Daily revenues generated by mobile games for iPhone in the USA have on average increased by another 1% compared to our last channel check one week ago (data provided by www.thinkgaming.com). The gradual increase of the daily revenues generated ever since the beginning of December continues untiringly. Since the beginning of 2014, daily revenues generated by mobile games for iPhone in the USA have now on average increased by close to 40%.
Last week, Sweden listed mobile gaming developer and publisher G5 Entertainment released its Q2 2014 report which showed revenue growth of 86% y-o-y. This came despite the fact that no major new game was launched during the quarter and is another strong sign that the underlying market is growing nicely, while at the same time, G5 manages to keep the top grossing ranking positions for its most important games. G5 is currently working on upcoming new free-to-play games with the aim to have more than 10 free-to-play games in the portfolio before the end of 2014.
Given the steady growth of the underlying market, combined with the upcoming release of new F2P-games, we are optimistic that G5 will be able to increase its revenues in H2 versus H1. For Q3 and Q4, we are now assuming a sequential revenue increase of 4% and 6% respectively, which leads to a FY 2014 revenue estimate of SEK 167m. This implies a y-o-y increase of 67% and must be seen as very impressive, even by the worst critics out there. In our updated scenario, we are now incorporating the higher fixed cost base. However, due to the expected sequential increase in revenue we believe G5 will be able to increase its adjusted EBIT margin from 9% in Q2, to 10.6% in Q3 and around 13% in Q4. This leaves us with a 2014 EPS estimate of SEK 1.69.
The transition to a F2P-player has been successful. The F2P-space is different compared with the original mobile gaming space and requires increased marketing cost. We are therefore not 100% sure that G5 will manage to return to its previous EBIT margin levels of 30% and more. However, we argue that this is not necessary either. At the current share price of around SEK 28, G5 is trading at roughly 17x our updated 2014 EPS estimate. For a company that is expected to grow sales by 67% for the FY 2014, this is certainly not ambitious at all. Furthermore, we believe that growth will continue into 2015 and beyond, both due to an increasing market and a larger games portfolio that will start to monetize in earnest during 2015. Prudently assuming sales growth of 25% for 2015, and an increased EBIT margin (due to the operational leverage) to 15%, we would end up with a 2015 EPS of just below SEK 3. This means that G5 is currently trading at a 12m-forward PE-multiple of 9x. This is very very cheap! In comparison, US mobile gaming developer Glu Mobile, is currently trading at 22x expected 2015 EPS.
Applying a 12-months forward PE-multiple of 22x on an estimated 2015 EPS of SEK 3 would imply a fair share price of SEK 66 for G5 Entertainment.
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