Starbreeze: Dollar exposure creates increased stability

Research Update

2022-10-28

07:19

Redeye updates its estimates on Starbreeze. Due to the strong dollar exposure, and relatively high player engagement in Payday 2 we have raised our estimates for the second half of 2022. We are also convinced that Starbreeze’s focus to publish external games with a “Games as a Service” business model is wise, due to its proven track record within this space.

Tomas Otterbeck

Viktor Lindström

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Proven expertise within “GaaS-publishing”

October 6, Starbreeze announced it returns to external publishing. The company will exploit its knowledge and proven track record in the business model “games as a service (GaaS)” in its publishing investments. We think this is a good strategy because Starbreeze’s proven GaaS expertise is probably its best competitive advantage in the competitive publishing arena.

Highly exposed to the dollar

We have raised our net sales estimates due to a strong dollar in comparison to the Swedish krona. We know that Starbreeze is highly exposed to the dollar. Since the end of 2021 USD/SEK is up 20%. This means we estimate the year-over-year organic growth excluding FX effects is negative. However, 2021 is a hard comparison year due to the market efforts and content releases connected to the 10-year anniversary of Payday and a Covid-19-related sales boost.

Updated estimates

Our new full-year estimate for 2022 is SEK123m (SEK99m), meaning a negative growth of 2% year-over-year. Net sales during Q3 have been raised to SEK34m (SEK26m). We have only made some minor changes in our estimates for 2023 and 2024. For example, admin costs have been increased due to the incentive program. Currently, we will not make any changes to our fair value range of SEK0.8-5 per share.

SEKm	2020	2021	2022e	2023e	2024e
Revenues	118.0	125.7	122.9	974.0	793.0
Revenue Growth	-57.9%	6.6%	-2.2%	692%	-18.6%
EBITDA	49.3	6.3	51.3	371.0	168.4
EBIT	-16.2	-53.7	-12.3	286.9	22.2
EBIT Margin	-13.7%	-42.7%	-10.0%	29.5%	2.8%
Net Income	-151.0	-100.1	-69.2	258.3	14.2
EV/Revenue	7.8	7.1	8.6	0.8	0.9
EV/EBIT	-57.0	-16.5	-85.7	2.6	31.9

Investment thesis

Case

Masters of “Games as a Service”

Starbreeze has shown that the company can create recurring revenue from a loyal fanbase for a long period of time twice, both with Payday 2 and through the publishing success Dead by Daylight. With the release of the much awaited Payday 3, ten years after its forerunner, Starbreeze has a good chance to continue the successful journey with the Payday-franchise. Starbreeze has also started initiatives to develop a new game planned to be released in 2025 and re-launched its publishing unit.

Evidence

Payday 3 shapes the future

Payday 3 will be released in 2023. Unlike its predecessor, it will be a multi-platform release which is expected to increase sales. Other significant drivers for higher sales are the brand’s increased strength since 2013, a higher development and marketing budget, and a significantly larger gaming market. When all direct costs are taken, we expect Payday 3 to give a gross profit of approx. SEK 400 million in 2023. If Starbreeze manages to maintain high recurring revenue in the coming years after launch it will create significant shareholder value.

Supportive Analysis

Payday 2 has generated net revenues of more than SEK 1.1 billion to Starbreeze in less than eight years. An interesting aspect is that Payday 2 brought in “only” SEK 120 million in net income during the initial period after launch (in this case four and a half months) which shows how well Starbreeze manages the business model “Game as a Service”.

Challenge

Key personnel have left the building

The success of Payday 3 ultimately is decided by the quality of the game, and how well it manages to serve loyal fans as well as create new ones. We would of course be more confident in the quality assurance if more original creators were still operative in the company such as key game designer Ulf Andersson. An incentive program connected to the quality of Payday 3 creates some conviction that the game will be good at launch.

Challenge

A somewhat weak ownership

Starbreeze has no active major shareholders. Due to very bad risk management historically that ended in reconstruction in 2018, no founders, active personnel, or manager of the board have a significant shareholding. This, of course, weakens the incentives in the company to build great shareholder value.

Valuation

High dependence on one game launch

The convertible loan and related liabilities to Digital Bros amounted to almost SEK 350 million (according to the Q2-report 2022). The enterprise value of Starbreeze is therefore approximately SEK 1 billion, when it is traded at around SEK 0.9 per share. The commercial result of Payday 3 is of course very important for the valuation of Starbreeze, but we argue the risk is significantly lower than in 2018 (the release of Walking Dead-game), due to a stronger balance sheet. We assume Starbreeze is likely a takeover target after the release of Payday 3.

Starbreeze bets on publishing again

October 6, Starbreeze announced it returns to external publishing. The company will exploit its knowledge and proven track record in the business model “games as a service” in its publishing investments. We think this is a good strategy, it is of course an important to find a competitive advantage in the competitive publishing arena.

Disclosures and disclaimers

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