Low-risk strategy with a diversified revenue base
MGI’s management highlights the following benefits from the group’s buy, integrate, build and improve strategy in the high-growth media and games sectors:
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Predictable M&A strategy, offering long-term revenues and predictable returns.
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Diversified portfolio with multiple revenue streams; sustainable long-term revenue drivers.
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Does not participate in the risky and capital-intense development of new games intellectual property (IP).
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High synergies via platform approach
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Concentration on increasing operational cash flow; buy, integrate, deliver synergies and grow.
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Platform philosophy: economies of scale, increased volume delivers greater efficiency.
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Active use of capital markets (debt and equity) to deliver funding advantage and finance growth.
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Active in attractive growth segments
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Strong growth (c 40–50% consensus revenue and EBITDA CAGR 2018–21e) and attractive margins (MGI is targeting sustainable 20%+ EBITDA margins, with gamigo targeting 30%+ EBITDA margins).
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Technology-led, using cloud infrastructure to cut IT costs, as well as to scale the media and games platform internationally.
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An identified pipeline of attractive M&A targets and opportunities for growth.
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Built on M&A competence; 30+ acquisitions in past six years with low rate of failure.
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Experienced management team.
Exhibit 4: Buy-and-build – games
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Exhibit 5: Buy-and-build – media
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Exhibit 4: Buy-and-build – games
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Exhibit 5: Buy-and-build – media
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Distressed assets: Buy, integrate, build and improve
MGI follows a buy, integrate, build and improve strategy in both the media (B2B) and gaming (B2C) segments, focused around distressed companies that have come under pressure due to a lack of scale and suffering from high overhead costs (particularly from personnel, distribution and IT infrastructure). After the companies are acquired, they are restructured and integrated with a focus on the realisation of cost synergies in personnel, IT and marketing/distribution, materially cutting overheads. After integrating a business, MGI continues to invest in organic growth, supporting for example game acquisition, ongoing development, in-game advertising, new launches or the internationalisation of its properties.
MGI’s principal subsidiary gamigo, which publishes massively multiplayer online games (MMOGs) and casual games, was founded in 2000 and acquired by Samarion (Remco Westermann’s investment vehicle) from Axel Springer in 2012. Under Remco Westermann’s management, the business model was changed, moving away from capital-intensive and risky new game development and concentrating instead on licensing and acquiring proven games and IP rights from distressed games and media companies.
Management has completed more than 30 acquisitions and, following this revised strategy, have delivered a five-year revenue CAGR FY14–19 of 31% for gamigo, MGI’s principal gaming subsidiary, and a five-year EBITDA CAGR of 61%. In May 2018, MGI bought 53% of the voting rights in gamigo and currently holds 99.9% of the equity following the acquisition of the substantial outstanding minorities in Q120. MGI’s strategy is now fully focused on the media (B2B) and gaming (B2C) sectors.
Exhibit 6: MGI and gamigo – a brief history
2000 |
Gamigo founded as online gaming magazine |
2016 |
Acquisitions of Aeria Games and adspree media |
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Gamigo evolves into a publisher of online browser-based role-playing games (RPGs) |
2017 |
Acquisition of Mediakraft |
Sep-08 |
Axel Springer acquires gamigo outright |
May-18 |
MGI acquires an indirect 39% stake in gamigo (53% of voting rights) |
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Gamigo starts developing games in-house |
Oct-18 |
Acquisition of Trion Worlds |
Jul-11 |
IPO of blockescence (now MGI) |
Apr-19 |
Acquisition of WildTangent |
Oct-12 |
Samarion (Remco Westermann's investment vehicle) acquires gamigo |
Jun-19 |
Name changed to MGI (from blockescence) |
2013 |
Buy and build M&A strategy starts, in-house development ceases |
Jul-19 |
MGI increases stake in gamigo from 39% to 53% leaving MGI with 67% of the voting rights |
Sep-14 |
Acquisition of INTENIUM, a casual games publisher |
Jan-20 |
Acquisition of Verve Wireless |
2015 |
Gamigo commences IP acquisition and game improvement and development strategy |
Feb-20 |
Acquisition of substantial outstanding minorities in gamigo announced. |
In B2C gaming, MGI publishes online and casual games, mainly through its subsidiary, gamigo, which publishes first-party titles and provides a degree of in-house ‘update and improve’ development support for end-customers. The group supports a broad portfolio of online and console games (c 30 MMOGs and more than 5,000 casual games) including casual games, role-playing games and strategy games, mainly targeting gamers in Europe and North America distributed via 15 online portals. Games are typically licensed worldwide or licensed exclusively for specific regions or territories.
MGI driven by free-to-play business model
Free-to-play massively multiplayer online games (MMOGs) account for the largest share of revenues. Free-to-play means users are able to play for free (with low-level ad-funding), but can purchase in-game items at a range of prices. The business model requires ongoing support to develop the game and related content, working in close collaboration with the playing community. In addition to regular events and competitions, new items (eg costumes, skins, weapons) and content (new functions, levels and opponents) are provided on a regular basis to enhance the game and maintain a fresh playing experience for the committed community.
Predictable, long-lived recurring revenues
With appropriate support, users can remain loyal to the game for many years, playing for free or investing money in the game over the entire period. For established games, over 50% of revenues can be generated by users who have been active players for more than five years. For paying users, monthly investment of €50–80 is not uncommon and over the full lifetime of a game (sometimes 10 years or more), superfans may choose to invest thousands or even tens of thousands of euros to maintain their playing experience. To highlight this longevity, set out below are the player age groupings for certain of MGI’s gaming portfolio.
Exhibit 7: Overall spending by player lifetime – Last Chaos North America
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Exhibit 8: Overall spending by player lifetime– Fiesta Online Europe
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Exhibit 7: Overall spending by player lifetime – Last Chaos North America
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Exhibit 8: Overall spending by player lifetime– Fiesta Online Europe
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MGI’s core demographic are male and female gamers aged 20–34, playing for an average of 10–15 hours per week. With gamers spending multiple hours per week, potentially over a number of years, on a cost per hour basis, even to higher spenders, MGI’s games offer a very cost-effective form of community-based entertainment, typically <€1 per hour (less than cinema).
Exhibit 9: User acquisition and retention metrics for MMO portfolio
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Average customer acquisition cost (CAC): €1.00–1.50
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Payback period for customer acquisition: c 90–120 days
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Average conversion rate (registration to paying user) after 30 days: 7–10%
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Monthly ARPU after 180 days: €50–80
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Stickiness (DAU/MAU*): c 30–40%
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Source: MGI. Note: *Stickiness calculation divides daily average users by monthly average users.
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Massively multiplayer online games (MMOGs)
MMOGs are where several thousand players meet, connect and interact with each other through fixed player communities (so-called ‘guilds’ or ‘clans’) on a playing field or server environment, with this community aspect creating a strong bond between the users and the game.
There is a technical difference between browser-based games (BBGs, games played online through an internet browser) and client games (games that are downloaded, with the client stored on the PC), although both are PC-based. However, when playing either BBGs or client games, players must be online to communicate with the server. Console games are games played online on consoles such as Xbox, PlayStation or Nintendo Switch.
As shown in Exhibit 10, PC-based online titles represented c 92% of gamigo’s FY19 revenues (client-based plus browser), with console titles representing 7% and mobile titles only 1%. Management recognises that the proportion of mobile revenue needs to grow, but intends to wait for the appropriate opportunity at the right price.
Exhibit 10: FY19 revenue breakdown by platform
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Source: gamigo, Edison Investment Research
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In addition to offering MMOGs, MGI also supports more than 5,000 casual games, playable on different platforms and devices. These are mostly single-player games accessed on the platforms of deutschland-spielt.de and WildTangent (acquired in April 2019), offering access to all the games on the portal for a monthly subscription. MGI’s casual games portfolio also includes Facebook games as well as mobile games. For all these casual titles (in contrast to premium titles paid for upfront), a portion of MGI’s revenues come from advertising and promotional videos.
The gamigo group currently offers over 30 MMOGs and more than 5,000 casual games. These include MMOGs such as Fiesta Online and Desert Operations, which have already been on the market for over 10 years. However, if the games are well supported and actively marketed, the company can maintain a low churn rate and stabilise or revitalise titles through targeted marketing and refreshed game content, in collaboration with the existing player community.
A risk-balanced approach avoiding original IP development
Launching new games on the market is a major risk for games companies, since there are already many games with a long-term loyal player base, as well as large numbers of new games launched every month. To manage this risk, MGI prefers to acquire game licences by taking over companies with titles with an existing user and sales base rather than developing original IP.
Gamigo has grown strongly in recent years and so has a large registered customer base and a good reputation, and is increasingly focusing on stronger licences. However, gamigo looks to ‘fail fast’, with titles that under-deliver against expectations being swiftly discontinued or phased out.
Gamigo does acquire new games IP and licences, but only based on strict criteria, minimising upfront investment and committing marketing budget only if user numbers and revenue targets are met. Since 2017, gamigo has invested in IP and development rights and has now acquired the worldwide rights for seven of its 10 best-selling games, with ongoing development work (improvement, updates and sequels) taken in-house.
The digital advertising sector
In the media (B2B) segment, MGI covers the entire value chain for digital advertising. In addition to adspree and Mediakraft, members of the gamigo group, MGI acquired three further media companies in 2019 – Applift, PubNative and ReachHero – as well as Verve Wireless in January 2020.
Online advertising value can be broken down into five distinct roles, as shown in Exhibit 11 below.
Exhibit 11: The programmatic advertising chain
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Source: Edison Investment Research
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MGI’s most important investments include ReachHero, a leading influencer SaaS platform; Applift, a leading media company specialising in mobile advertising; PubNative, an SSP platform for mobile advertising; and Verve Wireless, a mobile data platform for location-based programmatic video and display marketing.
Below is a summary of MGI’s principal marketing subsidiaries:
Mediakraft (online influencer marketing agency): Mediakraft is MGI’s online advertising agency specifically focused on social, influencer and video marketing. The company produces content, but also manages YouTube channels, as well as designing and producing end-to-end influencer advertising campaigns. Its customers include advertisers as well as influencers and YouTube channels, focusing on the gaming sector. The company manages content for YouTubers and influencers, connecting their content to relevant advertising. The company is active in Germany, Poland and Turkey.
Adspree (online performance marketing): adspree manages MGI's gaming portals, acquiring new users both for MGI’s own games and for third-party titles. Adspree is also a publisher, seeking to maximise ad revenues for MGI and third-party providers. It manages clients' advertising campaigns across all major channels: search engine optimisation (SEO), pay-per-click (PPC), social media/impact marketing, programmatic media buying, affiliate marketing and TV advertising for both first-party and third-party titles.
Applift (app performance ad agency)/PubNative (SSP): Applift and PubNative operate in a highly competitive but fast-consolidating space, with major rivals such as The Trade Desk (DSP) or Google Ad Manager (SSP). Applift and PubNative differentiate themselves by focusing on gaming SMEs (c 50% of revenues), a market that remains highly fragmented.
Applift is an international mobile advertising agency, which supports app-owners with user-acquisition. It has 10 sales-led offices worldwide. The company specialises in customer targeting and re-engagement via publishers as well as via programmatic technology.
PubNative, Applift’s subsidiary, is an SSP for mobile programmatic in-app advertising and enables app publishers to monetise their advertising inventory. It enables publishers to connect directly via an application programming interface (API). As well as having connections to most important DSPs and SSPs, PubNative also has a large direct supply network via SDK integration.
ReachHero (SaaS-based influencer ad agency): ReachHero (MGI holds 67.38%) provides agency services for social media influencers and creators to connect brands/products/advertisers with the appropriate influencer and channel. ReachHero operates a SaaS platform where agencies and advertisers can book and manage influencer campaigns and have access to more than 70k registered influencers. ReachHero is involved in the entire creation process and also acts as an advertising pipeline for Mediakraft.
Verve Wireless (location-based mobile programmatic advertising): Verve Wireless, acquired in January 2020, is a mobile data platform for location-based programmatic video and display marketing that will expand MGI’s programmatic mobile brand marketplace, as well as its data management and location-based platform. Verve uses first-party mobile data, including location data and ad products such as Tap-to-Map, for example, to allow retailers to drive store visits and pedestrian traffic.
Following a similar approach to that taken in the gaming segment, MGI has started to integrate its media companies into a single platform, leveraging their individual capabilities to extend their client reach and reduce the overall cost base.
Synergies between gaming and advertising
Media and gaming are complementary sectors with a number of similar characteristics: technology-led, high growth and with a highly fragmented corporate landscape. However, from a group perspective, there are also strong synergies between the two service lines that are essential to MGI.
To provide an effective advertising proposition, companies need to offer attractive content, ie high-quality advertising space, transparency and reliable user metrics. Accordingly, advertisers are increasingly looking for private marketplaces with exclusive partners in preference to open marketplaces, where platforms integrate with multiple publishers with weaker control over data, formats, visibility and reporting.
Gamigo reaches more than 600,000 daily active users (DAUs) and more than five million monthly active users (MAUs) across its games portfolio and gaming portals, providing access to a rich source of user data. The unique dataset generated is a competitive advantage for MGI and provides a significant USP for its advertising assets. In turn, the gaming business benefits considerably from access to in-house advertising specialists, particularly from cost-effective user acquisition. Using these advantages, gamigo is able to acquire or license third-party titles and cross-sell them to its existing user base, supported by the technology and insight from its advertising arm to target new users and monetise existing users.
Games: A global industry offering strong growth
Market analyst Newzoo estimates that more than 2.2 billion gamers generated c $148.8bn of revenues in 2019, with Western markets representing c 48% of global revenues and 45% of total revenues on mobile devices. Overall revenues are forecast to grow at c 8.4% (2019–22), building to a total market size of over $190bn by 2022. Mobile continues to offer a double-digit revenue CAGR, whereas PC and console offer single-digit growth (Newzoo).
To put this into context, the games market is already more than three times the value of global box office movie receipts, estimated to be $42bn (source: Statista), and seven times the size of the recorded music industry at $19bn (source: The International Federation of the Phonographic Industry (IFPI)), but remains some way behind the pay TV market, which ABI Research forecasts will reach $295bn by 2022, making the likes of Netflix increasingly nervous of the challenge from games for users’ screen time.
Exhibit 12: $149bn global market, split by region (with year-on-year growth rates)
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Source: Newzoo, Edison Investment Research
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Exhibit 13: Global games market value
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Exhibit 14: Growth forecasts by segment
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Source: Newzoo, Edison Investment Research
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Source: Newzoo, Edison Investment Research
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As an entertainment form, the games industry is now truly mainstream, spanning all geographies and most demographics. Supported by the rise of mobile gaming, 45% of US gamers are now female (source: Entertainment Software Association), with the balance in mobile games c 50/50. The average age of a US gamer is 34 (and ageing) and 64% of households are home to at least one person who plays video games.
Underlying market growth: Gaming
As mentioned above, the games industry continues to enjoy strong secular growth, both in revenues and player numbers. Historically, this growth can be seen in terms of the number of titles submitted to Steam, the leading PC distribution platform:
Exhibit 15: Steam is the dominant PC games distribution platform
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Source: Edison Investment Research, SteamSpy data
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In 2019, Western markets represented c 49% of global games revenues estimated at $152bn, with 45% of total revenues on mobile devices. Overall revenues are forecast to grow at c 8.4%+ (2019–22), with a double-digit mobile CAGR, whereas PC and console offer single-digit growth (Newzoo).
As we consider the underlying drivers of growth, there are a number of themes we would highlight that are likely to drive continuing growth over the short to medium term.
Eight drivers of growth for the games industry
As part of our broader research on the games sector, we have identified the following eight factors as future drivers of growth in the games sector:
Driver 1 – digitalisation continues to transform business models: digitalisation has reduced the financial resources and capital intensity required to launch new titles, supporting business model diversity, more flexibility and better profitability for developers and IP owners.
Driver 2 – prevalence of games-as-a-service (GaaS): GaaS involves managing a game’s community post-launch and has helped transform the economics of game creation, reducing development risk, increasing player stickiness and longevity and improving profitability. The GaaS business model offers substantial outsourcing opportunities, with the creation of downloadable content (DLC) and live game support over an extended lifecycle post-release considered non-core by most developers.
Driver 3 – streaming and subscription models: Significant investment is going into developing effective video game streaming models and the associated technologies by both publishers and technology companies, leading to a broadening of the player base and increasing subscriptions.
Driver 4 – e-sports to drive growth: e-sports is another evolution of the games industry that will have a significant impact on future growth, providing another way to build a community around successful titles, streamed live to a global audience over Twitch and YouTube.
Exhibit 16: Twitch is the dominant eSports platform (growth in average concurrent viewers)
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Driver 5 – mobile capturing the casual audience: mobile offers the potential for global scale and penetration, but remains a casual medium where tastes, fads and fashions move quickly. Sustainable revenues are hard to achieve, but emerging business models may change this. Apple Arcade, a subscription service ($4.99 per month) offering exclusive premium mobile content, launched in 2019 and may herald a more sustainable, premium revenue model in this fast-moving market.
Driver 6 – Far East/Chinese opportunity: the size of the Chinese market is hard to ignore; China constituted $36.5bn of the $71.5bn Asian market in 2019, together representing c 48% of global games revenues (Newzoo).
Driver 7 – IP/content is king: with the prospect of a proliferation of channels to market in the coming years (eg streaming, digital distribution, next-generation consoles), this should represent a great opportunity for IP owners to maximise returns from their IP and expertise.
Driver 8 – tax reliefs level the playing field: tax reliefs for the games and broader creative industries are now either in place or under consideration across much of Europe. These are critical to levelling the playing field and sustaining a creative industry in high-cost jurisdictions.
Pro forma figures comprising gamigo
Given MGI’s transformation over the past few years into a gaming and media company, we examine the group’s pro forma track record based around its subsidiary, gamigo, as this is the core of the business today and the basis for future growth. MGI’s P&L reflects €5m of discontinued operations in H118 relating to the sale of its residual real estate assets, but otherwise its FY18 and H119 financials mainly reflect its holding in gamigo following its initial consolidation in May 2018.
MGI’s H119 balance sheet had intangible assets of €226.7m (of which €83.2m are acquired intangibles), as well as €143.5m of goodwill largely arising from the consolidation of the non-controlling interest in gamigo. Shareholders’ equity of €160.7m includes minority interests in gamigo of €91.4m. In H119, the profit attributable to minorities (€0.53m) was actually higher than the profit to shareholders (€0.35m). However, with the acquisition of the minority interests in gamigo in Q120, significant minorities will henceforward be eliminated from the accounts.
Exhibit 18: Historical financials (gamigo FY15–17, MGI FY18-H119)
€’000s |
FY15 |
FY16 |
FY17 |
FY18 |
H118 |
H119 |
Revenue |
21,644 |
38,975 |
42,082 |
32,621 |
8,896 |
28,575 |
Capitalised development |
1,602 |
2,154 |
3,585 |
2,791 |
704 |
3,658 |
Oher Operating income |
935 |
574 |
2,374 |
6,506 |
809 |
2,773 |
Cost of purchased services |
(10,839) |
(17,311) |
(16,229) |
(12,699) |
(1,753) |
(13,508) |
Employee-related costs |
(4,223) |
(10,471) |
(13,912) |
(10,438) |
(2,489) |
(10,451) |
Other operating expenses |
(4,843) |
(11,286) |
(10,865) |
(10,135) |
(3,431) |
(3,506) |
EBITDA |
4,276 |
2,636 |
7,035 |
8,646 |
2,736 |
7,541 |
Adjusted EBITDA* |
4,276 |
6,921 |
10,459 |
13,409 |
3,693 |
8,371 |
Depreciation & Amortisation |
(4,677) |
(12,732) |
(10,392) |
(6,318) |
(2,177) |
(4,276) |
EBIT |
(402) |
(10,097) |
(3,357) |
2,328 |
559 |
3,265 |
Net financial income (expense) |
(955) |
(1,892) |
(2,308) |
(1,641) |
(274) |
(1,874) |
Income (loss) before taxes |
(1,356) |
(11,989) |
(5,665) |
687 |
285 |
1,391 |
Income taxes |
2,287 |
2,909 |
675 |
895 |
379 |
(511) |
Net profit/(loss) |
931 |
(9,080) |
(4,990) |
1,582 |
664 |
880 |
Discontinued operations |
- |
- |
- |
3,673 |
5,093 |
- |
Consolidated profit |
931 |
(9,080) |
(4,990) |
5,255 |
5,757 |
880 |
Number of shares outstanding (m) |
19.76 |
40.80 |
40.80 |
59.85 |
40.80 |
62.02 |
Average shares in issue (m) |
19.76 |
40.80 |
40.80 |
50.33 |
40.80 |
60.39 |
EPS (reported) (€) |
0.05 |
(0.22) |
(0.12) |
0.10 |
0.14 |
0.01 |
EPS (adjusted) (€) |
0.05 |
(0.22) |
(0.12) |
0.03 |
0.02 |
0.01 |
Cash flow from operating activities |
1,393 |
4,394 |
(7,511) |
(3,533) |
(8,187) |
5,831 |
- (including) Discontinued operations |
- |
- |
- |
(10,476) |
(10,476) |
- |
Cash flow from continuing activities |
1,393 |
4,394 |
(7,511) |
6,943 |
2,289 |
5,831 |
Cash flow from investing activities |
(2,110) |
(1,654) |
(305) |
(14,113) |
(185) |
(2,790) |
Cash flow from financing activities |
566 |
(1,249) |
6,761 |
13,111 |
9,288 |
18,757 |
Net cash/(debt) |
(8,206) |
(7,667) |
189 |
(37,849) |
(26,018) |
(54,155) |
Source: MGI and Gamigo accounts. Note: *EBITDA adjusted for one-off M&A and financing costs, as well as costs of de-consolidation and integration of the acquired businesses into the group, including the hard synergies resulting from the integration.
Through consistent organic growth, supplemented by M&A, MGI has achieved very strong top-line growth over the last five years. The group has completed more than 30 acquisitions since 2013, which has helped gamigo achieve a revenue CAGR of 31% in FY14–19, as well as an EBITDA CAGR of 61% over this period. H119 showed similar levels of ongoing growth, such that consensus forecasts indicate FY19 revenues of €71.6m for MGI, more than double FY18 revenues.
EBITDA rose to €8.65m in FY18, a 23% increase on FY17 (€7.0m), with consensus FY19e EBITDA of €14.5m, a further 67% increase over FY18. Historically, EBITDA margins for MGI and gamigo have largely varied between 20% and 30% since FY15; MGI is targeting EBITDA margins in the medium term of 20%+, with 30% EBITDA margins for gamigo. FY19e consensus EBITDA margins are 20.2%, rising to 22.5% in FY21e.
With management having drawn down on both its gamigo and MGI bonds in FY19, there was a sharp increase in interest payable in H119 (H119: €1.9m vs H118: €0.3m) and, following further drawdowns in H219, net interest is expected to more than double in FY19 vs FY18 (€2.1m). Following the acquisition of the outstanding minorities in gamigo, we understand that MGI’s net debt has risen to c €70m.
Based on consensus estimates, both sales and EBITDA for MGI are forecast to grow at a c 40–50% CAGR (2018–21e) as MGI scales in a high-growth sector, with FY19 revenue forecast to be €71.6m and EBITDA €14.5m (20.2% margin). Looking through to FY21e, consensus estimates are for sales of €115m and EBITDA of €25.8m, a 22.5% EBITDA margin, with consensus net income of €5.5m.
Exhibit 19: MGI/gamigo revenue and EBITDA trends
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Exhibit 20: MGI/gamigo capex spend
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Source: MGI and gamigo accounts, Edison Investment Research
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Source: MGI and gamigo accounts, Edison Investment Research
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Exhibit 19: MGI/gamigo revenue and EBITDA trends
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Source: MGI and gamigo accounts, Edison Investment Research
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Exhibit 20: MGI/gamigo capex spend
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Source: MGI and gamigo accounts, Edison Investment Research
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Balance sheet and cash flow
As an active acquirer in the technology and media sectors, MGI’s fixed assets largely comprise intangible assets arising from acquisition activity in recent financial years. In H119, intangibles represented €226.7m of total assets of €295m, an increase from €204.1m and €236.3m from FY18. At 30 June 2019, MGI reported gross cash of €26.2m and net debt of €54.2m.
Gamigo has proved able to generate consistently strong operating cash flows, allowing the group to finance acquisitions, as well as raise and pay down its debt. FY18 saw gamigo’s operating cash flow rise to €10.5m from €3.8m in FY17, sufficient to cover its cash commitment in the period (for the acquisition of Trion). In H119, the cash commitment for WildTangent was more than covered by MGI’s H119 operating cash flow of €5.8m.
As shown in Exhibit 21 below, MGI/gamigo’s revenue, EBITDA and operating cash flow trajectories on a pro forma basis have followed a positive upward trend since FY15.
Exhibit 21: Historical EBITDA and cash flow for MGI/gamigo
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Source: MGI and gamigo accounts, Edison Investment Research
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MGI has issued €17m of a €25m five-year unsecured bond issued by the parent company in 2019 and a €50m four-year secured bond issued by gamigo in 2018, in addition to its banking facilities (a €10m bank loan from UniCredit Bank and a €2.5m working capital facility from BillFront).
MGI has a long history of leverage and, despite increasing absolute levels of debt (see Exhibit 22 below), given healthy pro forma EBITDA growth since 2014 at gamigo, interest cover and leverage have continued to decline. However, with the recent transformation of the group, the acquisition of the remaining minority interests in gamigo and a number of major acquisitions in H219 (WildTangent) and H120 (Verve), we would expect H120 debt and leverage to reach record levels (net debt of c €70m, c 3.7x FY20e consensus EBITDA). Despite this, with the group’s predictable revenue streams and strong operating cash flow, consensus estimates anticipate leverage to fall materially over the course of FY20 and FY21 (absent further M&A).
Gamigo FY19 results summary
MGI’s principal free-to-play gaming subsidiary, gamigo, announced its audited FY19 results on 27 April 2020 ahead of MGI’s audited results, expected in June 2020. Gamigo’s revenues rose 30% to €59m (FY18: €45m), while EBITDA increased by 48% to €16m (2018: €11m) as margins widened to 28% from 24% in FY18. This led to a 22% increase in net profits of €2.0m (FY18: €1.6m).
As well as the positive business and financial progress made in FY19, the company highlighted the boost to game revenues it has been benefiting from in March and April 2020, seeing increased consumer demand as a result of international COVID-19 related lockdowns. In anticipation of the recessionary economic environment that is likely to follow later this year, the company’s CEO Remco Westermann also went further to highlight that historically games industry revenues have proven resilient in economic downturns.
Although gamigo has benefited from its mature games portfolio, management expects an increase in inbound M&A enquiries as other games and media businesses with financing challenges struggle. With gross cash of €22m as at 31 December 2019 and a net interest-bearing debt (NIBD)/EBITDA ratio of 1.7x (Exhibit 22), gamigo has the capacity for further M&A. Based on this analysis, management expects gamigo’s growth to continue in FY20.
Exhibit 22: gamigo net interest-bearing debt (NIBD) 2014–19
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Source: Gamigo accounts. Note: NIBD excludes shareholder loans.
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