Devrimb
The following segment was excerpted from this fund letter.
Embracer Group (OTCPK:THQQF) (stock price: – 2% in 2Q 2022)
“I am going to see every Bond film…if it’s bad I am going to be really upset…because I believe that that IP is always just beyond…And that’s the contract that Gearbox and 2K has with Borderlands customers” – Strauss Zelnick, Chairman & CEO Take-Two Interactive Inc.
Embracer Group AB (Embracer) closed out its “transition year” last quarter in line with expectations. Mobile games and particularly Easybrain were once again the bright spot. For the upcoming quarter, management forecasted operational EBIT to come in at one seventh of the full year’s number. For the full year Embracer projected operational EBIT of approximately $900m to $1.1bn, about twice the operating income that is expected from Take-Two Interactive (including Zynga) during the same period.
Mobile keeps performing. In the second quarter Embracer was the top three publisher by worldwide downloads from Google Play, only behind Meta (META) and Google (GOOG, GOOGL). Half of Embracer’s total revenues come from the US (46% in 2021) and should benefit from the strong dollar. Considering those developments and several stable new game releases (and first royalties from the Borderlands spin-off Tiny Tina’s Wonderlands), the implicit guidance for the upcoming quarter seems very achievable.
Embracer’s management continues to indicate significant profit growth over the next few years. Most of this growth is expected to come from hundreds of new game releases, particularly AAA-game projects (high-budget high-profile games). Embracer expects to release more than 25 AAA-projects over the next five years7.
Saints Row Reboot will be the first one of these games, launching in August and sporting a development budget likely close to what Embracer spent on last year’s entire slate of released games. Such a high budget venture requires to sell several million units to become a financial success. If a AAA-game becomes viral it can rake in multi-billions of dollars, and “gazillions” if it becomes a Bond-like franchise.
Embracer’s next quarterly financials are going to be prepared under IFRS accounting standards for the first time. Goodwill is not amortized under IFRS rules. This is going to eliminate billions of amortization ‘expenses’ from Embracer’s income statement and will significantly increase the bottom line. While IFRS standards are just another way of counting the same beans, other fund managers have expressed to us that they won’t get involved in Embracer before having a chance to look at IFRS numbers. In any event, the transfer to IFRS prepares for the uplisting to the main Swedish stock exchange this year.
The uplisting will add another arrow to the quiver: it will enable Embracer to buy back shares (which is prohibited under the rules of the current listing). Lars Wingefors knows how to use capital allocation to increase shareholder value. I don’t doubt that he would use buybacks when the right opportunity to increase long-term value presents itself. He certainly demonstrated capital allocation prowess again in early May when Embracer bought studios from SquareEnix for $300m in cash, when the stock price was at 67 krona, and then raised $1bn cash in June by selling shares at 103 krona.
This capital raise in June sold 8% of Embracer to Savvy Gaming Group (SGG), a part of the Saudi sovereign wealth fund PIF. PIF already owns 4% of SquareEnix, 5% of Activision (ATVI), 5% of Electronic Arts (EA), 6% of Nintendo (OTCPK:NTDOY), 7% of Take-Two (TTWO), 8% of Capcom (OTCPK:CCOEY), 9% of Nexon (OTCPK:NEXOF), 10% of NCSoft among many other investments. Nevertheless, the transaction with “a non-democratic country” triggered an avalanche of stakeholder outreach and was followed by a significant share price decline in the days thereafter.
Nordstern Capital appreciates SGG’s investment in Embracer. Those harboring concerns about SGG should read the response issued by Lars Wingefors. SGG supports Embracer’s strategy and might help to reach more gamers in the MENA region. I have had the opportunity to speak with Embracer employees and executives over the course of the last years and I believe that the individuals I interacted with reflect the company values of “Honesty, Trust, and Long-Term”.
I for one trust that Embracer is a value-based company and that the SGG transaction is in the best interest of Embracer’s stakeholders.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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