EG7: Tough comps in a transition year
Research Update
2024-02-14
07:00
Redeye updates on EG7 post Q4-results which came in lower than expected, driven mainly by Big Blue Bubble which saw a faster revenue decline than we expected. On the back of this, we have adopted a more cautious view on 2024 while also lowering our 2025-26E forecasts somewhat. Still, we highlight that 2024 will be a transition year ahead of stronger growth in 2025-26E as ongoing growth investments starts to yield revenue.
Hjalmar Ahlberg
Tomas Otterbeck
EG7’s Q4-results was lower than forecasted, where the main deviation was seen in Big Blue Bubble owing to a faster-than-expected revenue decline from My Singing Monsters. The company saw solid cash generation, supporting a slight sequential increase in net cash despite continued growth investments.
While we had anticipated 2024 to be a transition year, it now looks to be slightly more challenging than we previously expected, and this was reflected in the company’s 2024E guidance, which was lower than our forecast. However, the company continues to invest for growth, where the Cold Iron project supports improvement in 2025 with further upside in 2026 on the back of H1Z1.
We have lowered our 2024E EBITDA by c11% while 2025-26E EBITDA is down 5-7%. On the back of the estimate cuts, our base case is lowered to SEK44 (SEK50) which implies an EV/EBITDA valuation of 8x 2024. The share currently trades at less than 2x 2024 EBITDA, suggesting the market is sceptical about the company achieving its targets. In our view, successful game launches in 2024 (MechWarrior Clans), continued progress on the Cold Iron project, and H1Z1 moving into the production phase could be triggers for improved market confidence and a higher valuation.
| SEKm | 2022 | 2023 | 2024e | 2025e | 2026e |
| Total Revenue | 2,045.5 | 2,173.2 | 1,913.3 | 2,226.5 | 2,763.9 |
| Revenue Growth | -5.5% | 6.2% | -12.0% | 16.4% | 24.1% |
| EBITDA | 482.7 | 542.0 | 414.1 | 492.9 | 687.7 |
| EBITDA Margin | 23.6% | 24.9% | 21.6% | 22.1% | 24.9% |
| EBIT | 395.4 | 427.5 | 318.1 | 351.7 | 490.2 |
| Net Income | -281.2 | 156.0 | 142.6 | 167.8 | 271.7 |
| EV/Sales | 1.2 | 0.5 | 0.3 | 0.3 | 0.2 |
| EV/EBITDA | 4.8 | 2.1 | 1.5 | 1.1 | 0.6 |
| EV/EBIT | 5.8 | 2.6 | 1.9 | 1.6 | 0.9 |
EG7 reported revenue of SEK473m and EBITDA of SEK98m for Q4 2023 which was lower than our forecasts of SEK504m and SEK119m respectively. The main deviation on topline stems from Big Blue Bubble where revenue from My Singing Monsters declined faster than we had expected during the quarter. The company comments that it expects My Singing Monsters to stabilize at a new normal level during H1 2024. The lower-than-expected revenue in Big Blue Bubble also resulted in softer EBITDA-margin than expected and is also the main contributor to the weaker-than-expected EBITDA. The company saw strong cash flow during the quarter with an operating cash flow of SEK100m while net investments were SEK63m. The company ended 2023 with a net cash position of SEK481m while it budgeted for investments of around SEK264m for 2024. The table below summarize Q4-results outcome compared to our forecasts.
Disclosures and disclaimers