Update

Equity Research 22 November 2022

Embracer Group
Sector: Gaming

Weaker cash flow and cut guidance FAIR VALUE RANGE

BEAR BASE BULL

Redeye updates its view post Embracers Q2 2022/2023 report, which showed
72 116 157
slightly weaker profitability and cash flow than anticipated. The major event in
the report, however, was the cut guidance and that it is potentially evaluating
strategic options to realize shareholder value. Embracer VERSUS OMXS30
OMXSPI Indexed
Stronger sales but weaker earnings and cash flow Price (SEK)
120
Embracer posted stronger net sales than anticipated, driven by the PC/Console 100
segment, primarily from new releases such as Saints Row, Destroy All Humans! 80

2, and Way of the Hunter. In addition, royalties from Tiny Tina ticked in during the 60

quarter. Adj EBIT was slightly below expectations due to a weaker gross margin 40

and higher underlying operating costs. 20

0
FY 2022/2023 guidance cut 22-nov 20-feb 21-maj 19-aug 17-nov

Embracer reduced its guidance for FY 2022/23 and now expects Adj EBIT to be
between SEK8,000m-SEK10,000m. This does not come as a surprise given the REDEYE RATING
current market climate and already revised guidance from industry peers. In the
report, Embracer stated that its potentially evaluating a special review that could
include spin-off of operating units, which likely questions mark the long-term 4 4 4
strategy given its recent active M&A agenda.

Adj EBIT down by 7-1% for 2022/2023e-2024/2025e People Business Financials

On the back of the Q2 report and the delay of Dead Island 2, we cut Adj EBIT for
2022/2023e by 7% but leave our estimates for FY 2023/2024e and 2024/2025e
largely unchanged. We understand the question marks from investors but argue
that the share offers attractive value at 6.3x EV/Adj EBIT and 10% FCF yield in KEY STATS
2023/24e. Following our revised estimates and a somewhat weaker cash flow,
Ticker EMBRAC
we reduce our base case to SEK116 (125). At our base case, Embracer would
Market First North
trade at 15x EV/Adj EBIT.
Share Price (SEK) 45
Key Financials (SEKm) 2021/22 2022/23E 2023/24E 2024/25E Market Cap (SEKm) 60,615
Revenues 17,067 37,783 43,846 47,715 Net Debt 2022E (SEKm) 10,210
Revenue growth 89.0% 121.4% 16.0% 8.8% Free Float (%) 62%
EBITDA 1,667 7,966 14,913 16,636 Avg. daily volume (‘000) 5,000
EBIT 4,465 8,958 11,318 12,723

EBIT Margin (%) 26.2% 23.7% 25.8% 26.7% ANALYSTS

Net Income 1,077 4,035 6,522 7,791 Viktor Lindström
Viktor.lindstrom@redeye.se
EV/Revenue 6.2 1.9 1.6 1.5 Tomas Otterbeck
EV/EBITDA 63.4 9.0 4.8 4.3 Tomas.otterbeck@redeye.se
EV/EBIT 23.7 8.0 6.3 5.6
P/E 22.9 6.4 6.3 5.6

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 22 November 2022

Slightly soft profitability in Q2

Embracers Q2 2022/23 report showed higher sales but somewhat muted profitability and
cash flow. Net sales grew organically by 32% y/y, which was positive. However, a weaker
gross margin, particularly in Tabletop, and slightly higher underlying costs were key reasons
for a weaker Adj EBIT.

Q2 2022/23 deviation table

Embracer Group
P&L Estimates Redeye Diff (%) Consensus Diff (%) vs Consensus
(SEK m) Q2'21/22a Q2'22/23a Q2'22/23e Q2'22/23e
Net sales - Games 2,832 8,785 8,475 4% 8,180 7%
O/W PC/Console 1,976 4,097 3,558 15% 3,575 15%
O/W Mobile 856 1,441 1,717 -16% 1,512 -5%
O/W Tabletop 0 3,247 3,200 1% 3,093 5%
EES 465 784 743 6% 783 0%
Total Net sales 3,297 9,569 9,218 4% 8,963 7%

Gross Profit 3,124 6,269.0 7,361 -15%

Total Opex -1,912 -5,470.0 -4,347 26%

Adj EBIT 973 2,121 2,191 -3% 2,208 -4%

EBIT -460 461 1,632 -72%

Adj Net income 711 4,040.0 1,755 130%

Adj EBITDA - Capex 624 1,359.0 1,619 -16%

KPI's
Net sales y/y 38.3% 190% 180% 172%
Gross margin % 76% 65.5% 67.5%
Adj EBIT margin % 29.5% 22.2% 23.8% 24.6%
EBITDA - Capex margin % 18.9% 14.2% 17.6%
Source: Redeye Research

Net sales in Q2 2022/23 came in at SEK9,569m (3,297), 4% above our estimates. Net sales
grew 190% y/y, whereof 32% was organic. Proforma organic growth for the quarter reached
18%. As anticipated, PC/Console was the strongest contributor in the quarter, with
SEK4,097m in revenues beating our expectations by 15%. The PC/Console segment grew
107% y/y and thus represented 43% of net sales. However, the mobile segment disappointed
and came in 16% below our estimates and solely grew 5% y/y on a proforma basis and
decreased 3% q/q, despite recent high user acquisition in the previous quarter. Management
stated that the mobile units did see negative effects from lower advertising prices, similar to
other industry peers. The remaining units, tabletop and EES were fairly in line with our
estimates.
Embracer: Adj EBIT margin per segment Embracer: Net sales by business unit and growth y/y %
50% 14,000 200%
12,000
40% 150%
10,000
SEK m

30% 8,000
100%
20% 6,000
4,000 50%
10%
2,000
0% 0 0%
-10%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 21/22 Q1 Q2
20/21 20/21 20/21 20/21 21/22 21/22 21/22 21/22 22/23 22/23
PC/Console margin % Mobile margin % Net sales PC / Console Net sales Mobile Games
Net sales Asmodee Entertainment & Services
Table Top margin % Entertainment & Services margin %
Total Net Sales - y/y %
Source: Redeye Research Source: Redeye Research

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REDEYE Equity Research Embracer Group 22 November 2022

Stronger PC/Console than anticipated

PC/Console performed above expectations in the quarter, driven by the release of Saints Row,
Destroy all Humans! 2, Way of the Hunter, and royalties from Tiny Tina. Other notable
revenues were collected from platform fees related to Saints Row (Epic) and Valheim (Game
pass). Embracer stated that Saints Row has sold over one million units ( we expected 1.3m
units) and that the game recouped at 0.9x.

The reception from critics and players for its latest releases has been muted. This not only
indicates lower initial sales for a game but also lowers the tail for the game. This is one reason
for the cut guidance in FY 2022/2023. As can be seen in the chart, the recent ROI trend for
new releases is unappealing and is currently at 0.9x on an R12m basis versus its average of
2.1x. We believe this is one of the market's skepticism, and it will be crucial for Embracer to
improve the ROI from a profitability and trust perspective.

Embracer: ROI on finalized games - R12

3,000 3.0x
2,500 2.5x
2,000 2.0x
SEK m

1,500 1.5x
1,000 1.0x
500 0.5x
0 0.0x

New releases - sales R12m, SEKm Completed Games, SEKm R12m

Return on finalized games, R12m Average - R12m
Source: Redeye Research

It is important to remember that AAA games tend to have a lower ROI than AA and related
indie games. Given Embracers pipeline of 234 projects, where 25 is AAA, we expect a more
muted ROI. However, it should still improve from current levels. Upcoming titles that could
change the sentiment are Goat Simulator 3 and Evil West.

The mobile segment came in weaker than expected, feeling pressure from a weaker
advertising market as well as weaker consumer pocket spending for IAP. Net sales decreased
3% sequentially and grew 5% y/y on a proforma level, despite its recent high UA activity.
Additionally, both total installs and ARPDAU were down sequentially, signaling a weaker
market, as both industry organizations and publicly traded peers have stated. Embracer now
enters a seasonally strong quarter for mobile gaming, and we do expect a sequential
improvement and a slightly lower UA going forward, which should support Adj EBIT for the
unit.

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 REDEYE Equity Research Embracer Group 22 November 2022

Embracer: KPIs Mobile units Embracer: Mobile games - Net Sales and UA spending %
450 0.54 2,000 -70%
1,800 -60%
400 0.52 1,600
350 1,400 -50%

ARPDAU
0.50

SEK m
1,200
Millions

300 -40%
0.48 1,000
250 800 -30%
200 0.46 600 -20%
150 400
0.44 200 -10%
100 0 0%
50 0.42 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
0 0.40 21/22 21/22 21/22 21/22 22/23 22/23 22/23E 22/23E
Q1 21/22 Q2 21/22 Q3 21/22 Q4 21/22 Q1 22/23 Q2 22/23
Net sales Mobile Games
Total Installs, million MAU, million ARPDAU UA of Mobile games revenue %

Source: Redeye Research Source: Redeye Research

Muted profitability due to weaker gross margin and higher underlying costs
Gross profit in Q2 came in at SEK6,269m (3,124), corresponding to a margin of 65.5% (76%).
Slightly below our estimate of 67.5%. However, it is still a sequential improvement from
Q1’2022/23 due to favorable mix effects from a higher share of sales from PC/Console and
primarily notable platform deals regarding Saints Row and Valheim. However, the slightly
lower gross margin than expected is due to a less favorable revenue mix in Asmodee, which
saw high sales ratios from trading cards in the quarter. We forecast a slight gross margin
contraction in H2’2022/2023 due to a higher share of revenues stemming from Tabletop and
EES, both operating with lower gross margins than PC/Console and Mobile.

Embracer: Revenue mix and gross margin %

100%
80%
60%
40%
20%
0%

Adj EBIT PC/Console Adj EBIT Mobile

Adj EBIT Table Top Entertaintment & Services
Gross margin %
Source: Redeye Research

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 REDEYE Equity Research Embracer Group 22 November 2022

Adj EBIT grew 118% y/y and reached SEK2,121m (973), for a margin of 22%. This was 3%
below our estimates. The lower gross margin, higher operating costs (most likely in Tabletop),
and a continuously high UA in mobile sales are major drivers behind the somewhat weaker Adj
EBIT. Despite stronger sales, Tabletop’s Adj EBIT margin reached 13,9% in the quarter versus
16.7% in Q1. Illustrating the unfavorable product mix of more trading cards in the quarter.
Positively, PC/Console performed its strongest Adj EBIT ever with a margin of 34%. In
contrast, Mobile improved its Adj margin sequentially from Q1, despite lower sales.

Embracer: Net sales and Adj EBIT margin - PC/Console Embracer: Net sales and Adj EBIT margin - Mobile
5,000 50% 2,000 50%
1,800 45%
4,000 40% 1,600 40%
1,400 35%
SEK m

SEK m
3,000 30% 1,200 30%
1,000 25%
2,000 20% 800 20%
600 15%
1,000 10% 400 10%
200 5%
0 0% 0 0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
20/21 20/21 20/21 20/21 21/22 21/22 21/22 21/22 22/23 22/23 20/21 20/21 20/21 20/21 21/22 21/22 21/22 21/22 22/23 22/23
Adj EBIT Mobile Net sales Mobile Games Mobile margin %
Adj EBIT PC/Console Net sales PC / Console
PC/Console margin %

Source: Redeye Research Source: Redeye Research

Moreover, Embracer stated that it has been affected by inflationary pressure in its physical
entities. Higher marketing expenditures for new game releases also affected other external
expenses. Due to the removal of Dead Island 2, and that upcoming releases are low-budget,
this expense will likely come down going forward. We expect Embracer to focus on optimizing
the company and its underlying studios, which the latest shutdown of Onoma reflects.

Embracer: Other external expenses Embracer: Net Opex

-2,500 -35% -4,500 -60%
-4,000
-30% -50%
-2,000 -3,500
-25% -3,000 -40%
SEK m
SEK m

-1,500 -20% -2,500

-30%
-1,000 -15% -2,000
-10% -1,500 -20%
-500 -1,000
-5% -10%
-500
0 0% 0 0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
21/22 21/22 21/22 21/22 22/23 22/23 22/23E 22/23E

O/W UA O/W Other marketing costs

O/W Other external costs % of Net Sale Net Opex % of Net Sale

Source: Redeye Research Source: Redeye Research

Soft cash flow in the quarter

The softest point in the quarterly report was the cash flow. Operating cash flow came in at
SEK580 (1,009). Negatively affected by working capital changes of SEK-1,936m from
inventory build-ups and higher account receivables since more sales were tilted in September.
The third quarter is the seasonally strongest quarter for Tabletop due to the holidays. As such,
the purchase of inventory tends to be higher in the second quarter in order to be able to deliver
on the growing demand. Based on the current market environment, with longer lead times,
management decided to make an additional purchase to be able to deliver goods. The current
inventory level related to Tabletop is CSEK4,200m. Due to its recent acquisitions, the company
has become less business-light than before. For instance, the inventory levels in terms of
R12m sales reached 19%, up from 5% last year. Changing the margin profile and cash flow

5
REDEYE Equity Research Embracer Group 22 November 2022

generation for the whole group. We forecast Tabletop Net sales to be SEK3,980m in the third
quarter. As such, we forecast a stronger operating cash flow in H2 2022/2023 from a higher
release through.

Moreover, Adj EBITDA-Capex came in at SEK1,359m (624), for a margin of 14%. Slightly lower
than our forecast of SEK1,619m. The free cash flow, excluding acquisitions, was SEK-1.116m
in the quarter. Given Embracers' business model and high investments in its growing game
pipeline, we could expect the cash flow to fluctuate quarterly. However, it is clear that the free
cash flow does not follow Adj EBIT nor Adj EBITDA – Capex, and it was still negative on an
R12m basis. The current market climate puts a higher focus on the underlying free cash flow
generation. As such, we believe this is one of the question marks from investors. However, we
expect improved free cash flow from H2 2022/2023 and onwards due to positive working
capital releases and scalability. In addition, the potential transformative license deal could also
co-finance larger game projects which should mitigate internal capex and thus improve the
free cash flow.

Embracer: Adj EBIT, EBITDA-Capex and FCF - R12m

6,000

5,000

4,000

3,000
SEK m

2,000

1,000

0
Q4 19 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
-1,000 20/21 20/21 20/21 20/21 21/22 21/22 21/22 21/22 22/23 22/23

-2,000
Adj EBIT - R12m Adj EBITDA - Capex - R12m Free cash flow - R12m

Source: Redeye Research

Revised guidance for FY 2022/2023

The key highlight in the report is the reduced guidance. Embracer now expects an Adj EBIT of
SEK8,000m-10,000m in FY 2022/2023, previously SEK9,200m-11,300m. Note that the new
guidance includes all acquired units in August 2022. The cut guidance is based on three major
things. 1) Weaker reception from recent PC/Console releases that will negatively impact back
catalog sales for the remainder of the year. 2) A more cautious view of the macroeconomic
climate that primarily will / could affect mobile and tabletop. 3) The delay of its AAA game
Dead Island 2, now planned for April 2023 instead of February 2023. The first two reasons do
not surprise us and should be somewhat included in estimates. However, the delay of Dead
Island 2 comes as a surprise, although the delay is just 2-3 months. Thus, this will be removed
into FY 2023/2024.

The guidance for FY 2022/2023 and FY 2023/2024 includes the potential outcome of a
transformative partnership and licensing deal with a large industry partner. We believe it could
be Microsoft of Epic Games. Such a deal covers a range of large-budget coming games in the
forthcoming six years and is expected to close within this fiscal year. Such a deal would
mitigate the project risks and capex levels while improving visibility and cash flows at healthy
margins. However, it also caps the upside for the potential games.

6
REDEYE Equity Research Embracer Group 22 November 2022

Embracer reiterated its Adj EBIT guidance of SEK10,300m-SEK13,600m. Note that this
guidance includes Dead Island 2, which should at least contribute with SEK500m on Adj EBIT,
and the recent acquisitions, which will contribute with SEK850m.

Strategic review
Another major occasion in the report was that Embracer launched a special review to navigate
the current business climate and maximize long-term shareholder value and its strategic
flexibility. For example, the company said it could potentially lead to spinoffs into separately
publicly listed companies.

We believe investors view this review as question marks for the long-term strategy as it
previously focused on acquisitions to build its current digital entertainment ecosystem. The
transmedia opportunities are still in the long run. However, we believe it is a concern that the
company somewhat adopted its business strategy based on a weaker macroeconomic
outlook with higher interest rates.

We believe a large portion of the drop in the share price on the day of the report can be
explained by this strategic review. It is, in many ways, contradictory to the long-term thinking
Embracer stands for. “Desperate times call for desperate measures” is a known saying. We do
not think Embracer is desperate, but to communicate this kind of strategic opportunity during
a time when investors’ confidence is already shaken, could be harmful.

Digging into potential spin-offs, we have the impression that investors would appreciate
Coffee Stain, Asmodee, and a combined entity of its three AAA US game studios.

Coffee Stain is a hidden gem and has truly transformed into a strong player in the global
gaming market with its well-established IPs Valheim, Deep Rock Galactic, and Goat simulator.
The financial profile is very strong, and on an R12m basis, Coffee Stain Net sales reached
SEK1,300m with an Adj EBIT margin of 64%. Given the rather high multiples for premium
PC/console peers with a strong growth outlook, we believe the stock market could be willing
to pay 15-20x EV/EBIT for the unit.

The US AAA-powerhouse. Another interesting spin-off could be Gearbox-Saber combined with

Eidos and Crystal Dynamics. Those AAA-studios have many valuable IPs, including
Borderlands and Tomb Raider, and could be easier to understand for investors as a separate
group, enhancing the valuation. We assume this type of entity could be traded around 15x
EV/EBIT using our peer valuation table.

Asmodee is a global market leader in a niche market, with solid profitability margins (18% Adj
EBIT) and free cash flow conversions of 75%. Publicly listed peers trade on average around
10x EV/EBIT. We believe investors could be willing to pay a premium for Amodee given its
stronger margins. As such, we could likely see investors paying 12x EV/EBIT for Asmodee.

Assuming the above multiples, the remaining part of Embracer would implicitly trade around
5x EV/Adj EBIT. Most likely one of the reasons for the evaluation.

7
REDEYE Equity Research Embracer Group 22 November 2022

Change into the main Nasdaq Stockholm exchange

Embracer is still proceeding with its plan to move into the main Nasdaq Stockholm list. We
believe this could be a trigger for the share as it now attracts passive flows and a higher share
of foreign shareholders, as some are not obliged to invest at First North. In addition, this also
enables the company to start doing buybacks, something that is not possible at Frist North.

8
 REDEYE Equity Research Embracer Group 22 November 2022

Financial Estimates
On the back of the Q2 report and the cut guidance, we reduce our estimates for Adj EBIT by
7%-1% for 2022/2023 – 2024/2025. The revised estimates in 2022/2023 are due to the delay
of Dead Island 2, and a slightly more unfavorable product mix, as we had already factored in a
weaker market for mobile and tabletop in our estimates. For 2023/2024-2024/2025, the
change stems from marginally higher operating costs. In total, we forecast organic growth of
14% for 2022/2023.
Net Sales per Segment 22/23e
SEK m Q1 Q2 Q3'e Q4'e 2022/23e 2023/24e 2024/25e

Games Net Sales 6,447 8,785 9,988 8,577 33,564 39,384 43,019
O/W PC / Console 2,294 4,097 4,236 4,395 14,406 19,155 21,321
O/W Mobile Games 1,488 1,441 1,772 1,632 6,716 7,227 7,981
O/W Tabletop 2,665 3,247 3,980 2,550 12,442 13,002 13,717
EES 671 784 1,506 1,060 4,219 4,462 4,696
Total Net Sales 7,118 9,569 11,494 9,637 37,783 43,846 47,715
Revenue Split %
PC/Console Games 32.2% 42.8% 36.9% 45.6% 38.1% 43.7% 44.7%
Mobile Games 20.9% 15.1% 15.4% 16.9% 17.8% 16.5% 16.7%
Asmodee 37.4% 33.9% 34.6% 26.5% 32.9% 29.7% 28.7%
EES 9.4% 8.2% 13.1% 11.0% 11.2% 10.2% 9.8%

P&L Statment
Net Sales 7,118 9,569 11,494 9,637 37,783 43,846 47,715

COGS -2,506 -3,300 -4,294 -3,489 -13,589 -14,345 -15,566

Gross profit 5,578 7,495 8,449 7,366 28,854 34,386 37,039

Other external expenses -1,806 -2,364 -2,161 -2,024 -8,354 -7,892 -8,589
Personnel Expences -2,940 -3,228 -3,155 -3,244 -12,567 -11,561 -11,967
Other operating costs -134 -28 0 0 -162 -219 -48
Total opex -4,880 -5,620 -5,316 -5,268 -21,083 -19,673 -20,603

EBITDA 703 2,025 3,153 2,118 7,966 14,913 16,636

Non-recurring (Contingent consideration)

-1,165 -1,030 -851 -830 -3,876 -2,349 -1,649
Adjusted EBITDA 1,868 3,055 4,004 2,948 11,842 17,262 18,285

D&A -1,100 -1,565 -1,423 -1,260 -5,348 -5,965 -6,147

EBIT -397 460 1,731 858 2,618 8,948 10,489

Adj EBIT 1,323 2,119 3,223 2,293 8,958 11,318 12,723

Net finance 538 2,162 -112 -112 2,476 -202 -192

PTP 141 2,622 1,619 746 5,094 8,745 10,297

Tax -322 -241 -340 -157 -1,060 -2,223 -2,506

Net income -181 2,381 1,279 589 4,035 6,522 7,791

Adj Net Income 1,539 4,040 2,771 2,024 10,374 8,892 10,025
EPS adjusted 1.04 2.12 2.24 1.64 7.03 7.19 8.10

EBITDA - Capex -610 328 1,429 480 1,627 8,205 9,812

Growth y/y %
Net Sales 108% 190% 126% 84% 121.8% 16.0% 8.8%
Organic Growth -12% 32% 0% 2% 14% 9% 8%
EBITDA -54% 24% 112% 44% 378.0% 87.2% 11.5%
Adj EBIT 4% 118% 188% 118% 100.6% 26.3% 12.4%
Adj Net Income 29% 469% 232% 82% 164.3% -14.3% 12.7%
Adj EPS -14% 203% 176% 67% 102.7% 2.1% 12.7%

Other external expenses 129% 146% 47% 19% 76% -6% 9%

Personnel expenses 239% 249% 184% 124% 46% -8% 4%
Total Opex excl D&A 195% 194% 106% 68% 53% -7% 5%

Margins %
Gross margin % 64.8% 65.5% 62.6% 63.8% 64.0% 67.3% 67.4%
EBITDA margin % 9.9% 21.2% 27.4% 22.0% 21.1% 34.0% 34.9%
Adj EBIT margin % 18.6% 22.1% 28.0% 23.8% 23.7% 25.8% 26.7%
Adj Net Margin % 21.6% 42.2% 24.1% 21.0% 27.5% 20.3% 21.0%
EBITDA - Capex margin % -8.6% 3.4% 12.4% 5.0% 4.3% 18.7% 20.6%
Source: Redeye research

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 REDEYE Equity Research Embracer Group 22 November 2022

Valuation
Peer valuation

Multiples for gaming companies have contracted recently. We believe the historical low
multiples and easier comparison from 2022 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 1,638 0.5x 0.5x 0.5x 4.8x 3.7x 3.3x 9.8x 6.2x 5.3x
Paradox 19,815 10.1x 8.6x 7.7x 14.7x 12.4x 11.3x 22.4x 21.1x 18.6x
EG7 2,335 1.2x 1.1x 1.2x 4.8x 4.4x 5.2x 7.0x 7.1x 7.5x
Remedy 2,355 4.9x 4.6x 3.1x >100 neg 11.6x neg neg 17.1x
Stillfront 12,211 1.7x 1.6x 1.5x 4.7x 4.2x 4.0x 5.9x 5.3x 4.9x
G5 Entertainment 1,370 0.9x 0.9x 0.9x 4.8x 3.7x 3.4x 9.1x 5.9x 5.1x
MTG 6,356 1.1x 1.0x 1.0x 4.8x 4.4x 4.1x 9.6x 7.6x 6.9x
Median 2,355 1.2x 1.1x 1.2x 4.8x 4.3x 4.1x 9.4x 6.6x 6.9x
Average 6,583 2.9x 2.6x 2.3x 5.5x 4.7x 6.1x 9.1x 7.6x 9.3x
International
Ten Square 1,670 1.3x 1.3x 1.2x 6.1x 6.3x 5.9x 7.1x 7.2x 6.6x
Rovio 2,973 0.8x 0.8x 0.8x 5.1x 4.8x 4.7x 7.3x 6.4x 6.0x
Playtika 56,090 2.0x 2.0x 1.8x 5.8x 5.6x 5.2x 11.1x 10.0x 8.9x
11 Bit Studios 2,568 16.8x 4.9x 3.7x 42.2x 6.8x 6.6x 64.6x 7.7x 7.6x
Team 17 8,022 5.0x 4.6x 4.3x 14.8x 13.2x 12.1x 16.9x 14.7x 13.3x
KeyWords Studios 27,146 3.8x 3.3x 3.0x 19.1x 17.7x 16.1x 24.9x 22.5x 20.2x
Frontier Developments 6,320 3.7x 3.1x 2.7x 10.4x 8.3x 7.1x 25.2x 18.3x 14.7x
TinyBuild 2,435 3.2x 2.9x 2.7x 8.2x 7.2x 6.6x 9.3x 8.0x 7.2x
Activision 545,963 6.4x 5.4x 5.1x 17.8x 13.3x 12.3x 17.9x 13.6x 12.5x
EA 384,575 4.7x 4.4x 4.1x 13.0x 12.2x 11.5x 14.6x 13.4x 12.3x
Take Two 195,944 3.4x 2.6x 2.2x 18.9x 11.9x 9.0x 20.3x 12.5x 9.3x
CD Project 31,590 16.2x 14.6x 17.7x 33.6x 28.7x 39.0x 43.2x 38.8x 59.0x
Ubisoft 40,688 1.6x 1.4x 1.3x 3.6x 3.1x 2.7x 10.6x 8.0x 6.8x
Sega 23,905 0.9x 0.8x 0.8x 5.8x 5.0x 4.5x 7.5x 6.3x 5.8x
Capcom 62,042 6.7x 6.0x 5.6x 14.6x 12.9x 11.9x 16.1x 14.3x 13.1x

Median 27,146 3.7x 3.1x 2.7x 13.0x 8.3x 7.1x 16.1x 12.5x 9.3x
Average 92,795 5.1x 3.9x 3.8x 14.6x 10.5x 10.3x 19.8x 13.5x 13.5x
Median Gaming 14,751 2.4x 2.1x 2.0x 8.9x 6.3x 5.6x 12.8x 9.6x 8.1x
Average Gaming 49,689 4.0x 3.2x 3.0x 10.1x 7.6x 8.2x 14.5x 10.5x 11.4x
Tabletop Games & Ips
Nintendo 394,721 3.0x 3.1x 3.2x 8.8x 9.2x 9.8x 8.9x 9.0x 9.5x
Hasbro 128,376 2.0x 1.9x 1.8x 9.9x 9.3x 8.4x 12.4x 11.4x 10.2x
Mattel 93,741 1.5x 1.5x 1.4x 8.3x 7.6x 7.1x 11.1x 9.5x 8.8x
Median 128,376 2.0x 1.9x 1.8x 8.8x 9.2x 8.4x 11.1x 9.5x 9.5x
Average 205,612 2.2x 2.2x 2.1x 9.0x 8.7x 8.4x 10.8x 10.0x 9.5x
Peer Group Median 14,751 1.6x 1.5x 1.5x 6.8x 6.3x 5.6x 10.2x 8.1x 8.1x

Embracer 63,941 1.7x 1.5x 1.3x 5.8x 4.4x 3.9x 7.1x 6.1x 5.2x
Source: Factset

Embracer currently trades at a discount of 25% on 2023e across its entire peer group.
However, despite similar growth outlooks and margin profiles, it trades at a 50% discount
versus the big four players(Activision, EA, Take Two and Ubisoft). At our base case, Embracer
would trade at 15x EV/Adj EBIT, a 10% discount, versus the big four.

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 REDEYE Equity Research Embracer Group 22 November 2022

DCF Valuation
We make limited minor long-term assumptions in our DCF model. Our revised revisions stem
from lower estimates in 2022/2023.

Bear Case SEK 72 Base Case SEK 116 Bull Case SEK 157
Sales CAGR 2022-26E: 9% Sales CAGR 2022-26E: 11% Sales CAGR 2022-26E: 12%
Sales CAGR 2027-36E: 4% Sales CAGR 2027-36E: 6% Sales CAGR 2027-36E: 7%

Avg EBITDA margin 2022-36E: 30% Avg EBITDA margin 2022-36E: 33% Avg EBITDA margin 2022-36E: 35%

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

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

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REDEYE Equity Research Embracer Group 22 November 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 22 November 2022

2021 2022E 2023E 2024E DCF Valuation Metrics Sum FCF (SEKm)
INCOME STATEMENT 2022-2025 10869
Revenues 17,067 37,783 43,846 47,715 2026-2036 86805
Cost of Revenues 2,071 8,929 9,460 10,676 Terminal 76502
Gross Profit 14,996 28,854 34,386 37,039 Firm Value 174176
Operating Expenses 13,329 20,888 19,473 20,403 Net Debt 11035
EBITDA 1,667 7,966 14,913 16,636 Equity Value 163141
Depreciation & Amortization 9,851 5,348 5,965 6,147 Fair Value per Share 116
EBIT 4,465 8,958 11,318 12,723
Net Financial Items -101 2,476 -202 -196 2021 2022E 2023E 2024E
EBT 1,770 5,094 8,745 10,293 CAPITAL STRUCTURE
Income Tax Expenses 693 1,060 2,223 2,505 Equity Ratio 0.5 0.6 0.6 0.6
Non-Controlling Interest 0 0 0 0 Debt to equity 0.5 0.1 0.1 0.1
Net Income 1,077 4,035 6,522 7,787 Net Debt 14222 11035 11035 11035
Capital Employed 70316 91037 99250 109426
BALANCE SHEET Working Capital Turnover -34.1 -19.2 -30.6 -35.9
Assets
Current assets GROWTH
Cash & Equivalents 5,810 9,890 13,458 20,021 Revenue Growth 89.0% 121.4% 16.0% 8.8%
Inventories 3,162 3,778 4,604 4,771 Basic EPS Growth -1319.1% -181.2% 60.2% 19.4%
Accounts Receivable 3,755 6,045 6,577 6,680 Adjusted Basic EPS Growth 3.0% 102.7% 2.1% 12.7%
Other Current Assets 2,199 5,689 5,918 6,304
Total Current Assets 14,926 25,403 30,557 37,777 PROFITABILITY
ROE 13% 20% 13% 10%
Non-current assets ROCE 6% 10% 11% 12%
Property, Plant & Equipment, Net 720 1,131 1,482 1,864 ROIC 8% 10% 11% 12%
Goodwill 42,937 46,153 46,153 46,153 EBITDA Margin (%) 10% 21% 34% 35%
Intangible Assets 31,371 34,380 37,142 39,671 EBIT Margin (%) 26% 24% 26% 27%
Right-of-Use Assets 1,062 1,359 1,359 1,359 Net Income Margin (%) 6% 11% 15% 16%
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 84,857 87,970 90,881 VALUATION
Basic EPS -4.1 3.3 5.3 6.3
Total Assets 92,732 110,261 118,527 128,658 Adjusted Basic EPS 3.5 7.0 7.2 8.1
P/E 22.9 6.4 6.3 5.6
Liabilities EV/Revenue 6.2 1.9 1.6 1.5
Current liabilities EV/EBITDA 63.4 9.0 4.8 4.3
Short-Term Debt 12,800 1,745 745 145 EV/EBIT 23.7 8.0 6.3 5.6
Short-Term Lease Liabilities 297 387 387 387 P/B 1.9 0.9 0.8 0.7
Accounts Payable 3,602 5,668 6,577 7,157
Other Current Liabilities 5,717 11,424 11,569 11,543
Total Current Liabilities 22,416 19,224 19,277 19,232 SHAREHOLDER STRUCTURE CAPITAL % VOTES %
Lars Wingefors AB 20.9% 39.0%
Non-current liabilities Savvy Gaming Group 8.0% 5.4%
Long-Term Debt 7,232 6,235 5,235 4,635 S3D Media Inc 6.6% 10.6%
Long-Term Lease Liabilities 800 2,527 1,484 585 Swedbank Robur 5.0% 5.5%
Other Long-Term Liabilities 20,054 18,851 20,214 21,868 Canada Pension Plan 3.5% 2.3%
Total Non-current Liabilities 28,086 27,613 26,933 27,088
SHARE INFORMATION
Non-Controlling Interest 0 0 0 0 Reuters code Embrac
Shareholder's Equity 42,230 63,424 72,317 82,338 List First North
Total Liabilities & Equity 92,732 110,261 118,527 128,658 Share price 45.0
Total diluted shares, million 1347.0
CASH FLOW
NOPAT 3,772 7,898 9,095 10,218
Change in Working Capital 128 1,466 -532 -103 MANAGEMENT & BOARD
Operating Cash Flow 4,070 8,017 12,576 13,986 CEO Lars Wingefors
CFO Johan Ekström
Capital Expenditures -341 -411 -351 -382 Chairman
Investment in Intangible Assets -3,713 -5,927 -6,358 -6,441
Investing Cash Flow -37,528 -13,498 -8,008 -6,823
ANALYSTS Redeye AB
Financing Cash Flow 24,868 9,562 -1,000 -600 Viktor Lindström Mäster Samuelsgatan 42, 10tr
Free Cash Flow 16 1,678 5,868 7,162 Tomas Otterbeck 111 57 Stockholm

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REDEYE Equity Research Embracer Group 22 November 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 22 November 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
Henrik Alveskog oscar.bergman@redeye.se
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 22 November 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 Swedish Financial
Supervisory Authority.
Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial 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
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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
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• For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial
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Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless
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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 assessment 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 157 139 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
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Copyright Redeye AB.

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

16