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Edison Investment Research is terminating coverage on Abacus Health Products (ABCS), ADL Bionatur (BNT), ASIT Biotech (ASIT), GAME Digital (GMD), International Stem Cell Corporation (ISCO), Powerhouse Energy Group (PHE), Windar Photonics (WPHO). Please note you should no longer rely on any previous research or estimates for these companies. All forecasts should now be considered redundant. Previously published reports can still be accessed via our website.
Game Digital
For the purposes of the Takeover Code, Edison Investment Research is deemed to be connected with GAME Digital plc. Under Rule 20.1 Edison must not include any profit forecast, quantified financial benefits statement, asset valuation or estimate of other figures key to the offer, except to the extent that such forecasts, statements, valuations or estimates have been published prior to the offer period (as defined in the Takeover Code) by an offeror or the offeree company (as appropriate) in accordance with the requirements of the Code. Consequently we have removed our estimates until the Offer Period ends.
H1 EBITDA growth is solid, but we lower our EBITDA forecasts by 13-15% across FY19E-21E reflecting: (i) softer market conditions at the beginning of H2; and (ii) the impact of a slower roll-out of BELONG than anticipated. The latter’s impact on profits is disappointing, although the benefit could be better rent deals on new openings if current property market conditions continue.
Game Digital’s (GMD’s) core retail business performed well in a challenging market, with material planned cost savings absorbing an anticipated 1.4% decline in gross transaction value (GTV) and helping to deliver H119 EBITDA growth of 22%. We reduce our FY19 and FY20 EBITDA forecasts by c 8%, primarily reflecting current market headwinds and a shift in BELONG arena openings into subsequent years. The current share price represents a significant discount to our valuation of 69p.
Group LFL sales were up 2.0% over the peak trading period and have increased 1.0% in the first 23 weeks of FY19E. Mint software, hardware and digital growth continue to offset the decline in pre-owned.
Against a challenging retail landscape, Game Digital (GMD) delivered a solid sales performance and growth in higher-margin categories over the peak trading period, alongside ongoing cost efficiencies, which continue to counter trading pressures. Momentum in the BELONG roll-out, which accounts for a significant part of our 67p valuation, remains crucial.
FY18 adjusted EBITDA of £10.1m (+26% y-on-y) is in line. Operational efficiencies have realised material costs savings as planned. These, together with an improvement in Events, Esports & Digital, have more than offset the challenges in a tough retail market.
In a challenging market Game Digital (GMD) continues to make ground, meeting our 26% EBITDA growth forecast after achieving planned cost savings, despite the intensified swing to digital. In FY19 we expect the roll-out of BELONG to gather pace, as well as a continued fightback backed by the console industry. The value in our 67p valuation, other than cash of 33p, is in the BELONG roll-out, where continued momentum is crucial.
Even as Game Digital (GMD) faces short-term trading pressure, its developing BELONG gaming arena concept is arguably part of the answer of what to do with the UK’s high streets and shopping centres. The first BELONG sites under the February 2018 agreement with Sports Direct are now opening. With GMD’s share price still less than net cash of 32p, neither the existing business, which currently contributes £10m of EBITDA, nor BELONG which we value at 23p, are attributed any value by the market. Our total valuation is 75p.
GAME's year-end update highlights a continuation of the H1 trends, which leads us to lower our adjusted EBITDA forecasts by 8%-10%. Pre-Owned Software, which is higher margin, continued to be challenging with this impact more than offsetting continued growth in Mint Hardware and Digital.
Game Digital (GMD) has finished its year with cost measures countering trading pressures and with BELONG moving into action as the first, larger, sites open. The clearer future represented by BELONG is not reflected in the share price, which remains less than cash.
H1 EBITDA of £21.2m is in line, leaving our FY18E-20E estimates unchanged. Profit growth in new Hardware and Accessories, alongside reduced losses in Events/Esports /Digital were more than offset by a fall in Preowned due to the lagged impact from weaker software sales in H1 17.
A year ago we titled our initiation note ‘The long game’. But growth is now more closely tied to the transformative expansion of BELONG, as well as retail formats under the recent collaboration agreement with Sports Direct. These plans represent a direct path to Game Digital’s future identity as a service-based business providing gaming experiences.
Today's announced collaboration with Sports Direct and the new financing the company will provide, is an important step in GAME's ongoing transformation. It will support a faster roll-out and investment into the BELONG gaming arenas to further accelerate the group's diversification into the high growth areas of esports and events.
The agreement to roll out BELONG gaming arenas and retail concessions in Sports Direct’s (SD) nationwide estate accelerates Game Digital’s (GMD) strategy to move from a seller of games to a provider of gaming services. This capitalises on the move in consumer spend from products towards experiences and positions the company more strongly in the high-growth e-sports market. A high level of control retained by GMD indicates that the relationship should be positive for all shareholders.
Game Digital (GMD) has posted good sales growth over its first 23 weeks and even better results over the Christmas peak. While sales have been led by hardware, management is confident of covering any mix issue through cost savings, and we retain our forecast. With net cash at 35p, the market is valuing this business at 3.5x FY18e EBITDA, which looks misplaced.
Peak trading has been solid, with group Gross Transaction Value up +5.2% year-on-year, continuing the positive momentum achieved earlier in the year. This has been supported by the ongoing strength in the console market. In the UK, cost saving plans are progressing well, which provide good support to our near-term forecasts. Confidence in the roll-out potential of the in-store BELONG arenas remains, as does the long-term growth prospects for Esports and Events. The group's net cash position of £67m is a clear positive, helped by the recent sale of Multiplay Digital, which supports the valuation.
Game Digital (GMD) has announced the sale of Multiplay (UK), which operates an online game server-hosting business. The disposal reflects a tightening of GMD’s strategy, announced in August, to focus on customers’ gaming interests. We do not expect a material effect on forecasts, but the immediate cash receipt reduces the FY18e EV/EBITDA multiple to only 1.8x.
Underlying FY17 EBITDA of £8.0m is slightly ahead of our £7.8m forecast. As expected, UK profitability was impacted by a tough H1, while Spain proved more resilient.
Results confirm that the sales recovery signalled in August has been fully realised in terms of profit delivery. The business transformation strategy is on track, and Game Digital is successfully developing future growth areas such as digital content, virtual reality, BELONG arenas, and tournaments. With significant euro exposure, and buoyant retail growth in Q1 of the current year, an FY18e EV/EBITDA valuation of 2.1x looks misplaced.
GAME's FY17E pre-close delivers a slight top-line beat, leaving profit in line with current market expectations. The UK and Spanish markets have seen an improving performance, with new console and software releases expected to see this continue into peak trading.
Game Digital (GMD) is ending FY17 on revised expectations after demand for the Nintendo Switch caused a short-term hiatus, which we believe masks positive market developments. Refining its medium-term transition strategy, GMD is to exit its B2B web hosting operation. The market values GMD’s business at less than zero, but we keep our 83p share valuation.
The reduction of profit expectations resulting from UK supply shortages of Nintendo’s Switch console shows, if proof were needed, that Game Digital is still tied into the old product-driven gaming cycle. It is still early days in terms of management’s mission to migrate to a more experiential model, which is where we locate the value. Although the share price has halved on short-term delays, on the main issue the prospects, the execution risks, and the upside associated with success remain intact.
Following last week's trading update we lower our forecasts, with a new FY17E (y/e July) underlying EBITDA of £7.8m vs. our previous £19.4m. We now expect losses at a PBT level and we assume no further dividend pay out.
Core retail categories have continued to be weak. The Nintendo Switch console, released in March, while proving popular with strong consumer demand, has suffered from limited supply into the UK.
Game Digital has acknowledged that UK supply shortages for the highly successful Nintendo Switch console will have an impact on results in the second half of FY17. This is by nature a timing issue and other aspects of management’s transition strategy remain on course. We have placed our forecasts under review.
Game Digital (GMD) is a market leader in video gaming with an enviable 32% average share of its two markets. It is executing a major change of strategy aimed at a fuller, experience-based relationship with its customer group, which should bring reduced dependence on the cyclicality of the games market. For the moment management is focused on the transition, while the balance sheet, and hence the dividend yield, is well protected.
GAME's H1 performance is in line, with a softer UK retail market impacting as expected. The key positive is current trading, which shows a significant boost from the recent launch of the Nintendo Switch console, and the potential strong pipeline of software releases. We prudently leave our P&L forecasts unchanged at this early stage, but we are encouraged by this development as well as the strategic progress that is being made with new growth initiatives.
GAME's Christmas trading update is in line with expectations. Despite difficult market conditions headline GTV sales fell -1.6% in the three weeks to 7 January but grew +2.0% excluding low margin hardware sales. Over the 23 weeks to 7 January Group sales fell -6.3% (+0.7% ex-hardware).
Recent data from industry publication MCV says that unit sales of boxed games are down 14.6% ytd. There is a weaker selection of games vs last year and some A-list titles such as Call of Duty are significantly down Y-on-Y. US retailer GameStop (NR) released Q3 earnings last night with LFL sales down -6.5% implying a poor read-through for GMD.
FY results are as expected with EBITDA of £28m exactly in line with our forecast. As previously stated GAME faces difficult market conditions. The video games retail market declined 9% in the year across its markets so GAME did well to limit its top line decline to 5%.
GAME Digital has entered into a sale and leaseback agreement on its Basingstoke head office and distribution centre. For a cash consideration of £13.5m the company will pay an initial rent of £1.06m.
Following the recent year end trading update we re-instate our previous Hold rating (from Under Review) and re-set our target price at 68p (also from Under Review). As stated in our report of 3 August (Challenging outlook, investing for growth) GAME Digital faces difficult market conditions in its core retail markets but is sensibly investing into other areas including eSports and its recently acquired Ads Reality business. Our new TP of 68p implies a 9x 2016e PE.
GAME's pre-close statement highlights the challenging market outlook for its retail division. Management is guiding to an in line FY16E but we prudently lower our EPS -15% to sit towards the lower end of consensus.
GAME has announced the acquisition of Ads Reality for an initial consideration of £2m and potential further performance related payments of up to £18m.
GAME has seen an improvement in sales trends since the end of December. H1 EBITDA of £33m is ahead of January's guided figure of £30m. The dividend has been rebased with 5p indicated for the FY. The company is in the process of renewing its short term financing arrangements to provide greater flexibility and fund an increase in stock to support anticipated demand in growing categories such as GAMEtronics (preowned phones and tablets). GAME closed H1 with net cash of £120m. Investment in the opportunities at Multiplay reduce outer year forecasts but could unlock long term profits.
GAME has issued an AGM trading update following the unscheduled release on 23 December. A decline in gross transaction value of -6.7% in the first 21 weeks of the FY eased to a decline of just -0.4% for latest three weeks. This includes the last week of trading up to Christmas and the first two weeks of the post-Christmas sales which we estimate drive c20% of H1 gross profit. The company has confirmed H1 EBITDA guidance at c£30m. We leave our low end FY profit forecasts unchanged but see upside risks to numbers. Hold
Following GAME's trading update on 23 December we now downgrade to Hold and cut our target price from 290p to 120p. In our note on 23 Dec we cut our EPS forecasts by 60% for 2016, 42% for 2017 and 30% for 2018. Today we cut dividend forecasts by 19% this year to 12p per share, implying 0.6x earnings cover and forecast that the company will hold the dividend at this level until cover begins to build. We view this pay out as sustainable and while uncovered this year, forecast y/e net cash to be broadly £50m for the next three years.
UK sales have fallen off sharply in the past few weeks at the most critical time of year for GAME. General weakness has been exacerbated by very rapidly slowing sales in old format content, down 57% in the UK, and while sales of new generation content remained strong these were not enough to offset the decline. The Spanish market remains strong with sales up 8%. While a decline in old format sales was expected the scale has surprised the company while the importance of Christmas trading has hugely magnified the issue. We cut our FY EPS forecasts by 60%, 2017e by 42% and 2018e by 30%. There is no updated guidance on the dividend, but we note that current year cover is just 0.5x. We place our rating and TP under review.
GAME has announced FY results a touch ahead of our forecasts with a strong H2 performance showing both sales and margin growth. The console cycle is at the stage where low margin hardware sales are slowing while high margin content and accessories are seeing accelerating growth. GAME sees a huge opportunity in its eSports and Digital divisions and is investing substantially to maximise future profits. We cut 16e and 17e forecasts to reflect this but still see 6% PBT growth this year and 13% in 17e. In addition we are encouraged that GAME is well placed for a profitable Black Friday.
GAME announces prelims on 15 October. The company issued a full Q4 trading update in August so we do not expect any surprises in the full year numbers (we forecast PBT of £37.5m). In terms of current trading we expect a qualitative comment only, but note that the equivalent period last year contained the launch of Destiny, the single biggest selling launch in the company’s history. More important is the long list of top titles coming between now and Christmas (29 vs 21 last year) which should support trading over peak when the comparison base is much easier. Maintain BUY
Following January's downgrade today's H2 update confirmed a return to growth. Excluding hardware, sales grew by 7% and the bias of gross profit towards content saw a total gross margin gain of 300 bps aided by strong growth in digital sales, up 16%. We leave forecasts unchanged. Looking ahead to 2016 we see diminishing risk around peak trading as the console cycle develops, supported by a strong line up of titles to drive content sales. The eSports and events division looks well placed strategically in what is an increasingly high growth market. BUY
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