We raise our adj. EBIT estimates by 5-6% for 21/22e-23/24e, respectively. This is driven both by the Q1 beat as well as by our increasing our gross margin assumptions. The gross margin will fluctuate depending on the performance of the “low-margin” Partner Publishing segment, but following the consolidation of Gearbox, Easybrain and Aspyr, Embracer now has a quarterly back catalogue that appears to generate SEK +2bn with a high percentage of digital and owned titles sales, leading to a strong gross margin. This is partly offset by an increase in opex, e.g. Easybrain’s heavy UA investments, but still has a net positive effect on adj. EBIT. In terms of Q2’21/22e, Embracer is facing tough comparables from 2020 while at the same time having a small new game pipeline (SEK 225-275m dev. cost). We think this could lead to slightly negative growth in Q2 (we are at around ~9%), but this ramps up to +40% in Q3 and even more in Q4 (see page 7). We also think Gamescom (25-27 August) could feature a reveal of the AAA titles slated for release in Q4.
Embracer is now trading at a ‘21/22e EV/adj. EBIT of 14x on our estimates, which is ~25% below the five-year historical average, according to FactSet. This is despite Embracer having a new game pipeline with a SEK ~3bn development cost (~4x more than last year) which we think will drive ~30% organic growth in a year where peers are struggling for growth and there is plenty of M&A headroom (SEK +20bn). We also raise our SOTP fair value range to 230-355 per share.
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