grossing positions yet. In Q3 2012, VCP had a stellar quarter which makes the comparison base a very tough one for Q3 2013.

What to look for in the Q2 report:

  • Any comments around the Secret Society performance will be highly interesting
  • As we reported a few days ago, G5 has launched a new free-to-play game in Canada, apparently to have a test-run there. “Pet Zoometery”, as the game is called could be the long-awaited next success for G5 and we will eagerly await comments on when the game will be launched globally.
  • Details about Pet Zometery: is it internally developed?
  • Other new free-to-play titles: how many and when?
  • Comments on the relisting to Nasdaq OMX. We believe that it will take place in early Q4 but the sooner the better for the share price, obviously
  • We will be looking for comments on how G5 management intends to boost the performance of its games on Google Play. On this platform G5 is clearly lagging its own success on iOS. Also, what will management do in order to push the performance of its non-free-to-play games? Judging from the preliminary Q2 numbers, they actually declined y-o-y if we assume a revenue contribution of around SEK 8m from Secret Society.
  • Any comments on the long-term targets. G5 aims to reach revenues of SEK 300m and EBIT of SEK 100m, while mainting historical growth rates (ca. 85% p.a.). Is this still valid?

Number of G5 Entertainment games among the top grossing charts for iOS:

(We are screening the app markets of Australia, Brazil, Canada, China, France, Germany, Italy, Japan, Netherlands, Russia, South Korea, Spain, Sweden, UK and USA)

G5iosrankings

We continue to see 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. 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. As share price of around SEK 100 should therefore not be out of reach in the coming 12 months.

Nordic Investor

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