Remedy: Lowered budget assumptions on key projects
Research Update
2022-12-02
07:30
Redeye keeps its valuation range and base case unchanged despite a lowered revenue and EBIT expectation in 2023. Since decreased budget assumptions only have an impact on Remedy’s short-term revenue, we are still optimistic regarding its more long-term prospects, due to the fact that a lower budget in our view increases the royalty opportunity.
Tomas Otterbeck
Viktor Lindström
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Investment Thesis
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We have for conservative reasons lowered our revenue estimates for 2023, due to the unknown release date of Alan Wake 2 and lowered estimated budgets for Max Payne Remake and Vanguard. This has a noticeable impact on EBIT as well in our 2023 estimate, but the change is quite irrelevant to our EBIT assumption for 2024 and forward. A lower budget also increases the royalty potential we assume. In this update, we show our estimates regarding development fees for 2023-2026. It however feels convincing regarding the quality assurance regarding Alan Wake 2 that the relatively conservative CEO Tero Virtala, communicated in the Q3-comment that he is confident that Remedy will launch an excellent game in 2023.
Recently it was announced that Tencent has increased its stake in Remedy from 3.8% of the capital to more than 5%. This of course is likely the explanation for the recent strength in the Remedy-stock, before the press release on November 28. Tencent likely bought the shares over the market pushing the share price upwards. We believe Remedy is one of the most obvious acquisition targets in the Nordic gaming industry. On the top of our buyer's list sits Epic Games followed by the three biggest players in the industry namely Sony, Tencent, and Microsoft. Interesting to know is that Tencent also owns 40% of Epic Games.
Our base case assumes relatively successful launches of the upcoming new games based on Alan Wake, Control and Max Payne. We have lower expectations of its live-service games, due to a nonexistent track record. Our fair value range of EUR 14-55 per share with a base case of EUR 32 per share is unchanged after this research update.
| EURm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Total Revenue | 41.1 | 44.7 | 43.6 | 39.3 | 62.8 |
| Revenue Growth | 29.9% | 8.8% | -2.5% | -9.9% | 59.9% |
| EBITDA | 14.3 | 13.6 | 0.86 | -5.0 | 16.0 |
| EBIT | 13.2 | 12.7 | -1.1 | -7.2 | 13.3 |
| EBIT Margin | 32.1% | 28.4% | -2.6% | -18.4% | 21.1% |
| Net Income | 13.2 | 10.5 | -0.79 | -5.8 | 10.6 |
| EV/Revenue | 10.9 | 10.3 | 5.9 | 6.8 | 4.2 |
| EV/EBIT | 34.1 | 36.5 | -228 | -36.7 | 19.7 |
Case
De-risked high quality
Remedy is one of the last legendary independent game studios left in the world. The founder and top management own more than 30% of the company. The biggest gaming platforms are screaming for quality content and Remedy will continue to grasp this opportunity. The studio has therefore a lucrative risk-reward in its coming projects and is an obvious takeover target that de-risk the case further.
Evidence
An "Epic" release in 2023
In 2023 Alan Wake 2 will be released, Remedy’s strongest self-owned IP. We expect the total budget is approximately EUR 60 million (in comparison to the game Control with a budget of EUR 30 million). The higher budget, the financially strong publisher Epic Games, and the strength from the Alan Wake IP are three strong arguments that the game will likely sell at least twice as much as the game Control. For these reasons, we believe investors should have high expectations of the company’s growth prospects.
Supportive Analysis
Remedy is one of three critically acclaimed game studios that have been hand-picked by Epic Games for the first strategic “publishing push” with favorable terms almost unheard of for developers. The agreement between Epic Games and Remedy announced at the end of March 2020 is fully funded by Epic with at least a 50% profit share for Remedy and full ownership of the IP.
Challenge
A big budget for a niched game
Remedy creates relatively niched games. In its upcoming game (Alan Wake 2), which will be released in 2023 the budget is double as high as in its latest game. We estimate the game must sell 2.15 million copies before Remedy can receive a 50% profit share. For a relative niche product, this is a rather high sales number.
Uncertain profitability in 2025
In 2024-2025 Remedy will launch two online multiplayer games according to our assumptions. This is new territory for Remedy and one of the games (Vanguard) will be free-to-play. The immediate financial impact will therefore likely be protracted, meaning lower revenue for a longer period of time for both of these live-service games. This could hurt the profitability in 2025 according to our estimates regarding the game pipeline.
Valuation
An obvious takeover target
Only a few independent major game studios are left after the recent years accelerated consolidation in the industry. We are certain that Remedy has a high position in the shopping list amongst many major players. Potential buyers are Epic Games, Tencent, Sony, Microsoft, and Take-Two Interactive we believe. This fact considerably de-risks an investment in Remedy we argue despite the relatively high valuation multiples in a short-term perspective.
Down below we show our assumptions regarding the pipeline of game releases. Of course, there is a big uncertainty regarding the timing of these game launches.
Disclosures and disclaimers
Contents
Investment Thesis
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