Easybrain Divestment And Blockbuster Games Set To Enhance Profitability And Stability

Key Takeaways

• The divestment of Easybrain enhances Embracer Group's financial stability, enabling strategic investments and improving future earnings.
  
• Robust game development pipeline and strategic game releases are set to drive revenue growth and enhance profitability.
  
• Delays and underperformance in the PC/Console segment, along with mobile sector risks, threaten Embracer Group’s revenue and earnings stability.

Catalysts

Develops and publishes PC, console, mobile, VR, and board games for the games market worldwide.

• The divestment of Easybrain is expected to significantly improve Embracer Group's financial position by reducing net debt, potentially allowing for more favorable terms on future financing and enabling strategic investments, positively impacting future earnings and financial stability.
  
• Upcoming high-profile game releases, such as Kingdom Come: Deliverance II and Legacy of Kain Soul Reaver Remastered, are expected to drive significant sales growth and enhance profitability in the coming quarters, positively affecting revenue and earnings.
  
• Asmodee's stable growth and recent successes in the tabletop segment, alongside new corporate strategies and governance, provide an optimistic outlook for increasing adjusted EBIT margins and enhancing overall net margins.
  
• Embracer's continued investment in a robust game development pipeline, with over 120 projects in progress, is poised to generate new revenue streams and improve long-term earnings as these projects are completed and released.
  
• The strategic focus on optimizing release windows for game launches aims to improve return on investment by aligning timed releases with favorable market conditions, which should positively influence revenue growth and net margins.

Embracer Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Embracer Group's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -59.8% today to 10.8% in 3 years time.
• Analysts expect earnings to reach SEK 4.5 billion (and earnings per share of SEK 22.63) by about January 2028, up from SEK -22.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, up from -2.0x today. This future PE is lower than the current PE for the SE Entertainment industry at 26.2x.
• Analysts expect the number of shares outstanding to decline by 4.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.99%, as per the Simply Wall St company report.

Embracer Group Future Earnings Per Share Growth

Risks

• The company's PC/Console segment experienced a decline due to weaker return on investment and delays in game releases, which could negatively affect future revenue and net margins.
  
• Organic growth in the PC/Console segment was recorded at negative 33%, reflecting a drop in revenue, with implications on overall profitability due to an underperformance of recent game releases and a lack of notable new launches.
  
• Amortization of previously underperforming titles continues to impact the margins negatively, which could also depress earnings in quarters without significant releases, affecting overall margin improvement efforts.
  
• Despite a positive outlook for the coming months, the company faces higher fixed costs and potential further delays in the game release pipeline, posing risks to cash flow and earnings stability.
  
• The divestment of Easybrain is aimed at improving financial positioning, but there is concern over slower performance in the mobile sector, showcasing a potential risk to both revenue and earnings contribution from this segment.

Valuation

• The analysts have a consensus price target of SEK204.97 for Embracer Group 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 SEK300.0, and the most bearish reporting a price target of just SEK108.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK41.6 billion, earnings will come to SEK4.5 billion, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 7.0%.
• Given the current share price of SEK197.4, the analyst's price target of SEK204.97 is 3.7% 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.