G5 reported weaker than expected growth in Q4 2023 and while recent and upcoming game launches support gradually improving topline, we have lowered our near-term growth assumptions. Although the company’s announced cost optimizations mitigate the impact of a lower topline to some extent, we have reduced our EBIT estimates by c14-18% for 2024-25E.

G5 reported revenue of SEK317m for Q4 2023, which was c5% lower than our forecast of SEK332m. We had forecasted a sequential improvement on the back of positive seasonality while the company instead saw a sequential decline driven by soft performance by its older games portfolio. The company comments that it saw stable performance from its active portfolio and strong performance from the licensed game Hidden City. While revenue from G5 Store continued to increase in the quarter, the soft performance from own vs licensed games yielded a lower-than-expected gross margin which came in at 67.6% while we expected 68.5%.

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G5 Entertainment

* Mature game portfolio leading to overall declining revenue, highlighting the need for successful new game launches.
* Fragmented mobile gaming market with intense competition, making it challenging to maintain market share and profitability.
* Limited pricing power in the gaming industry, with costs typically not following inflation, potentially impacting long-term revenue growth.
* Concentration risk with some games representing over 20% of total revenue, exposing the company to potential volatility.
* Products do not contribute significantly to greater societal good, potentially limiting appeal to socially conscious investors.

* Strong recurring revenue from live service games, with potential for long-term player engagement and loyalty.
* Asset-light business model allows for efficient scaling without expensive reinvestment, enhancing profitability and cash generation.
* Successful geographic expansion demonstrates adaptability and growth potential in diverse markets.
* High return on invested capital (ROIC) consistently exceeding cost of capital, indicating a sustainable competitive advantage.
* Limited regulatory interference and minimal impact from commodity prices, contributing to operational stability.

* Lack of consistent operating margin growth and earnings stability, with Operating Margin (EBIT) failing to increase for three consecutive years.
* Revenue growth not consistently above industry average over the last five years, potentially indicating market share challenges.
* Absence of long-term dividend growth, failing to increase dividends by over 7% annually in the past three years or consistently over the past decade.
* Free Cash Flow conversion below 80% over the past five years, suggesting potential inefficiencies in converting profits to cash.

* Strong profitability with gross profit margin exceeding 40% and consistently high Return on Equity (ROE) of at least 20% over the past five years.
* Robust financial health with a solid net cash position supporting dividend payments and share buybacks.
* Solid earnings quality with efficient inventory and accounts receivable management, and high Operating Cash Flow conversion.
* Attractive dividend yield between 1-2.5 times market median, well-covered by cash flows, indicating sustainable shareholder returns.

* Recent negative topline growth due to challenges in producing enough new successful games, indicating potential execution issues in game development.
* Limited board independence, with the CEO serving as a board member, potentially compromising the board's ability to challenge management effectively.
* Uneven executive compensation distribution, with the CEO earning more than twice the average salary of other management team members.
* Limited personal stakes held by most board members (excluding the CEO), which may reduce their alignment with shareholder interests.

* Experienced and committed founder-CEO with deep industry knowledge, driving long-term value creation and adaptability in the mobile gaming market.
* Strong track record of organic growth, consistent dividend payouts, and share buybacks, supported by solid cash flow generation and high returns on capital.
* Decentralized organization promoting accountability, with a strategic focus on being a leader in its niche within the competitive mobile free-to-play market.
* Transparent and candid management communication, focusing on long-term business value and maintaining consistent key metrics over time.
* Significant insider ownership (around 13%) by CEO and COO, aligning management interests with shareholders and demonstrating confidence in the company's future.

SEKm	2022	2023	2024e	2025e	2026e
Revenues	1,400.1	1,319.9	1,284.1	1,343.9	1,411.1
Revenue Growth	6.4%	-5.7%	-2.7%	4.7%	5.0%
EBITDA	318.3	278.9	277.7	306.8	348.4
EBIT	167.0	111.4	126.3	153.0	182.0
EBIT Margin	11.9%	8.4%	9.8%	11.4%	12.9%
Net Income	66.9	127.6	113.7	133.8	159.3
EV/Sales	1.1	0.8	0.6	0.5	0.4
EV/EBITDA	4.9	3.6	2.7	2.2	1.6
EV/EBIT	9.4	9.1	5.9	4.3	3.0
Dividend Yield	3.8%	5.3%	6.2%	6.9%	7.7%

Soft performance from own games in Q4

Lowered near-term growth assumptions

Reduced estimates and valuation range

Key financials

Soft performance from own games in Q4