Stillfront Group

G5 Entertainment

Embracer Group

Starbreeze

Maximum Entertainment

* Limited growth potential, unlikely to achieve five-fold expansion in a decade due to mature market conditions.
* Lack of clear geographic expansion, potentially limiting market reach and growth opportunities.
* Operating in a fragmented AA gaming market with intense competition, challenging market dominance.
* Potential dependence on key individuals in certain business segments, particularly in Fireshine's publishing business.
* Products not contributing significantly to greater societal good, limiting appeal to socially conscious investors.

* Strong recurring revenue from live service games, providing stability and predictable earnings.
* Diverse portfolio of long-lasting IPs, including Everquest and MechWarrior, offering potential for future game development and brand loyalty.
* Close collaboration with gaming communities for product innovation and development.
* Generally positive employee satisfaction, particularly in some subsidiaries, fostering talent retention and productivity.

* Somewhat volatile margin on a quarterly basis, but more stable looking annually.
* Return on Equity (ROE) below 20% for the last five years, but partly due to legacy acquisitions.
* Inconsistent revenue growth compared to industry average over the last five years.
* Lack of stable earnings (EPS) growth over the last 10 years, suggesting potential volatility in profitability.

* Strong gross profit margin exceeding 40%, indicating profitable product mix and pricing power.
* Consistent improvement in operating margin (EBIT) over three consecutive years, suggesting enhanced operational efficiency.
* Strong balance sheet with a net cash position that can cover both investment and potential shareholder remuneration (dividend and share buybacks).

* Limited commitment to innovation, with the company focusing more on current strengths.
* Unclear sustainability-related performance incentives, potentially indicating a lack of focus on ESG factors.
* Uncertain CEO evaluation and succession plan, given Ji Ham's interim status.
* Limited information on the board's ability to challenge management without adverse consequences.
* Lack of clear, consistent dividend policy, with only one dividend payment in 2023 and unexecuted buyback announcements.

* Strong leadership with CEO Ji Ham demonstrating a clear long-term vision, industry expertise, and focus on building evergreen game franchises with repeatability potential.
* Lean organization with quick adaptability to market changes, consistent delivery on promises, and effective capital allocation strategies.
* High insider ownership, including significant stakes held by management and board members, aligning interests with shareholders.
* Transparent and timely investor communication, focusing on long-term business value and maintaining consistent equity story.
* Diverse and experienced board with a good mix of gaming and finance backgrounds, capable of creating shareholder value.

With revenues of SEK 666 million (Jan-Sep 2020) Daybreak Games is on par with EG7 (SEK 657 million including Big Blue Bubble and Piranha Games). During the same period Daybreak Games had an EBITDA of SEK 255 million which more than doubled the EBITDA for the whole Group (62% of total EBITDA pro forma).
Even more interesting is the balance sheet of Daybreak Games. Most gamers (in my own age) know or have played the over 20-year old MMO (Massive Multiplayer Online) “Everquest”. Daybreak Games owns this cult classic IP.
Our sources tell us the Everquest peaked in popularity around 2002 -2003. The game was a pioneer of its age, both critically acclaimed and commercially successful. The developers of the games were also one of the first to distribute digital expansions. Nowadays many loyal fans still play the game. According to the website “mmo-population.com” Everquest today has 26 000 dayily users and in total 915 000 players/subscribers. According to the same source this makes Everquest rank 39 of the biggest MMO´s by population. As a comparison Funcom’s Conan Exiles has rank 15 according to the same source. Two other IPs owned by Daybreak Games are the battle royal game H1Z1 and Planetside.
Daybreak has also been successful in developing and publishing online games within the franchises “The Lord of the Rings”, “Dungeons &amp; Dragons” and the “DC Universe”. In the press release announcing the acquisition we did not see how the revenues were split between different business areas/games.
In August 2020, Daybreak Games acquired “Cold Iron Studio”, a studio that has been developing an online game based on the Alien-franchise for several years. The studio had 40 developers at that time and was founded in 2015. The seller was the highly successful mobile games developer/publisher Scopely. Cold Iron Studio was a part of Foxnext Games acquired by Scopely a short period of time earlier. Being a PC/Console developer Cold Iron Studio was not a suitable fit for Scopely. We believe it is therefore a good guess that the price tag was attractive for Daybreak Games.
After the acquisition of Daybreak Games, the major shareholder Jason Epstein will own around 10% of the shares in EG7 and become the largest shareholder in the Group.
Considering the size of this acquisition we would likely rather call it a merger or a “reverse acquisition” EG7 becomes a totally different entity. The dilution after the transaction is approximately 40% for existing shareholders, which is more than a fair price we would say in this early stage. Our initial opinion is that this deal looks very interesting for EG7 and its future prospects. In only one week the Group has not only moved to the next level but an entirely new dimension.
This new dimension of course means new great opportunities but also risks. Daybreak Games has in the last years suffered from multiple layoffs and reorganizations. Online PC-games (its core business) has many similarities with the mobile games industry, it is highly competitive and primarily dependent on a free to play model. And many games come with a big budget.
In 2015 Sony Online Entertainment sold the company to Jason Epstein (mainly) and the major deal today can partly be seen as an exit for Jason Epstein. The majority of the deal is cash-based and no earn-outs were announced, however of course a lock-up (24 months). However, he will still own around 10% of EG7, meaning he still has a lot “skin in the game”.
New games from Daybreak Games will of course be announced, one of them not unlikely within the Everquest-franchise. The new EG7 will certainly give shareholders many catalysts in the future, more potential and more risks.
The targeted share issues were completed successfully at no discount. Meaning SEK 82 per share. New and existing institutional shareholders participated with SEK 1.7 billion including Swedbank Robur, Handelsbanken Fonder, Skandia, Första AP-fonden, Lannebo Fonder, Stena, TIN-fonder and Creades.
We will increase our valuation range significantly. Our new “work in progress” valuation rage is SEK 40-130 (SEK 21-100) with a new base-case of SEK 90.
The valuation-multiples in the table below is based on a share price in EG7 of SEK 82.
<img class="alignnone wp-image-800860 size-full" src="https://res.cloudinary.com/redeye/w_853,h_364,c_fill,dpr_2.0/cms/app/uploads/2020/12/eg7-daybreak.png" alt="Financials, Jan-Sep" width="853" height="364" />