Verve Group

* Lack of a diversified and wide revenue base, potentially exposing the company to risks associated with market fluctuations or customer loss.
* Possible cyclical nature of the advertising business, which could impact financial performance during economic downturns.

* Strong recurring revenue model based on advertising volumes, enhancing business stability and predictability.
* Asset-light business model allowing for efficient scaling with high incremental returns and minimal reinvestment needs.
* Clear competitive moat through extensive database and market leadership in the in-app advertising market.

* Lack of consistent earnings growth, with EPS growth not exceeding historical averages or maintaining stability over longer periods.
* Net debt exceeds two times operating cash flow, potentially indicating challenges in debt management.
* Absence of dividend payments or growth, limiting appeal for income-focused investors.
* Return on Equity (ROE) has not consistently reached 20% over the last five years, indicating potential room for improvement in capital utilization.

* Strong profitability with gross profit margin exceeding 40% and operating margin above 20%, indicating pricing power and competitive advantage.
* Consistent revenue growth above industry average over the last five years, suggesting market share gains and strong demand.
* High operating cash flow conversion (above 80%) over the past five years, demonstrating ability to generate real cash profits.

* EPS growth has been dampened by high debt and interest costs, potentially impacting overall financial performance.
* Lack of clear information about sustainability-related performance incentives in executive compensation plans.
* Insufficient information available to assess the CEO evaluation process and succession planning.

* Visionary CEO with long-term perspective and deep industry knowledge, consistently delivering on promises and creating shareholder value.
* Strong commitment to innovation and strategic planning, focusing on ID-less solutions and niche market segments.
* Clear and consistent investor communication, emphasizing long-term business value and transparency about mistakes.
* Founder-CEO owns a significant stake (c25%) in the company, aligning management interests with shareholders.

For the fourth quarter, we expect sales to grow by 54% y/y and reach EUR 75.0m and forecast Adj EBITDA to grow 130% y/y, reaching EUR 23.3m, equalizing an Adj EBITDA margin of 31.1%. Thus, we expect MGI to beat their Adj EBITDA guidance for the full year. Furthermore, yesterday (9th of February) MGI announced that it intends to move its headquarter to Stockholm, something we deem as positive.
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We expect sequential margin improvements in both segments. Further scalability and good ROI on user acquisition costs will drive improvements in games. Most MGI’s games are played on PC/Browser and are within the strategy MMO genre, suggesting limited effects from the IDFA implementations compared to competitors.
We expect the previously gained market share to continue for the media segments. MGI’s media segment operates within the “open” internet market outside Facebook and Google’s eco-systems. We believe the current IDFA implementations could imply that advertisers are moving from Facebook’s eco-system towards the “open” internet, which would benefit MGI.
We are also pleased to see the first receptions for its innovative ATOM solutions. Based on anonymized data, ATOM collects data regarding behavior and contexts provided to advertisers. This enhances the information for advertisers and improves its ROI on marketing activities. The product will be fully rolled out to customers during the year.
The business model within the media segment is characterized as a fixed costs business, which indicates that incremental sales will have a high drop-through rate. Moreover, Smaato’s margins are accretive to the media segments (&gt;30% EBITDA margins last year), and the entity has grown organically since the consolidation. The organic growth and already reached revenue synergies from cross-selling will support the profitability levels.
On the 9th of February, MGI announced that it intends to move its headquarter to Stockholm and expects to complete the transformation by the end of 2022, with an effective date in January 2023. MGI will implement a nomination committee and an independent board of directors in line with Swedish law, while MR Remco Westermann will remain CEO. MGI expects the transfer to enhance its reputation, removing any potential negative aspects from Malta’s greylisting issued by the FATF. Something we deem as positive since some global investors may be restricted from investing in companies headquartered in Malta. Furthermore, the administrative complexity of having three different legal entities will be reduced. Which likely will indicate some cost savings but predominately free up time for management. According to management, there shall be minor negative tax effects (15% tax rate in q3’21).
The share has been weak recently and is down ~25% since the q3 report, especially due to its recent minority purchase in EG7. As we stated in our previous note,  (<a href="https://www.redeye.se/research/828654/mgi-strategic-minority-position-in-enad-global-7">found here </a>) we understand the rationale behind the purchase and believe MGI could create strong synergies with Daybreaks game portfolio even though we would rather have seen further investments within the media segment.
Tech stocks have plunged during the last month, and MGI is no exception. MGI currently trades at ~30% discount to major peers on EV/EBIT estimates. Despite stronger growth outlooks and profitability levels.
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On our estimates, MGI currently trades at 7.1x EV/Adj EBITA (22’e), which we find attractive given the business model and its position in the fast-paced ad-tech market. We forecast a 20-23’e sales CAGR of 39%. Our base case is based on a blended DCF and a SOTP valuation. Due to the recent multiple contraction for growth/tech stocks, we decreases our motivated multiple for the media segment.
Our new base case is SEK 75 (85). At our base case, MGI would trade at 15.0x EV/Adj EBITA (22’e).