Update

Equity Research 25 August 2022

Embracer Group
Sector: Gaming

Premium with a Doubt FAIR VALUE RANGE

BEAR BASE BULL

Redeye updates its view post Embracers Q1 2022/23 and from its latest game
86 134 178
release Saints Row, where reviews came in weaker than anticipated. As such, we
lower our base case.
Embracer VERSUS OMXS30
Weaker than expected reviews for Saints Row
OMXSPI Indexed
Price (SEK)
Embracer released one of its largest game projects, Saints Row, on the 23th of 120
August. The reviews for the game came in lower than we anticipated, why we 100

reduce our expectations for the game. We now estimate the game to sell ~1.5 80

million copies (previous ~2 million) during Q2’22/23E and expect it to take a long 60

time to recoup its investments. 40

20
Becoming IP owner of The Lord of The Rings and The Hobbit
0
24-aug 22-nov 20-feb 21-maj 19-aug
Embracer announced five acquisitions, the most notable ones being the IP-rights
of the Lord of The Rings and The Hobbit, as well as the Game studio Tripwire.
Through the acquisition, Embracer retains the IP rights for the majority of the REDEYE RATING
media segment except for the literature books. The acquisitions were paid at an
EV/EBIT(2023/24) multiple of 7x and adds ~3% to Adj EBIT in 2023/24-2024/25.
4 4 4
Adj EBIT down by 7-3% for 2022/23-2024/25

Embracer reiterated its guidance in its Q1 report. However, due to the weaker
People Business Financials
outlook for Saints Row, lower ROI expectations for upcoming games, and a
slightly weaker outlook for mobile, we cut our Adj EBIT estimates by 7-3% for
2022/23-2024/25. We still expect organic growth of 23% during the year. Our
new base case stands at SEK 134 (146), derived from a DCF model. At our base
case, Embracer would trade at 19x EV/Adj EBIT (2022/23E). KEY STATS
Ticker EMBRAC
Market First North
Key Financials (SEKm) 2021/22 2022/23E 2023/24E 2024/25E
Share Price (SEK) 65
Revenues 17,039 39,751 45,738 49,937
Market Cap (SEKm) 82,225
Revenue growth 88.7% 133.3% 15.1% 9.2%
Net Debt 2022E (SEKm) 7,346
EBITDA 6,139 12,433 15,838 17,671
Free Float (%) 62%
Adj EBIT 4,421 9,753 11,722 13,127
Avg. daily volume (‘000) 5,000
EBIT Margin (%) 25.9% 24.5% 25.6% 26.3%
Net Income -4,284 5,453 7,390 8,666
ANALYSTS
Viktor Lindström
EV/Revenue 6.2 2.3 1.8 1.5
Viktor.lindstrom@redeye.se
EV/EBITDA 17.2 7.2 5.3 4.2
Tomas Otterbeck
EV/Adj EBIT 23.9 9.2 7.1 5.7
Tomas.otterbeck@redeye.se
P/E 21.4 9.4 8.6 7.7

Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report
Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: info@redeye.se
 REDEYE Equity Research Embracer Group 25 August 2022

Saints Row Reviews weaker than expected

On 23 August, One of Embracers biggest and most ambitious games, Saints Row (Reboot),
was released. The game is one of two announced AAA games during the year and is
important for Embracers 2022/23 FY guidance, as Embracers holds the IP rights and is both
developed and published internally. The game's PC version will be released exclusively on Epic
Games, while the console version will be released on PS4, PS5, Xbox One, and XSX.

The game has so far received a Metacritic and Opencritic score of 67/100. This is a clear
disappointment, we expected a score of 75/100. We still believe the game will sell a decent
number of copies during the first months. In its latest quarterly report, Embracer stated that
the pre-orders were slightly above expectations and that over 1.3 million players have installed
the pre-release editor Boss-Factory, where fans can create their own personal avatar for the
upcoming game.

Based on reviews, we note that some were disappointed with the graphics, variation, and the
less freaky game style. We are especially disappointed with the graphics and car mechanics,
where at least some synergies between the internal studios could easily fix that issue.

Due to the weaker reviews, we believe it will be harder to attract new players to the game and
also expect the tail of the game to be shorter. As such, we lower our estimates for the number
of units sold during the year. We now expect the game to sell ~1.5 million copies instead of
~2 million and fear that it will take time to recoup its investment. We estimate that ~3 million
units need to be sold to reach breakeven. However, this could differ depending on different
platform deals with other stakeholders (EPIC Games) and how aggressively discounted the
game will be in a few months.

Based on the retail price of USD 59.9, we apply a discount of 20% to be on the conservative
side regarding the overall price level. Additionally, based on VAT and geographical weight, we
estimate the net retail price to be USD ~45.1. We estimate the initial game investments to be
SEK 1,100m and a marketing budget of SEK 200m. Based on the PC exclusivity on Epic
games store, we estimate Embracer to receive SEK 300m from Epic. Implied in a total
investment of SEK 1,000m. Hence, we forecast the game needs to sell at least 3 million
copies to go breakeven. We currently pencil in revenues of SEK 711m in Q2.
Saints Row - Sensitivity Contribution in Q2'E Breakeven levels
Units sold '000 1,000 1,250 1,500 1,750 2,000 2,250 2,500 2,750 3,000 3,250 3,500
ASP (€/$) 59.9 59.9 59.9 59.9 59.9 59.9 59.9 59.9 59.9 59.9 59.9
Discount 20% 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%
ASP (€/$) - After discount 47.9 47.9 47.9 47.9 47.9 47.9 47.9 47.9 47.9 47.9 47.9

Revenue (SEKm) 473.8 592.3 710.7 829.2 947.6 1,066.1 1,184.5 1,303.0 1,421.4 1,539.9 1,658.3

Platform fee (Epic) 12% 12% 12% 12% 12% 12% 12% 12% 12% 12% 12%
Platform fee (Other) 30% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30%

Epic Weight % 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% 15%
Other Weight % 85% 85% 85% 85% 85% 85% 85% 85% 85% 85% 85%

Platform fee (Weighted) 27.3% 27.3% 27.3% 27.3% 27.3% 27.3% 27.3% 27.3% 27.3% 27.3% 27.3%
Distributor / License fee 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Gross Profit (SEK m) 344.5 430.6 516.7 602.8 688.9 775.0 861.1 947.3 1,033.4 1,119.5 1,205.6
Gross margin % 72.7% 72.7% 72.7% 72.7% 72.7% 72.7% 72.7% 72.7% 72.7% 72.7% 72.7%

Initial investment (SEK m) 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300 1,300
Platform Exclusive (EPIC) 300 300 300 300 300 300 300 300 300 300 300
Total Investment 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
Contribution profit -655.5 -569.4 -483.3 -397.2 -311.1 -225.0 -138.9 -52.7 33.4 119.5 205.6
ROI -0.66x -0.57x -0.48x -0.40x -0.31x -0.22x -0.14x -0.05x 0.03x 0.12x 0.21x
Source: Redeye research

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 REDEYE Equity Research Embracer Group 25 August 2022

Besides making it harder to recoup its investment for the game, the poor game mechanics
questions the confidence regarding upcoming key titles. We believe the risk of delays has
become higher and expect the negative trend on ROI for finalized games to continue. We think
investors have and will continue to apply a discount on Embracers game pipeline versus the
big four industry players.

The second announced AAA game in 2022/23, Dead Island 2, was announced recently and is
planned to be released on February 2, 2023. Game delays have been a strong trend amongst
AAA games for some time now, which of course, with the Saints Row delay in our short
memory, make us more sceptical about Embracer successfully releasing the game in Q4.
During the Gamescom opening ceremony, we could not see more than 1-second clips from
the gameplay, which made us wonder what state the game was in. However, we read a
calming article on the website “Gamereactor” on August 24, where a game journalist had
tested a demo of the game, and it was quite optimistic. We hope Embracer is more certain of
the game release date this time to restore some trust from investors.

Softer profitability in Q1
Tabletop Games is the outperformer

Embracers' Q1 report was decent, in our view. Net sales came in 1% ahead of our estimates
while Adj EBIT was weaker than anticipated (-8%). However, this is a small quarter for
Embracer, and we would not put too much effort into the weaker profitability levels.
Deviation table
Embracer Group
P&L Estimates Redeye Consensus
(SEK m) Q1'21/22A Q1A'22/23 Q1'22/23E Q1'22/23E Diff (%) - vs Redeye
Net sales - Games 2,967 6,447 6,313 6,410 2%
O/W PC/Console 2,239 2,294 2,217 - 3%
O/W Mobile 728 1,488 1,596 - -7%
O/W Tabletop 0 2,665 2,500 - 7%
EES (Darkhorse & Partner publishing) 466 671 729 - -8%
Total Net sales 3,433 7,118 7,042 7,176 1%

EBITDA 1,573 1,867 1,935 -4%

Op EBIT 1,277 1,322 1,442 1,464 -8%

Net sales y/y 65.6% 107% 105.1%

O/W Organic Games 10% - 2.2%
Op EBIT margin % 37.2% 18.6% 20.5%
Source: Redeye Research

Net sales came in at SEK 7,118m (2,962). Equivalent to a y/y growth of 107%, this was 1%
higher than our estimates. Organic growth for the entire group was -12%. Proforma organic
growth for the group was -6% in the quarter. The major positive deviation primarily stems
from tabletop games that came in 7% higher than our estimates and grew 6% on a proforma
level despite a flat market, which is highly encouraging.

As expected PC/Console had a quarter with few new releases and faced tough comparable
due to last year's major release of Biomutant. Thus, the organic growth was -21% in the
quarter. Various report has stated that the mobile market has contracted by 7-10% during
H1’22. The mobile segment still outgrows the market with a proforma growth of 11%.
Embracer states that it still sees a healthy return on its UA investments. The UA spending
remained at high levels and reached SEK 883m in the quarter, equivalent to 59% of mobile
games revenue, indicating a slightly lower return on its previous investments.

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 REDEYE Equity Research Embracer Group 25 August 2022

Note that Easybrain positively impacted an ad-mediation deal in Q4, which we estimated to be
between SEK 150-200m.

Operating (adjusted) EBIT came 8% below our estimates at SEK 1,322m (1,277) and grew 4%
y/y. This corresponds to a margin of 18.6% (37.2). The margin contraction stems from a
weaker gross margin due to a higher share than from tabletop games, which have a lower
gross margin than PC/Console and mobile. Also, the mobile segment posted weaker sales
than expected, but the UA investments remained at high levels, which implied that the Adj
EBIT margin for the mobile segment reached 19% (39). The PC/Console also failed to hold up
the profitability levels from last year due to high investments in developers.

As can be seen in the charts below, the higher share of Table top games indicated that the
gross margin contracted sequentially. We expect the gross margin to fluctuate in the range of
64-67% during the quarter, dependent on seasonally. The third quarter tends to be the
strongest for both Table top games and EES, so we expect the gross margin to be weakest in
Q3 2022/23.

The game industry is characterized as a fixed industry, so quarters with limited releases could
negatively impact margins. As seen, both PC/Console and mobile saw margin contraction
versus last year. The mobile segment momentum faded a bit during the quarter while the UA
investments remained high, which harmed the Adj EBIT margin for the mobile segment.

Embracer: Adj EBIT margin per segment Embracer: Revenue mix and gross margin %
50% 100%
45% 80%
40%
35% 60%
30% 40%
25%
20% 20%
15% 0%
10% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
5% 21/22 21/22 21/22 21/22 22/23 22/23E 22/23E 22/23E
0%
Q1 21/22 Q2 21/22 Q3 21/22 Q4 21/22 Q1 22/23 PC/Console Mobile
Table Top Entertaintment & Services
PC/Console Mobile Table Top Entertainment & Services
Gross margin %
Source: Redeye Research Source: Redeye Research

IFRS conversion….
This was the first interim report presented in accordance with IFRS. Thus, there were a few
implementations that we believe investors should be aware of. First of all, Embracer started
its reporting into four different segments. PC/Console, Mobile, Tabletop, and Entertainment
and Services. Games segments include PC/Console, Mobile, and Tabletop games.

Embracer’s new key metric will be Adj EBIT. This is the most similar metric as Operational
EBIT and could be defined as Adj EBITA. This excludes contingent considerations in the
quarter and amortizations from acquired intangible assets (PPA), such as brands, IPs, and
customer contracts.

While the amortization of acquired intangible assets will be classified under D&A (not as
operational), the contingent consideration will instead be under personnel expenses , as it is
assumed that sellers should remain employed to receive an earnout. Thus, it should be
expensed as it is earned and reported as personnel costs. Hence, this will impact the EBITDA,

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REDEYE Equity Research Embracer Group 25 August 2022

why Embracer also will report Adj EBITDA, as it believes it’s a relevant proxy for measuring the
underlying operating cash flow. Thus, it is important to remember that the net Opex and
personnel expenses will be boosted going forward.

Other meaningful aspects were the balance sheet, which was much more transparent under
IFRS, and Embracer started to disclose Adj EBIT for the four segments. Additionally, the
number of outstanding shares was also affected by the IFRS conversion and was reduced
because it does not include shares that have not yet been released due to operational and
financial earnouts.

Five Acquisitions and one new operating group

On 18 August, Embracer also announced five acquisitions, the two most notable ones were
the IP rights of the Lord of the Rings and The Hobbit, as well as the game developer/publisher
Tripwire Interactive. In addition to the announced acquisitions, Embracer communicated that
it had started its 11th operating group, Freemode.

Freemode will provide global strategic, operational, and financial support through its
ecosystem to achieve and enhance operational efficiency. In addition to the five announced
acquisitions, Embracer also stated that it has agreed to acquire an additional PC/Console
company.

Securing the IP rights to Lords of the Ring and the Hobbit opens up vast opportunities to
capitalize on the iconic IP and collect licensing fees. There is still some uncertainty regarding
the IP rights Embracer owns. However, on a summary basis, Embracers owns the IP rights
except for the literature books. Some opportunities could be developing and exploring new
games and movies based on the iconic characters. Asmodee does already create and publish
tabletop games based on Lord of the Rings, and from now on, those license payments will
instead be retained in-house.

Key upcoming releases where Middle Earth Enterprises has financial interest consist of
Amazon’s upcoming series The Lord of the Rings: rings of power, the animated movie The
Lord of the Rings: The War of the Rohirrim (Warner Bros) and the mobile game The Lord of the
Rings: Heroes of Middle Earth (EA). Besides the long-term opportunities of capitalizing on one
of the world's most iconic IPs and collecting licensing fees, we also believe these moves could
attract top talent to Embracer.

The other notable made acquisition was Tripwire Interactive. A US-based AAA game studio
and publisher, focusing on FPS and action games. The studio is the founder of the beloved
games series Rising Storm (over 14 million players), Killing Floor (over 35 million players), Red
Orchestra, and Maneater (over 16 million players). The titles have an average Metacritic score
of 75. Tripwire is expected to deliver solid organic growth, driven by an upcoming AAA title,
release content updates, and explore new platforms (VR) for its existing franchises.

The other acquisitions were Tuxedo Labs, Singtrix and Limited Run. The initial purchase price
amount to SEK 6,000m, whereof SEK 5,500m will be paid in cash. There is also an earnout
structure based on the upcoming seven years' financial performance worth SEK 2,200m.
Thus, the total purchase price, including earnouts, amounts to SEK 8,200m.

The five acquisitions are expected to generate Adj EBIT of SEK 850m in 2023/24 and SEK
1,250m in 2024/25, applying the mid-range of the guidance. For FY 2023/24, Embracer pays a

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 REDEYE Equity Research Embracer Group 25 August 2022

multiple of 7.0x EV/Adj EBIT upfront and 9.6x in total, which we deem fair based on the highly
attractive IP rights of Lord of the Rings and The Hobbit.

20-35% organic growth expected in FY 2022/23

Embracer expects to achieve 20-25% organic growth during the year, driven by the
PC/Console segment and the annualization of Easybrain. We forecast 23% for the full year.
The upcoming key titles except for Saints Row are, Destroy All Humans! 2 in Q2, Goat
simulator 3 in Q3, Dead island 2 in Q4, and several other smaller AA and indie titles to
contribute in Q3 and Q4.

Embracer’s game investments reached SEK 3,870m on a R12m basis. This will be the
foundation of organic growth. On the negative side, the recent ROI on finalized games is
unappealing and reached 1.0x on an R12m basis, versus its average of 2.2x. The recent
quarter's release schedule has been muted, while some of the releases have performed below
management expectations, such as MX vs ATV Legends and ELEX II. There are also clear
risks the negative trend for ROI will continue to fall due to the high value of completed games
in Q2, from Saints Row, Way of the hunter, and Destroy all humans! 2.

However, we still believe this year's release schedule to have a favorable mix of AAA, AA, and
indie games which shall positively impact the ROI. The ROI for AAA games is not as high as
AA and indie games due to the high development and marketing budgets. We currently pencil
in an ROI of 1.80x on its finalized game projects.
Embracer: Game investments - R12m Embracer: ROI on finalized games - R12
4,200 3.5x 2,500 3.2x
3,700 3.0x 2,000 2.7x
3,200 2.2x
SEK m
SEK m

2.5x 1,500
2,700 1.7x
2.0x 1,000
2,200 1.2x
1.5x 500 0.7x
1,700
1,200 1.0x 0 0.2x
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
20/21 20/21 20/21 20/21 21/22 21/22 21/22 21/22 22/23 20/21 20/21 20/21 20/21 21/22 21/22 21/22 21/22 22/23
Total investments in games R12m New releases - sales R12m, SEKm
Game investments / Finalized games, R12m
Completed Games, SEKm R12m

Source: Redeye Research Source: Redeye Research

Embracer has 222 games in its pipeline, of which 25+ are AAA games, expected for release by
2025/26.
Embracer: Mobile games - Net Sales and UA spending % Embracer:PC/Console Net sales and growth y/y %
2,500 -70% 140%
5,500
-60% 120%
2,000
-50% 4,500
100%
SEK m
SEK m

1,500 -40% 3,500 80%

1,000 -30% 60%
2,500
-20% 40%
500 1,500
-10% 20%
0 0% 500 0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
21/22 21/22 21/22 21/22 22/23 22/23E 22/23E 22/23E

O/W Mobile Games UA of Mobile games revenue % O/W PC / Console O/W PC/Console y/y %

Source: Redeye Research Source: Redeye Research

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 REDEYE Equity Research Embracer Group 25 August 2022

Sequential improvement expected

We expect a sequential improvement from Q2 and onwards and expect Q4 to be the strongest
quarter of the year. Driven by a strong release schedule within PC/Console, supported by the
AAA game release Dead Island 2. Mobile segment should benefit from the upcoming strong
seasonal quarters, further boosted by high UA spending. This, should accelerate the Adj EBIT
margin throughout the year. For FY 2022/23, we estimate Adj EBIT to grow 120% y/y and
reach SEK 9,753m, 5% below Embracers mid-point guidance.

Embracer: Adjusted EBIT and margin % Embracer: Net sales by business unit and growth y/y %
3,500 40% 14,000 200%
35% 12,000
3,000
10,000 150%
30%

SEK m
2,500 8,000
25% 100%
SEK m

2,000 6,000
20%
1,500 4,000 50%
15% 2,000
1,000 10% 0 0%
500 5%
0 0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
21/22 21/22 21/22 21/22 22/23 22/23E 22/23E 22/23E
O/W PC / Console O/W Mobile Games
Adjusted EBIT Adj EBIT margin % O/W Asmodee Entertainment & Services
Total Net Sales - y/y %
Source: Redeye Research Source: Redeye Research

The improved Adj EBIT, and the inclusion of Asmodee should boost the cash flow during the
upcoming periods. We note that Asmodee tied up some inventory for the important seasonal
season but have no reason to believe this should be an issue. We expect the free cash flow
(excluding acquisitions) to reach SEK 2,662m in 2022/23 and Asmodee to contribute 66% of
the free cash flow. We noted that EBITDA-Capex was weak during the quarter but expect this
metric to improve, in line with game releases. For 2022/23, we expect the EBITDA-Capex to
reach SEK 6,441m, corresponding to a margin of 16.2%.

Embracer: Operational EBIT and margin % Embracer: EBITDA - Capex and FCF
14,000 35% 12,000
12,000 30% 10,000
10,000 25% 8,000
SEK m

SEK m

8,000 20% 6,000

6,000 15% 4,000
4,000 10% 2,000
2,000 5% 0
0 0% -2,000
2019 20/21 21/22 22/23E 23/24E 24/25E 2019 20/21 21/22 22/23E 23/24E 24/25E
Adjusted EBIT Adj EBIT margin % EBITDA - Capex Free cash flow excl aquisitions

Source: Redeye Research Source: Redeye Research

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REDEYE Equity Research Embracer Group 25 August 2022

Financial Estimates
On the back of the Q1 report, and the recent release of Saints Row, we cut our Adj EBIT
estimates by 7% for 2022/23, due to weaker sales from Saints Row and negative mix effects
(slightly lower gross margin). In addition, we cut Adj EBIT by 3% for 2023/24-2024/25, due to
reduced ROI on finalized game projects as well as a slightly weaker outlook for the mobile
segment.

SEK m Q1 Q2'E Q3'E Q4'E 2022/23E 2023/24E 2024/25E

Games Revenue 6,447 8,406 10,309 10,346 35,538 41,083 45,049
O/W PC / Console 2,294 3,489 4,264 5,122 15,092 18,988 21,298
O/W Mobile Games 1,488 1,717 2,044 1,925 7,282 8,272 9,099
O/W Tabletop 2,665 3,200 4,000 3,300 13,165 13,823 14,653
EES 671 743 1,234 1,325 4,212 4,655 4,888
Total Net Sales 7,118 9,149 11,542 11,671 39,751 45,738 49,937
Revenue Split %
PC/Console Games 32.2% 38.1% 36.9% 43.9% 38.0% 41.5% 42.6%
Mobile Games 20.9% 18.8% 17.7% 16.5% 18.3% 18.1% 18.2%
Asmodee 37.4% 35.0% 34.7% 28.3% 33.1% 30.2% 29.3%
EES 9.4% 8.1% 10.7% 11.4% 10.6% 10.2% 9.8%

P&L Statment
Net Sales 7,118 9,149 11,542 11,671 39,751 45,738 49,937
Other income 100 100 100 100 400 400 400
Work for own use / Capitalised dev 866 1,006 1,131 1,260 4,264 4,574 4,994
Total Revenue 8,084 10,255 12,773 13,032 44,415 50,712 55,331

COGS -2,506 -3,032 -4,117 -3,982 -13,637 -15,002 -16,184

Gross profit 5,578 7,223 8,657 9,049 30,777 35,710 39,147

Other external expenses -1,806 -1,857 -1,847 -1,809 -7,319 -7,958 -8,589
Personnel Expences -2,940 -2,384 -2,590 -2,791 -10,705 -11,669 -12,617
Other operating costs -134 -73 -69 -70 -346 -274 -300
Total opex -4,880 -4,314 -4,507 -4,670 -18,371 -19,902 -21,506

Associated Companies 5 7 7 7 26 30 30

EBITDA 703 2,915 4,157 4,386 12,433 15,838 17,671

Non-recurring (Contingent consideration) -1,165 -532 -532 -532 -2,761 -1,977 -1,471
Adjusted EBITDA 1,868 3,447 4,689 4,918 15,194 17,815 19,142

Depreciation and amortisation -1,100 -1,382 -1,584 -1,677 -5,743 -6,103 -6,396

EBIT -397 1,533 2,574 2,709 6,689 9,735 11,275

Adj EBIT 1,323 2,092 3,119 3,219 9,753 11,722 13,127

Net finance 538 -37 -37 -37 427 -1 21

PTP 141 1,496 2,537 2,672 7,116 9,734 11,296

Tax -322 -299 -507 -534 -1,663 -2,344 -2,630
Net income -181 1,197 2,029 2,138 5,453 7,390 8,666

Adj Net Income 1,539 1,756 2,574 2,648 8,517 9,377 10,518
EPS adjusted 1.30 1.42 2.07 2.13 6.93 7.55 8.47

EBITDA - Capex -610 1,525 2,657 2,869 6,441 9,435 10,930

Growth y/y %
Net Sales 107.6% 177.5% 127.0% 123.2% 133.3% 15.1% 9.2%
Organic Growth -12.0% 42.9% 22.4% 44.1% 23.3% 12.8% 9.2%
EBITDA -54.3% 77.8% 179.0% 197.9% 102.5% 27.4% 11.6%
Adj EBIT 3.6% 115.1% 178.6% 205.9% 120.6% 20.2% 12.0%
Adj Net Income 28.8% 147.1% 208.9% 138.4% 121.2% 10.1% 12.2%
Adj EPS 7.9% 103.1% 155.3% 117.3% 87.3% 9.0% 12.2%
Margins %
Gross margin % 64.8% 66.9% 64.3% 65.9% 65.7% 67.2% 67.6%
EBITDA margin % 9.9% 31.9% 36.0% 37.6% 31.3% 34.6% 35.4%
Adj EBIT margin % 18.6% 22.9% 27.0% 27.6% 24.5% 25.6% 26.3%
Adj Net Margin % 21.6% 19.2% 22.3% 22.7% 21.4% 20.5% 21.1%
EBITDA - Capex margin % -8.6% 16.7% 23.0% 24.6% 16.2% 20.6% 21.9%
Source: Redeye research

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 REDEYE Equity Research Embracer Group 25 August 2022

Valuation
Peer Valuation
Multiples for gaming companies have contracted recently. We believe the historical low
multiples and easier comparison from H2’22 to act as support for the sector.

EV EV/S EV/EBITDA EV/EBIT

Company name SEK m 2022 2023 2024 2022 2023 2024 2022 2023 2024
Nordics
Thunderful 1,876 0.6x 0.6x 0.6x 5.4x 4.0x 3.7x 11.3x 6.3x 5.9x
Paradox 16,805 8.7x 7.4x 6.7x 12.9x 11.2x 10.0x 21.2x 19.1x 16.6x
EG7 1,349 0.7x 0.7x 0.7x 2.8x 2.6x 3.1x 4.2x 4.2x 4.4x
Remedy 2,411 5.2x 5.2x 3.5x 93.0x >100 11.2x >100 neg 18.0x
Stillfront 15,177 2.1x 2.0x 1.8x 5.8x 5.1x 4.7x 7.2x 6.4x 5.9x
G5 Entertainment 1,300 0.9x 0.9x 0.8x 4.1x 3.2x 2.9x 8.0x 4.7x 4.5x
MTG 3,027 0.5x 0.5x 0.5x 2.2x 2.1x 1.9x 4.9x 3.9x 3.5x
Median 2,411 0.9x 0.9x 0.8x 5.4x 3.6x 3.7x 7.6x 5.5x 5.9x
Average 5,992 2.7x 2.5x 2.1x 18.0x 4.0x 5.4x 8.1x 6.4x 8.4x
International
Ten Square 1,264 1.1x 1.1x 1.1x 5.0x 5.2x 5.1x 6.0x 6.2x 5.9x
Rovio 2,988 0.9x 0.9x 0.9x 5.2x 4.9x 4.8x 7.0x 6.4x 6.0x
Playtika 58,614 2.1x 2.0x 1.9x 6.0x 5.6x 5.3x 11.4x 10.0x 9.0x
11 Bit Studios 2,418 19.8x 5.0x 3.7x 51.8x 7.4x 6.3x 84.3x 7.9x 7.4x
Team 17 6,153 3.9x 3.6x 3.3x 11.3x 10.1x 9.2x 12.8x 11.3x 10.3x
KeyWords Studios 23,288 3.5x 3.1x 2.8x 17.5x 16.3x 14.9x 22.8x 20.8x 18.8x
Frontier Developments 7,275 4.3x 3.6x 3.2x 12.2x 9.5x 7.8x 29.9x 21.7x 16.7x
TinyBuild 2,399 3.5x 3.2x 3.0x 9.2x 8.0x 7.2x 9.8x 8.5x 7.8x
Activision 592,499 7.0x 5.8x 5.5x 18.9x 14.1x 13.0x 19.9x 14.7x 13.5x
EA 374,426 4.4x 4.1x 3.9x 12.5x 11.5x 10.8x 13.9x 12.6x 11.4x
Take Two 199,557 3.2x 2.3x 2.2x 16.8x 10.1x 8.8x 17.3x 10.2x 8.9x
CD Project 17,034 8.9x 8.0x 9.7x 19.4x 16.1x 20.7x 23.7x 20.4x 31.9x
Ubisoft 62,615 2.5x 2.2x 2.0x 5.7x 4.8x 4.3x 16.4x 12.5x 10.5x
Sega 30,199 1.1x 1.0x 1.0x 7.0x 6.0x 5.5x 8.8x 7.5x 7.1x
Capcom 54,739 5.8x 5.2x 5.1x 13.1x 11.5x 11.1x 14.3x 12.7x 12.0x

Median 23,288 3.5x 3.2x 3.0x 12.2x 9.5x 7.8x 14.3x 11.3x 10.3x
Average 95,698 4.8x 3.4x 3.3x 14.1x 9.4x 9.0x 19.9x 12.2x 11.8x
Median Gaming 12,849 2.2x 2.0x 1.9x 8.8x 6.5x 5.8x 10.9x 8.4x 8.1x
Average Gaming 50,845 3.7x 2.9x 2.7x 16.1x 6.7x 7.2x 14.0x 9.3x 10.1x
Tabletop Games & IPs
Nintendo 411,406 3.1x 3.2x 3.3x 8.9x 9.2x 9.9x 9.0x 9.2x 9.6x
Hasbro 158,353 2.3x 2.2x 2.1x 11.5x 10.6x 9.6x 14.3x 13.1x 11.8x
Mattel 117,329 1.9x 1.8x 1.7x 9.9x 8.5x 7.9x 12.7x 10.4x 9.8x
Median 158,353 2.3x 2.2x 2.1x 9.9x 9.2x 9.6x 12.7x 10.4x 9.8x
Average 229,029 2.4x 2.4x 2.3x 10.1x 9.4x 9.1x 12.0x 10.9x 10.4x
Peer Group Median 12,849 1.6x 1.5x 1.4x 7.6x 6.4x 5.8x 10.1x 8.0x 7.8x

Embracer 88,441 2.3x 2.0x 1.9x 7.6x 6.0x 5.1x 8.7x 7.4x 6.6x
Source: Factset

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 REDEYE Equity Research Embracer Group 25 August 2022

DCF Valuation
We make limited minor long-term assumptions in our DCF model. Our revised revisions stem
from lower estimates in 2022/23. We apply a Wacc of 9% in all our scenarios.

Bear Case SEK 86 Base Case SEK 134 Bull Case SEK 178
Sales CAGR 2022-26E: 10% Sales CAGR 2022-26E: 12% Sales CAGR 2022-26E: 13%
Sales CAGR 2027-36E: 4% Sales CAGR 2027-36E: 6% Sales CAGR 2027-36E: 7%

Avg EBITDA margin 2022-36E: 34% Avg EBITDA margin 2022-36E: 35% Avg EBITDA margin 2022-36E: 38%

Terminal growth: 2% Terminal growth: 2% Terminal growth: 2%

Terminal EBITDA margin: 30%. Terminal EBITDA margin: 34%. Terminal EBITDA margin: 38%.

EBITDA Margin
SEK/Share 133.9 30.0% 32.0% 34.0% 36.0% 38.0%
10.0% 102 107 113 119 124
Wacc % 9.0% 120 127 134 141 148
8.0% 144 153 162 171 180
Source: Redeye research

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REDEYE Equity Research Embracer Group 25 August 2022

Summary Redeye Rating

The rating consists of three valuation keys, each constituting an overall assessment of several factors that are rated
on a scale of 0 to 1 points. The maximum score for a valuation key is 5 points.

People: 4

Embracer is a play on top-class capital allocators with a high proportion of insider ownership. On the negative side,
there is no large outside shareholder on the board, poor bonus disclosure of bonus measurements, and two classes
of stocks with different voting rights.

Business: 4

Embracer operates in a highly competitive industry. However, the company takes market shares (even organically).
A majority of total revenues is recurring (back-catalog and live-service games). We also think the premium games
segment enjoys pricing power meaning with the right quality standard publishers can raise prices without losing
customers.

Financials: 4

Embracer is a company with a strong market position. One of the company’s core strategies is to acquire game IPs
from companies in financial distress; this has led to a conservative approach regarding putting on debt. The
income streams are diversified with a large portfolio of IPs and different games. Overall the video game industry is
not sensitive to the business cycle which dampens the financial risk of downturns. During the past years, Embracer
has been growing heavily and still producing more than satisfying margins and return on assets. The future
profitability levels will vary due to game release schemes as the business model inherits a high degree of scalability.
Long-term increasing margins as the company continue to grow and the revenue streams from their own IPs
increase even further.

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REDEYE Equity Research Embracer Group 25 August 2022

2021 2022E 2023E 2024E DCF Valuation Metrics Sum FCF (SEKm)
INCOME STATEMENT 2022-2025 18392
Revenues 17,039 39,751 45,738 49,937 2026-2036 91240
Cost of Revenues 2,071 8,973 10,028 10,790 Terminal 84404
Gross Profit 14,967 30,777 35,710 39,147 Firm Value 194037
Operating Expenses 8,828 18,345 19,872 21,476 Net Debt 7346
EBITDA 6,139 12,433 15,838 17,671 Equity Value 186691
Depreciation & Amortization 9,851 5,743 6,103 6,396 Fair Value per Share 134
EBIT 4,421 9,753 11,722 13,127
Net Financial Items -101 427 -1 21 2021 2022E 2023E 2024E
EBT -3,814 7,116 9,734 11,296 CAPITAL STRUCTURE
Income Tax Expenses 470 1,663 2,344 2,630 Equity Ratio 0.5 0.5 0.5 0.5
Non-Controlling Interest 0 0 0 0 Debt to equity 0.5 0.4 0.3 0.3
Net Income -4,284 5,453 7,390 8,666 Net Debt 14222 7346 1057 -7634
Capital Employed 70316 87533 96247 106933
BALANCE SHEET Working Capital Turnover -34.1 22.7 15.8 13.5
Assets
Current assets GROWTH
Cash & Equivalents 5,810 16,448 20,737 27,428 Revenue Growth 88.7% 133.3% 15.1% 9.2%
Inventories 3,162 5,963 6,632 7,441 Basic EPS Growth -1319.1% -203.0% 42.7% 17.3%
Accounts Receivable 3,755 4,373 5,031 5,493 Adjusted Basic EPS Growth 9.9% 87.3% 9.0% 12.2%
Other Current Assets 2,199 6,303 7,022 7,525
Total Current Assets 14,926 33,087 39,422 47,888 PROFITABILITY
ROE -14% 11% 12% 12%
Non-current assets ROCE 6% 11% 12% 12%
Property, Plant & Equipment, Net 720 1,120 1,577 2,076 ROIC 9% 10% 11% 12%
Goodwill 42,937 46,153 46,153 46,153 EBITDA Margin (%) 36% 31% 35% 35%
Intangible Assets 31,371 33,085 34,915 36,613 EBIT Margin (%) 26% 25% 26% 26%
Right-of-Use Assets 1,062 1,006 1,006 1,006 Net Income Margin (%) -25% 14% 16% 17%
Shares in Associates 134 142 142 142
Other Long-Term Assets 1,582 1,692 1,692 1,692
Total Non-Current Assets 77,806 83,198 85,485 87,682 VALUATION
Basic EPS -4.1 4.2 6.0 7.0
Total Assets 92,732 116,285 124,907 135,570 Adjusted Basic EPS 3.7 6.9 7.6 8.5
P/E 21.4 9.4 8.6 7.7
Liabilities EV/Revenue 6.2 2.3 1.8 1.5
Current liabilities EV/EBITDA 17.2 7.2 5.3 4.2
Short-Term Debt 12,800 13,865 12,865 11,865 EV/Adj EBIT 23.9 9.2 7.1 5.7
Short-Term Lease Liabilities 297 303 303 303 P/B 1.9 1.1 1.0 0.9
Accounts Payable 3,602 5,168 6,175 6,941
Other Current Liabilities 5,717 9,416 9,318 9,528
Total Current Liabilities 22,416 28,752 28,661 28,637 SHAREHOLDER STRUCTURE CAPITAL % VOTES %
Lars Wingefors AB 23.2% 42.3%
Non-current liabilities S3D Media Inc 7.4% 11.5%
Long-Term Debt 7,232 9,929 8,929 7,929 Swedbank Robur 5.8% 3.8%
Long-Term Lease Liabilities 800 968 1,928 2,895 Canada Pension Plan 5.1% 3.3%
Other Long-Term Liabilities 20,054 18,453 19,816 21,870 PAI Partners 3.5% 2.3%
Total Non-current Liabilities 28,086 29,350 30,674 32,694
SHARE INFORMATION
Non-Controlling Interest 0 0 0 0 Reuters code Embrac
Shareholder's Equity 42,230 58,183 65,573 74,239 List First North
Total Liabilities & Equity 92,732 116,285 124,907 135,570 Share price 65.0
Total diluted shares, million 1265.0
CASH FLOW
NOPAT 3,951 8,090 9,378 10,497
Change in Working Capital 128 -2,252 -1,138 -798 MANAGEMENT & BOARD
Operating Cash Flow 4,293 8,383 12,992 14,433 CEO La rs Wi ngefors
CFO Joha n Eks tröm
Capital Expenditures -341 -400 -457 -499 Chairman
Investment in Intangible Assets -3,713 -5,289 -5,946 -6,242
Investing Cash Flow -37,896 -10,762 -7,703 -6,741
ANALYSTS Redeye AB
Financing Cash Flow 25,025 13,018 -1,000 -1,000 Viktor Lindström Mäster Samuelsgatan 42, 10tr
Free Cash Flow 239 2,694 6,589 7,691 Tomas Otterbeck 111 57 Stockholm

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REDEYE Equity Research Embracer Group 25 August 2022

Redeye Rating and Background Definitions

Company Quality

Company Quality is based on a set of quality checks across three categories; PEOPLE, BUSINESS, FINANCE. These
are the building blocks that enable a company to deliver sustained operational outperformance and attractive long-
term earnings growth.

Each category is grouped into multiple sub-categories assessed by five checks. These are based on widely
accepted and tested investment criteria and used by demonstrably successful investors and investment firms. Each
sub-category may also include a complementary check that provides additional information to assist with
investment decision-making.

If a check is successful, it is assigned a score of one point; the total successful checks are added to give a score for
each sub-category. The overall score for a category is the average of all sub-category scores, based on a scale that
ranges from 0 to 5 rounded up to the nearest whole number. The overall score for each category is then used to
generate the size of the bar in the Company Quality graphic.

People

At the end of the day, people drive profits. Not numbers. Understanding the motivations of people behind a business
is a significant part of understanding the long-term drive of the company. It all comes down to doing business with
people you trust, or at least avoiding dealing with people of questionable character.
The People rating is based on quantitative scores in seven categories:
• Passion, Execution, Capital Allocation, Communication, Compensation, Ownership, and Board.

Business

If you don’t understand the competitive environment and don’t have a clear sense of how the business will engage
customers, create value and consistently deliver that value at a profit, you won’t succeed as an investor. Knowing
the business model inside out will provide you some level of certainty and reduce the risk when you buy a stock.
The Business rating is based on quantitative scores grouped into five sub-categories:
• Business Scalability, Market Structure, Value Proposition, Economic Moat, and Operational Risks.

Financials

Investing is part art, part science. Financial ratios make up most of the science. Ratios are used to evaluate the
financial soundness of a business. Also, these ratios are key factors that will impact a company’s financial
performance and valuation. However, you only need a few to determine whether a company is financially strong or
weak.
The Financial rating is based on quantitative scores that are grouped into five separate categories:
• Earnings Power, Profit Margin, Growth Rate, Financial Health, and Earnings Quality.

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REDEYE Equity Research Embracer Group 25 August 2022

Redeye Equity Research team

Management
Danesh Zare
danesh.zare@redeye.se
Björn Fahlén
bjorn.fahlen@redeye.se Fredrik Reuterhäll
fredrik.reuterhall@redeye.se
Tomas Otterbeck
tomas.otterbeck@redeye.se
Life Science Team
Technology Team Gergana Almquist
gergana.almquist@redeye.se
Hjalmar Ahlberg
hjalmar.ahlberg@redeye.se
Oscar Bergman
oscar.bergman@redeye.se
Henrik Alveskog
henrik.alveskog@redeye.se
Christian Binder
Alexander Flening christian.binder@redeye.se
alexander.flening@redeye.se
Filip Einarsson
Douglas Forsling filip.einarsson@redeye.se
douglas.forsling@redeye.se
Mats Hyttinge
Forbes Goldman mats.hyttinge@redeye.se
forbes.goldman@redeye.se
Ethel Luvall
Jessica Grünewald ethel.luvall@redeye.se
jessica.grunewald@redeye.se
Gustaf Meyer
Jesper von Koch gustaf.meyer@redeye.se
jesper.vonkoch@redeye.se
Erik Nordström
Anton Hoof erik.nordstrom@redeye.se
anton.hoof@redeye.se
Richard Ramanius
Rasmus Jacobsson richard.ramanius@redeye.se
rasmus.jacobsson@redeye.se
Kevin Sule
Viktor Lindström kevin.sule@redeye.se
viktor.lindström@redeye.se
Fredrik Thor
Fredrik Nilsson fredrik.thor@redeye.se
fredrik.nilsson@redeye.se
Johan Unnerus
Mark Siöstedt johan.unnerus@redeye.se
mark.siostedt@redeye.se

Jacob Svensson
jacob.svensson@redeye.se

Niklas Sävås
niklas.savas@redeye.se

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REDEYE Equity Research Embracer Group 25 August 2022

Disclaimer
Important information
Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic
region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and
investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful
distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Sw edish Financial
Supervisory Authority.
Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding f inancial instruments,
prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf
of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services
in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary
authorization).

Limitation of liability
This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this
analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking
information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee
that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is
intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement
this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingl y, Redeye accepts no
liability for any loss or damage resulting from the use of this analysis.

Potential conflict of interest

Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the
objectivity and independence of its analysts. The following applies:
• For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedi sh Financial
Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees
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day after this date.
• An analyst may not engage in corporate finance transactions without the express approval of management and may not receive any
remuneration directly linked to such transactions.
• Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analy sis, or
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Redeye’s research coverage

Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless
otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of
significant changes in market conditions or events related to the issuer/the financial instrument.

Recommendation structure
Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating
model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessmen t of the company
in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their
decision-making.

Redeye Rating (2022-08-25)

Rating People Business Financials

5p 32 15 4

3p - 4p 155 139 48

0p - 2p 5 40 142

Company N 194 194 194

Duplication and distribution

This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical
or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to appl icable laws or other
regulations.
Copyright Redeye AB .

CONFLICT OF INTERESTS
Tomas Otterbeck owns shares in the company : Yes
Viktor Lindström owns shares in the company : No
Redeye performs/have performed services for the Com pany and receives/have
received com pensation from the Company in connection with this.

15