Last Friday, mobile gaming developer and publisher G5 Entertainment announced new financial targets (http://aktietorget.se/NewsItem.aspx?ID_News=69301&Language=2).
The company aims at the following:
“The market for casual mobile games continues to grow quickly, and G5 Entertainment aims at continuing to grow revenue in line with or faster than the market.
Investments in activities that promote organic growth may from time to time have a negative effect on the operating margin, but the company aims at achieving an operating margin of 30% over time.”
Previously, G5 said that it wants to achieve SEK 300m in revenues and SEK 100m in EBIT, without being specific on the exact timing. The new financial targets imply an unchanged margin-guidance, which we believe comes somewhat surprisingly given the margin-deterioration during 2013, when G5 changed its focus more on more towards Free-to-Play games. This is obviously very encouraging as it highlights that the lower margins were most likely only temporary (we believe 2013 EBIT margin adjusted for non-recurring items was around 9%).
Applying the new financial target on the current situation, we believe G5 could have 2015 revenues of around SEK 200m with an EBIT of SEK 60m (using annual sales growth of ca. 40%). In combination with a flat financial net (as G5 is debt free) and a tax rate of 16% (in-line with historical rates), this would imply a net profit of around SEK 50m, or an EPS of SEK 5.7.
In light of the new financial targets the G5 share seems once again ridiculously undervalued. At the current level of around SEK 27, G5 shares trade at a 12-months forward PE-ratio of 4.7x using the back-of-the-envelope calculation above.