As anticipated, G5 Entertainment reported a strong set of results this morning. Q1 2014 revenues of SEK 39.1m marked a 42% y-o-y increase, while EBIT came in at SEK 5.6m (versus SEK 9.4m in Q1 2013). The implied EBIT margin of 13% was markedly down compared with the level of 34% seen during the same period one year ago, but this comes hardly as a surprise given the shift of focus over the last 12-months. Instead, we are encouraged to see the clear change of trends as the 13% EBIT margin in Q1 shows a strong improvement compared with the levels seen in both Q4 and Q4 2013.
As you can see the graph above, G5 has managed to return to profitable growth and has furthermore generated record monthly and quarterly revenue and record cash flow before financial activities. The strong revenue development is driven by growth within free-to-play games, which grew 254% compared with Q1 2013. In total, they accounted for 66% of total revenue in Q1 2014 (versus 27% in Q1 2013).
Just as our channel checks via www.thinkgaming.com have suggested, G5 also mentions in the report that it has not experienced any traditional pronounced seasonality this year. The decline in revenue in Q2 2013 verus Q1 2013 was 21%, something which does not seem to reoccur this year. This is of course great news.
In turbulent times like these, it is also encouraging to hear that business in G5’s Kharkov office continues as usual.
Conclusion: All in all, we think G5’s Q1 2014 was a step into the right direction and shows clear signs of improvement. With new free-to-play games in the pipeline, we believe chances are high that the company with achieve its growth targets. In terms of share price valuation, we think that a stage is reached where the company seems finally undervalued again. Simply annualising Q1 2014 EPS of SEK 0.46 whould give us a full-year 2014 EPS of SEK 1.84. At current share price levels of SEK 32, this implies a PE-ratio of 17x. This appears as very attractive to us because:
- G5 seems back on track to grow around 40% – high growth justifies high multiples
- Quarterly EPS is likely to increase during 2014 compared to the Q1 level, i.e. simply annualising Q1 EPS levels is too conservative