Redeye updates on Maximum Entertainment post Q2-results where topline was somewhat soft while EBITDA was in line with expectations, supported by a strong gross margin. While we have made limited changes to our estimates, we have lowered our valuation range to reflect the risk of an equity raise owing to a continued high debt level.

<strong>Soft topline in Q2, but EBITDA in line</strong>

Maximum Entertainment reported revenue of EUR17.4m and EBITDA of EUR1.4m for Q2 2024 which can be compared to our forecast of EUR19.0m and EUR1.4m, respectively. While topline was soft, the gross margin of 34% was stronger than our forecast of 31% and up from 32% in Q1 2024 and 29% in Q2 2023. This was achieved despite a stable revenue mix from own IPs which stood at 14% in the quarter, and we believe it was likely driven by higher digital sales and better pricing. With stable opex development, this supported an EBITDA that was in line with our expectations. The table below shows the Q2-results outcome compared to our forecast.

Maximum Entertainment

* Lack of recurring revenue model and inability to scale up without expensive reinvestment.
* Not positioned to grow five-fold in a decade or capture the greatest market value.
* Industry's 10-year median ROIC is below 15%, indicating potential profitability challenges.
* Products do not have long lifespans (over a decade), and the market is not dominated by few players.
* Inconsistent returns on invested capital compared to cost of capital, suggesting potential competitive disadvantages.

* Strong growth potential with meaningful reinvestment opportunities and successful geographic expansion.
* Benefits from secular tailwinds supporting growth and core business unlikely to be disrupted.
* Easily identifiable sustainable competitive advantages.
* Diversified and wide revenue base with minimal regulatory interference and independence from key individuals.
* Proactive customer engagement for innovation and focus on creating value for customers and suppliers.

* Poor profitability metrics, including low gross profit margin, operating margin, return on equity, and return on assets.
* Weak historical growth in earnings per share (EPS) and stock price since IPO.
* Concerning financial health indicators, with unfavorable current ratio and high debt levels relative to operating cash flow and free cash flow.
* Low operating cash flow and free cash flow conversion rates, suggesting potential issues in turning profits into actual cash.
* Lack of dividend payments or growth, indicating limited shareholder returns and possible cash flow constraints.

* Revenue growth consistently above industry average over the last five years, indicating market share gains and competitive strength.
* Cash and short-term investments cover expected cash burn for more than two years, suggesting financial stability and resilience.
* Efficient inventory and accounts receivable management, with both ratios below 20% and their 5-year averages.
* Low occurrence of one-time charges, averaging less than 3% of sales over the past five years, demonstrating financial transparency.

* Senior team and CEO tenure under five years, potentially indicating instability or lack of continuity in leadership.
* Management has not consistently delivered on promises, which may erode investor confidence and trust in the company's ability to execute its strategies.
* The company lacks a clear, consistent, and affordable dividend payout policy, which could be a concern for income-focused investors.
* There's weak commitment to sustainability reporting, potentially exposing the company to reputational risks and failing to meet growing stakeholder demands for ESG transparency.
* Board members do not hold sizeable personal stakes in the company, which may reduce their alignment with shareholder interests and commitment to long-term value creation.

* Strong founder involvement and significant insider ownership (>10%) demonstrate commitment and align interests with shareholders, fostering long-term focus and potential outperformance.
* CEO demonstrates deep industry knowledge, focuses on successful capital allocation, and has a history of value creation, indicating strong leadership potential.
* The board promotes gender diversity in leadership and appears to have directors who deeply understand the value creation process, enhancing decision-making and governance.
* Management owns a significant stake in the business and there's a controlling owner with long-term commitment, further aligning interests with shareholders.
* The company maintains direct and timely business updates, focusing communication on long-term business value, which fosters trust and transparency with investors.

EURm	2022	2023	2024e	2025e	2026e
Total Revenue	112.7	99.9	99.1	106.5	114.5
Revenue Growth	121%	-11.4%	-0.8%	7.5%	7.5%
EBITDA	9.2	12.1	14.1	18.2	21.6
EBIT	6.4	10.2	5.9	8.2	9.6
EBIT Margin	6.0%	10.2%	5.9%	7.7%	8.4%
Net Income	-7.4	-17.5	0.71	3.2	4.9
EV/Sales	0.4	0.6	0.5	0.5	0.5
EV/EBITDA	4.2	4.6	3.7	2.9	2.4
EV/EBIT	5.9	5.5	9.0	6.5	5.4

Soft topline in Q2, but EBITDA in line

Solid pipeline for H2 2024

Limited estimate changes, valuation lowered to reflect financial risk

Key financials

Soft topline in Q2, but EBITDA in line