Rising Marketing Intensity And Store Dependence Will Shape Future Earnings Stability

Catalysts

About Ten Square Games

Ten Square Games develops and scales free to play hobby themed mobile and simulator games such as Fishing Clash, Hunting Clash and Wings of Heroes.

What are the underlying business or industry changes driving this perspective?

• Reliance on increasingly complex segmentation and A/B testing in mature flagship titles risks slower execution and delayed uplift, which can prolong the current period of flat bookings and pressure top line revenue and earnings growth.
• Shift toward higher marketing intensity for Wings of Heroes, Trophy Hunter and future simulators in a more competitive user acquisition landscape may require structurally higher customer acquisition costs. This may constrain net margins even if headline revenue recovers.
• Growing dependence on platform stores and a still limited contribution from TSG Store, despite regulatory shifts around Apple and alternative payments, could cap future take rate improvements and keep EBITDA margins close to current levels rather than expanding.
• Expansion of the portfolio into subscription and hybrid ad monetization models, such as Real Combat Simulator and Trophy Hunter, introduces volatility in cohort behavior and ad yields. This could undermine the company’s historically stable cash flows and net profit.
• Ongoing tax audit exposure around IP related reliefs and earn out obligations tied to prior acquisitions absorbs liquidity and creates downside skew to reported net income. This limits upside to valuation from the current cash generation profile.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Ten Square Games's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.8% today to 18.3% in 3 years time.
• Analysts expect earnings to reach PLN 69.0 million (and earnings per share of PLN 10.15) by about December 2028, down from PLN 79.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, up from 6.9x today. This future PE is greater than the current PE for the PL Entertainment industry at 10.4x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.63%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If A/B testing and increasingly granular segmentation on mature flagship titles fails to translate into broad based uplift, the planned ramp up in marketing could result in higher user acquisition costs without a proportional increase in bookings, which would weigh on revenue growth and compress net margins and earnings over time.
• The strong early KPIs and revenue uplift from newer titles such as Wings of Heroes, Trophy Hunter and future subscription based simulators suggest meaningful upside optionality from expanding into larger hobby segments. If these products scale successfully across global markets, the resulting higher bookings and operating leverage could drive sustained growth in revenue and earnings beyond a flat share price scenario.
• Structural shifts in app store regulation and continued expansion of TSG Store, which already accounts for over 20 percent of company revenue, could further lower platform commissions and improve the company’s take rate. This would support higher EBITDA margins and net profit than currently implied by a stagnant valuation.
• Management’s willingness to flex marketing spend aggressively based on return thresholds, combined with the ability to self finance growth from a strong cash position and ongoing cash generation, increases the likelihood that successful cohorts are scaled rapidly. This could accelerate top line revenue and earnings growth relative to expectations of a flat share price.
• Resolution of the prolonged tax audit on IP related reliefs in the company’s favor would allow release of a sizable tax provision and remove a long running overhang. This could provide a one time boost to net profit and improve visibility on future cash flows, supporting a re rating of the share price.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of PLN92.01 for Ten Square Games based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of PLN112.0, and the most bearish reporting a price target of just PLN79.27.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be PLN377.6 million, earnings will come to PLN69.0 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 11.6%.
  
• Given the current share price of PLN87.0, the analyst price target of PLN92.01 is 5.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.