Incubated: Cleavage Sensitivity Analysis, RemainCo (OTCMKTS:THQQF) Destroyed

Embracer (OTCPK:THQQF)(OTCPK:EBCRY) is making moves. In addition to the relatively uneconomical disposals of Saber Interactive and Gearbox Entertainment, the latter was used in Take-Two Interactive (TTWO), salvaging market leverage. Concerned that Embracer continues to be aggressively discounted, they have also announced a strategic shift as they plan to split the business. We were wary of RemainCo. As I focused In our final analysis, they’ve been really taken down by the eliminations, and really rely on the Middle Earth MMO, which, as we also mentioned in our last article, isn’t guaranteed to be well received. With some sensitivity analysis of the separates and residuals, you’ll know what to buy and sell when things break apart. Essentially, RemainCo will be the AAA studio and the most worrying entity for shareholders, with Asmodee tabletop and mobile And other AA and indie games at Coffee Stain and Friends. With the two separate issues scheduled to take place over the next 12 months and/or in calendar year 2025, it will be important to see if markets are missing something in the separate issues. Startups tend to be great opportunities to make money and buy things before the markets understand the properties of securities.

A quick look at the quarterly results

So far, Saber Interactive’s disposals have been closed recently, but apparently only after the books have closed for the financial year. The gearbox has not yet been completed and is expected to close in the next quarter. We are still looking for the full Embracer. Sales are down slightly, but significant headcount cuts mean decent growth in adjusted EBIT.

The difference between EBIT and adjusted EBIT is a pile of non-cash write-downs, including investment losses for both Gearbox and Saber Interactive, which were written off at a loss. Even Asmodee’s assets were severely impaired by nearly SEK 7 billion in annual impairment tests.

As for sales developments by sector, year-on-year developments are poor for the fourth quarter on an organic basis in the PC gaming sector. Mobile was bad for the year but not during the quarter, and E&S was bad for the quarter but not for the year. The E&S decreases are due to difficult compositions, as there are fewer anime versions.

Earnings generally rose from the large layoffs that occurred across sectors.

There are things happening for E&S. new Gollum The film with New Line Cinema (Peter Jackson) would mean royalties for Embracer. The LoTR MMO will also come at some point from Amazon, which will also mean royalties. That could take years, in late 2020. It’s also a LoTR musical going into production as well as Rohirrim Anime also gets milked property. Dark Horse is fine with Rambunctious It manages growth. the Avatar: The Last Airbender Graphic novels also did well, helped by the release of the live-action series, which motivated fans to buy more Avatar merchandise.

Board games, which include great features such as Catanhas slowed down a bit now after a year of holding down the fort, however Star Wars: Unlimited It was just released and should generate some activity next quarter. Demand was outstripping supply. There are more groups coming, things are looking good here.

For mobile gaming, LiveOps continues to lead the pack. Concentrating cash flow at DECA means poor growth from there. Overall, the quarter performed well here.

For PC gaming, there was initial growth when Saber Interactive was eliminated from last year’s competition. But other than that, there are clear declines, and Saber was coming out with a new 40k game, Marine space 2, which would have been a major component of this year’s pipeline. Gearbox will soon be gone too, taking most of its valuable IP with it except Rest And Hyper Light Breaker,continuation The wanderer. As we discussed in previous coverage, it was South Park And Tomb rider That held a quarter. And he was there too Star Wars: Battlefront Classic Collection, another failure where the company took games that were perfectly good and had long-standing followings and found a way to piss off fans. But it has performed so far.

The growth engine in the PC gaming sector has run its course. Next year will be quiet here, and we expect nothing of the highest levels of growth in this sector. giantThe MOBA game was launched several years ago, but it won’t be free now. It was a good game, but it wasn’t very popular at the time, so it won’t be popular now, that’s our bet. The only good things left are Breaker, Kingdom Come: Deliverance 2, Gothic Remake. Hopefully Kingdom Come doesn’t drop the ball after a strong first entry. Gothic remakes are great, but the markets may not be that big there. The breaker should be solid, but it is a thin pipeline.

Spin-offs and our bottom line

There will be a big change at the company sometime this year, as Asmodee, the tablet business, will be distributed to shareholders, possibly this year. The same goes for Coffee Stain and some other companies (they call them… Spot coffee and friends), i.e. a lot of the mobile gaming sector.

Rymenko (Middle-earth institutions and friends) will be AAA titles, and a thin pipeline that Borderlands and Space Marine 2 lack.

The company has provided us with pro forma statements and debt targets for the planned spin-offs. We also have disclosure of net revenues from Saber and Gearbox. With the debt targets of RemainCo and Asmodee, we can point out Coffee Stain and Friends’ debt burden from the current group’s debt burden. In addition, spin-offs should not create value, so we have the current market value as a reference for what their total value should be for the stock values ​​of the spin-offs.

We have a fixed Asmodee multiplier that we use in sensitivity analysis. Here the suggested EV for Asmodee is low, but when obtained, it was around 32,000 MSEK, which is our upper range for the sensitivity analysis. The total value of each company must be a current market capitalization of SEK 35 billion. By fixing the Asmodee multiples, we can see what the implied multiples will be for other companies depending on how the market distributes Embracer’s valuation to each of the components, which we cannot know until the spin-off occurs. This way, we have a framework for knowing what to buy and sell at the moment the spin-offs occur, first for Asmodee and perhaps later for Coffee Stain and Friends, even though it may all happen on the same day.

Building on collections from our previous article, where we believe Embracer is a company that offers a discount to the best and brightest in gaming, we’ve highlighted favorable reviews in green in our Snapshot Sensitivity Analysis, which captures the range of potential valuations for each property on offer (obviously We cannot know how the markets will react on supply days. Depending on the value of the components when bidding, we will buy green and sell brown. Color intensity corresponds to how appropriate/unsuitable we think the rating is based on the combinations.

Overall, RemainCo’s disposals leave us with very large margins of safety to take on, given that we believe its growth is highly vulnerable and the economics of game development are really tough right now. We don’t expect them to release many great games out of nothing, and they will have to acquire studios that have successfully transitioned from AA to AAA, as the economics of AAA are difficult to navigate, resulting in massive layoffs as they adapt. to structural challenges due to larger budgets, more risks, more short-termism, and tougher human capital challenges. We believe the upper bound on the fair multiple here lies around the current value of the Embracer group as a whole, 4x EV/EBITDA.

Coffee Stain and Friends includes some AA studios and independent studios, so there is an opportunity to perform there since it will be more independent and closer to the consumer, and is unlikely to disappoint in the way AAA has begun to do it systematically. We have these at fair values ​​at higher multiples than RemainCo, around 6-8x EV/EBITDA.

Asmodee, being the most resilient sector and continuing growth even after the pandemic, is the business we chose to value, also because it was acquired by Embracer relatively recently for around SEK 32 billion. Its characteristics are very unique, and it has a leading edge in the table top which makes it more noticeable.

Since spin-offs typically spend some time as independent entities before price discovery occurs, we expect that opportunities may arise in their valuations more than they did with RemainCo, especially since RemainCo was the group of companies that was most damaged by the leveraged sell-offs. Finance, which was the main concern of the market based on the sudden rise in prices, although the dispositions were at a loss.

Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these stocks.