LIND RESEARCH
Video & Comment | Analyst: Kristoffer Lindström
Video Interview at EFN on Evolution Bid and Embracer Group's Q1’26/27 report.
Kristoffer joined EFN with comments related to the low-ball bid from Kenneth Darth (Candle Lake) on Evolution, plus some comments on Embracer’s Q1 report that beat market expectations. In this post, we also dig into the reported Q1 figures and what the current valuation implies for Embracer.
On the Evolution bid
There is not much to say about Darth's bid on Evolution. He clearly does not want to take it private, at least not through Candle Lake. The bid was at the lowest possible level allowed by law, and he has no expectations that it will go through. Evolution is a company we follow with watchlist coverage but have no active position in the portfolio.
On a side note, this morning news broke that Darth has initiated a position in Evolution's peer, Hacksaw Gaming, now owning 0.6% of the slots provider. Darth, arguably one of the world’s most informed on Casino and iGaming, continues to buy when Nordic institutions are selling due to ESG guidelines. Our bet is that Darth has more insight into long-term value.
Embracers Q1 report
Embracer's report came in strong, driven by Embracer Remainco, especially within Entertainment & Services, mobile, but also in PC/Console thanks to strong performance of Girthic 1 Remake. We wrote about the remaster engine coming back online for Embracer in this note. The share was initially up about 16% and has since then calmed down somewhat to a gain of ≈6%. Embracer is a company we are following closely, but we do not have an active position in it.
The report was stronger than expected, but it was a small quarter. The big releases and thus revenue and cash flows lie in Q3 and Q4 this year, with Metro 2039 and Tomb Raider: Legacy of Atlantis being released. There are also large releases planned for FY’27/28, including the next Warhorse game, Darksiders 5, and more.
Management feels increasingly confident in their statements, and there is clear momentum in the group. Cost efficiency and increased focus on high-ROI projects are clearly showing effect; preparations for the Fellowship spin-off during CY2027 are underway, and focus is on a lean and profitable organization.
The licensing business is developing, and TCG game Magic: The Gathering - Hobbit will soon be released. Here are some quotes from Hasbro's earnings call related to the Hobbit release:
Prepared remarks, listed alongside Marvel as an H2 positive:
"Marvel Super Heroes set a record for day one and month one revenue and became the fastest set to reach $300 million in revenue with solid reorders and sell-through. The Hobbit is also tracking like a fan favorite."
Q&A, answering Kylie Cohu at Jefferies on what drives back-half Magic growth. This is the substantive one:
"The one thing I'd just counsel people as you model Magic is not every set has the same composition of SKUs or card density or complexity. Marvel is a quite large release, very consistent with what we would have done several years ago with The Lord of the Rings or what we did last year with Final Fantasy. The Hobbit will be still a big release, but it'll be comparatively smaller in terms of the number of SKUs and number of cards that we release associated with that. You should scale those. Those correlate quite closely with overall sales potential."
All in all, this is revenue at near 100% margins contributing directly to Embracer's (Fellowships) bottom line.
A smaller but positive note is that ReAnimal from Traiser is showing strong momentum. The first DLC was released just a few days ago, and the reception has been great. What was not mentioned is the shadow drop remaster of The Lord of the Rings: War in the North from Aspyr. Aspyr has confirmed they are working on more classic Lord of the Rings game remasters. We belive yet again this shows the increased focus on high ROI remakes/remasters.
Some remarks were made about Sony’s plan not to sell physical copies, but in general management says it’s too early to make a judgment on the precise impact. Physical game retailing does have a considerable revenue contribution, but at the same time only a modest Cash EBIT impact.
To sum it all up
We feel that the management's confidence in the SEK 1bn cash EBIT guidance for the year has increased. It sounds like the guidance target is more or less viewed as the floor they are aiming at but hope for higher levels. Underpromise and overdeliver has always been a core ethos of Chairman Wingefors. But as always with gaming, judging game releases beforehand is extremely difficult.
Assuming the Cash EBIT will be somewhere in the SEK 1.0-1.2bn range, then Embracer is trading at a multiple of 10-12x. Not a high number for a company on a clear operational improvement trajectory. Let’s say that SEK 1.1bn is more of a floor going forward and a sustainable level to think that Embracer can deliver per year in Cash EBIT; that gives a NOPAT in the region of SEK 870m. Given there is still significant growth investment within those numbers, we will assume SEK 900m as a more “no-growth” figure that is sustainable going forward.
Applying a WACC of 8-10% creates a no-growth earnings power value in a range of SEK 9bn to SEK 11.3bn (9900/10% and 900/8%). The current enterprise value of Embracers is around SEK 12bn. This indicates that the market puts very low value on the future growth of the earnings streams and all the IP value the group holds. In essence, at current levels, one is buying current cash flows and getting the growth more or less for free, plus a spin-off value unlock and prudent capital allocation with buybacks and more; to us, that sounds attractive. We will evaluate the timing of adding an active position in Embracer into the portfolio.
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