Update

Equity Research 8 June 2022

Embracer Group
Sector: Gaming

Savvy Organic Growth Ahead FAIR VALUE RANGE

BEAR BASE BULL

Share Issue could cause some Issues
95 146 195
On June 8, Embracer announced that it had carried out a directed right issue. The
shares will be solely issued to Savvy Gaming Group (SGG), which will be one of
the major shareholders and hold ~8.1% of the outstanding shares. SGG is 100%
Embracer VERSUS OMXS30
owned by the Public Investment Fund (PIF) of Saudi Arabia, focusing on the
video games and E-sport sector. According to us, this investment could cause OMXSPI Indexed
Price (SEK)
some ethical problems for both existing/potential investors and partners. 150

Premium segment to drive organic growth in 2022/23 100

Embracer’s upcoming game releases are ~2.9x the finalized game values on a
50
R12m basis. Furthermore, it has 25+ AAA games and more than 225 games in
the pipeline. We expect the premium segment to be the key organic growth driver
0
in the coming years and expect organic growth of 32% for the group in 2022/23. 08-jun 06-sep 05-dec 05-mar 03-jun

Improved free cash flow ahead

REDEYE RATING
On the back of the strong game pipeline as well as the inclusion of Asmodee, we
expect much improved free cash flow going forward. Currently, Embracer offers
a free cash flow yield of 6.4% 2023/24, which we deem attractive under the
4 4 4
current market circumstances.

Estimates only finetuned for 2022/23-2023/24’E

People Business Financials
We have only finetuned our estimates and included Eidos as of Q2. However,
based on Embracer's new financial structure (net debt), recent dilution effect,
and fully included earnouts, we revise our base case to SEK 146 (155), derived
from a DCF and an earnings multiple approach. At our base case, Embracer KEY STATS
would trade at 16x EV/EBITA(23/24’e). Ticker EMBRAC
Market First North
Share Price (SEK) 96
Key Financials (SEKm) 2021/22 2022/23E 2023/24E 2024/25E
Market Cap (SEKm) 118,550
Revenues 17,039 38,677 45,284 49,666
Net Debt 2022E (SEKm) 2,255
Revenue growth 89% 127% 17% 10%
Free Float (%) 62%
EBITDA 6,139 13,772 16,791 18,473
Avg. daily volume (‘000) 5,000
EBIT 4,421 10,500 12,263 13,705
EBIT Margin (%) 26% 27% 27% 28%
ANALYSTS
Net Income -4,284 -8,059 -6,159 -4,956
Viktor Lindström
Viktor.lindstrom@redeye.se
EV/Revenue 6.2 3.4 2.7 2.3
Tomas Otterbeck
EV/EBITDA 17.2 9.4 7.2 6.2
Tomas.otterbeck@redeye.se
EV/EBIT 23.8 12.4 9.9 8.3
P/E 21.4 14.4 12.3 11.0

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 8 June 2022

Net sales continue ahead of expectations

Solid Q4-results from Easybrain, Gearbox, and Saber Interactive

Embracers' Q4 report was decent, in our opinion. Net sales came in 18% higher than our
estimates, while Operational EBIT was in line.

Business Units: Estimates vs Result P&L: Estimates vs Result

(SEK m) Q4A'20/21 Q4'21/22A Q4'21/22E Diff (%) (SEK m) Q4A'20/21 Q4A'21/22 Q4E'21/22 Diff (%)
THQ Nordic 355 328 335 -2% Net sales - Games 1,976 3,846 3,353 15%
Koch Media 465 543 570 -5% Net sales - Asmodee n.a 571 400 43%
Coffee Stain 781 171 170 1% Net sales - Partner / Publishing 429 737 660 12%
Saber Interactive 271 448 400 12% Darkhorse n.a 75 n.a
Gearbox n.a 606 445 36% Total Net sales 2,405 5,229 4,413 18%
Premium Games 1,872 2,097 1,920 9%
Deca Games 104 615 603 2% Gross Profit 1,442 3,840 2,996 28%
Easybrain n.a 1,134 830 37% Gross Profit margin % 60.0% 73% 67.9%
Mobile Games 104 1,749 1,433 22%
Total Net sales - Games 1,976 3,846 3,353 15% EBITDA 1,173 1,473 1,445 2%

Partner Publishing 429 737 660 12% Op EBIT 904 1,052 1,048 0%
Asmodee n.a 571 400 43%
Dark Horse n.a 75 n.a Op EBIT margin % 37.6% 20.1% 23.7%
Total Net Sales 2,405 5,228 4,413 18%

Source: Redeye Research Source: Redeye Research

Net sales came in at SEK 5,229m (2,405). Equivalent to a y/y growth of 117%, this was 18%
higher than our estimates. The positive deviation primarily stems from Saber Interactive,
Gearbox, and Easybrain. Organic growth for games in CCY reached -34%. However, excluding
last year's major success Valheim, the organic growth for games in CCY was -2%. On a
proforma level, including all acquired units, organic growth reached 3% in the quarter.

We were very impressed by the mobile unit's performance in the quarter. Organic growth on a
proforma level reached impressively 43%. This should be seen in contrast to the overall
mobile market, where organic growth was -7% in the first quarter, according to SensorTower.
The UA remained at high levels and reached SEK 898m in the quarter, up 2% from Q3’21/22.
However, it decreased in terms of sales of the mobile units. Thus, there are good prospects
for future growth opportunities within mobile. It should also be noted that Easybrain saw a
positive effect from an ad mediation deal.

Embracer: Net sales - Games and growth y/y % Embracer: Mobile games - Net sales
5,000 200% 2,000
1,800
4,000 150% 1,600
1,400
SEK m

3,000 100%
SEK m

1,200
%

2,000 50% 1,000

800
1,000 0% 600
400
0 -50%
200
0
Q2 Q3 Q4 Q1 Q2 Q3 Q4
20/21 20/21 20/21 21/22 21/22 21/22 21/22
Games Revenue Games Revenue y/y %
Organic growth, CCY % DECA Games - Mobile Easybrain - Mobile

Source: Redeye Research Source: Redeye Research

2
 REDEYE Equity Research Embracer Group 8 June 2022

Gross profit reached SEK 3,840m (1,940), corresponding to a gross margin of 73% (60). The
gross margin improvement is due to the high share of the sales from the back catalog (93%),
digital distribution channels (83%), and from internal owned IPs (69%).

Embracer: Back catalog vs new releases Embracer: Gross Profit and gross margin %
100% 5,000 90%
90% 4,500 80%
80% 4,000 70%
70% 3,500 60%

SEK m
60% 3,000
50% 50%

%
2,500
40% 2,000 40%
30% 1,500 30%
20% 1,000 20%
10% 500 10%
0% 0 0%

New releases - sales Back catalog - sales Gross profit Gross margin %

Source: Redeye Research Source: Redeye Research

Despite the stronger than expected Net sales and Gross profit, its Operational EBIT did not
manage to follow. One of the reasons for the margin contraction is that both Asmodee and
Darkhorse had Operational EBIT margins of 10% in the quarter since Q4 is a seasonally weak
quarter for both business units. This, in conjunction with further high UA investments (~SEK
900m), and support of humanitarian aid of SEK 50m, held back some of the scalability in the
quarter. Thus, Operational EBIT came in at SEK 1,052m, in line with Embracers guidance for
the full fiscal year 2021/22.

Embracer: Operational EBIT and margin %

1,400 40%
1,200 35%
1,000 30%
25%
SEK m

800
20%
600
15%
400 10%
200 5%
0 0%

Operational EBIT Op EBIT margin %

Source: Redeye Research

3
 REDEYE Equity Research Embracer Group 8 June 2022

Outlook for 2022/23

Premium segment and Easybrain to drive organic growth

We expect strong organic growth of 32% in 2022/23, driven by the premium PC/Console
segment and from the full-year inclusion of EasyBrain.

Embracer has invested heavily in its premium segment and has more than 25 AAA games in
the pipeline and more than 223 games in total across the group. The game investments
reached an all-time high last quarter at SEK 950m, and SEK 3,526m for the last twelve
months, which is the foundation of organic growth in the coming periods.

Embracer: Game investments - Quarterly Embracer: Game investments - R12m

950 5.5x 4,000
1,000 3,526 3.5x
3,500 3.0x
800 4.5x
3,000 2.5x
3.5x 2,500
600 2.0x
2.5x 2,000
1.5x
400 1,500
1.5x 1.0x
1,000
200 0.5x 500 0.5x
0 -0.5x 0 0.0x

Total investments in games Total investments in games R12m

Game investments / Finalized games Game investments / Finalized games, R12m

Source: Redeye Research Source: Redeye Research

The return on finalized games was soft in the quarter and reached 1.2x. The only major
release in the quarter was ELEX II, which underperformed commercially, the major explanation
for the soft performance. Additionally, for the last twelve months, the ROI reached 1.4x (2.8x).
Commonly, ROI for high-budget games tends to be lower than for medium-sized games and
other games with less expensive budgets. Thus, we expect the ROI for the upcoming games
pipeline to be lower than the R12m average of 2.2x. We currently pencil in a ROI of 1.7x for the
upcoming game releases in 2022/23 due to a solid mix of AAA and AA games.

The upcoming release highlights for 2022/23 are Koch Medias AAA releases of Saints Row:
Reboot and Dead Island 2 and plentiful upcoming medium size games from THQ Nordics and
Saber Interactive. Additionally, Embracer currently has 159 unannounced titles under
development. In total, we expect the premium segment to grow 71.5% y/y in 2022/23 and
contribute with net sales of SEK 14,600m

Embracer: ROI on finalized games - Quarterly Embracer: ROI on finalized games - R12
1000 8.0x 2500 3.00x
7.0x
800 2000 2.50x
6.0x
600 5.0x 2.00x
1500
4.0x 1.50x
400 3.0x 1000
1.00x
2.0x
200 500 0.50x
1.0x
0 0.0x 0 0.00x

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

Source: Redeye Research Source: Redeye Research

4
 REDEYE Equity Research Embracer Group 8 June 2022

The mobile units, and in particular Easybrain continues to perform above expectations. Net
sales from the mobile segments reached SEK 1,749m, and grew 43% y/y on a proforma basis.
However, it should be noted that the User acquisition (UA) spending remained high in Q4 and
reached SEK 898m, equivalent to 51% of sales from the mobile units. This ratio is very high
among mobile peers and illustrates the benefit of being a large industry player.

Management indicates that the UA spending will remain at current levels as it sees a good
return on its marketing spending. Thus, we see good prospects for further growth and
estimate the mobile units to grow by 58% y/y, where we expect Easybrain to be the major
contributor. Easybrain was consolidated in Q1 2021/22, which indicates that its current
momentum should lead to substantial organic growth in 2022/23. We forecast Easybrain to
grow 44% y/y organically.

Mobile games require less capex than the premium segment and thus have a higher cash
conversion. We expect the mobile segment to contribute with solid free cash flow in the
upcoming periods, which could also be used to finance further growth investments in the
premium segments.

Embracer: Mobile games - Net Sales and UA spending % Embracer: Premium segment Net sales and growth y/y %
2,500 -70%
4,000 145%
-60% 125%
2,000 3,500
-50% 105%
3,000
SEK m
SEK m

1,500 -40% 85%

2,500
65%
1,000 -30% 2,000 45%
-20% 1,500 25%
500 1,000
-10% 5%
0 0% 500 -15%

Easybrain - Mobile DECA Games - Mobile

UA of Mobile games revenue % O/W Premium Games O/W Premium y/y %
Source: Redeye Research Source: Redeye Research

Both Asmodee and Darkhorse were consolidated at the end of Q4. Both Asmodee and
Darkhorse have a clear seasonal pattern, where Q3 is the strongest quarter, both in terms of
sales and operating margins. This should lead to a slightly lower gross margin in Q3. We
estimate that Asmodee will represent 31% of the net sale in 2022/23 and is encouraged by the
proforma growth of 19% y/y in Q4. Furthermore, the majority of Asmodee’s most vital IPs
were renewed in 2021, which reduces the risk going forward.

Asmodee is expected to reach an Operating EBIT of SEK 2,000-2,500m in 2022/23, which

implies annual growth of at least 10%. The midpoint guidance indicates an Operational EBIT
of SEK 2,350m, a growth of 17.5% y/y. This corresponds to an Operational EBIT margin of
19.6%. It should be noted that Asmodee has a Capex light business model, and its free cash
flow conversion has varied between 70-80%. The slight margin contraction should be seen in
the light of improved free cash flows. We believe Asmodee to contribute with SEK ~1,700m in
free cash flow during 2022/23.

Embracer expects to reach synergies across the group and released the first three joint
projects in the latest earnings presentation. The projects consist of console porting, a new
video game with Saber Interactive, and a board game distribution regarding Coffee Stains
Deep Rock galactic.

5
 REDEYE Equity Research Embracer Group 8 June 2022

Embracer: Net sales by business unit and growth y/y % Embracer: Net sales by business unit and growth y/y %
60,000 14,000 250%
140%
12,000
50,000 200%
10,000

SEK m
40,000 90% 8,000 150%
SEK m

30,000 6,000 100%

4,000
20,000 40% 50%
2,000
10,000 0 0%
0 -10%
21/22 22/23E 23/24E 24/25E
O/W Premium Games O/W Mobile Games
O/W Asmodee Dark Horse - E&S O/W Premium Games O/W Mobile Games
Partner Publishing - E&S Total Net Sales - y/y % O/W Asmodee Dark Horse - E&S
Organic growth, CCY % Partner Publishing - E&S Total Net Sales - y/y %
Source: Redeye Research Source: Redeye Research

Operational EBIT and guidance

Embracer reiterated its guidance for 202/23 and 2023/24. It expects Operational EBIT to be
between SEK 9,200-11,300m for 2022/23 and between SEK 10,300-13,600m in 2023/24. We
are slightly ahead of the midpoint guidance and currently forecast the Operational EBIT to
reach SEK ~10,500m in 2022/23 and SEK ~12,260m. Corresponding to y/y growth of 137%
and 17%, respectively.

Embracer also stated that Q1 2022/23 would be the weakest quarter and represent ~1/7 of
the full years Operational EBIT. This is due to a few new game releases in Q1 as well as
seasonally weak quarters for Asmodee. The major release in Q1 will be Saber Interactives’
release of Evil Dead, which has performed ahead of expectations and managed to sell 500,000
copies the first five days from release.

The publisher of Tiny Tina (T2 Interactive) stated that the game had sold better than expected.
We believe the budget for the game to be around SEK 1,000m and expect Embracer to receive
royalties from the game during 2022/23. However, we currently expect these to materialize
from Q2 2022/23.

We currently forecast the Operating EBIT margin to reach 27.1% in 2022/23 and take a
conservative view on future synergies. We also expect the marketing expenditure and UA
investments to remain high until 2024/25, holding back some of the margin expansion.

Embracer: Operational EBIT and margin %

16,000 35%
14,000 30%
12,000
SEK m

25%
10,000
SEK m

20%
8,000
15%
6,000
4,000 10%

2,000 5%
0 0%
2019 20/21 21/22 22/23E 23/24E 24/25E

Operational EBIT Op EBIT margin %

Source: Redeye Research

6
 REDEYE Equity Research Embracer Group 8 June 2022

Improved free cash flow ahead

We expect much improved free cash flow from 2022/23 and onwards, given the premium
game releases pipeline, the continuous mobile momentum, and the inclusion of Asmodee.
Embracer currently offers a free cash flow yield of 3.8% in 2022/23 and 6.4% in 2023/24,
something we value as attractive.

We believe the improved free cash flow could be an important catalyst going forward, as it
would also highlight Embracer’s ability to work down its debt and potentially finance future
acquisitions with its own cash flows.
Embracer: EBITDA - Capex and FCF Embracer: EBITDA - Capex, R12m
12,000 8,000
7,000
10,000
6,000

SEK m
8,000 5,000
4,000
SEK m

6,000
3,000
4,000 2,000
2,000 1,000
0
0
-2,000
2019 20/21 21/22 22/23E 23/24E 24/25E

EBITDA - Capex Free cash flow excl aquisitions EBITDA-Capex, R12m

Source: Redeye Research Source: Redeye Research

Eidos and Crystal Dynamics deals

At the beginning of May, Embracer acquired two of the most reputable AAA game studios,
Eidos and Crystal Dynamics. Mostly known for the Tomb Raider and Deus Ex series, which
sold ~88 million and ~12 million units. Embracer expects these acquisitions to be EBIT
neutral until its upcoming games are released. We expect the first releasement in 2024/25
and to generate EBIT of at least SEK 500m annually. The acquired units pipeline consists of
new installments of beloved franchises and original IPs, including a new Tomb Raider game.
We also believe there are vast opportunities for remakes and transmedia.

At first sight, USD 300 million sounds cheap for these franchises and highly regarded studios.
We also believe it is cheap, but we also know these studios have some mediocre years behind
them. For example, the new Tomb Raider Trilogy has had a negative sales trend since the first
game was released in 2013. But that said, the first game and second game were both
blockbusters (sold 14.5 million and 11.8 million separately). However, the last game was sold
with an aggressive discount of less (around 30%) than a month after its release. According to
our sources, the game has sold approximately 9 million copies during its lifetime.

The Deus Ex-series' latest game was not a commercial success, with an enormous
development budget for a relatively niched game. However, most of these studios’ game
libraries have high scores from critics (meta core above 80%).

These two studios have also released two high-budget Marvel games in the last few years.
While “Avengers” was a critical and commercial failure, “Guardians of the Galaxy” was a
positive surprise for both critics and gamers. However, the game had a slow commercial start
but has shown stable growth since its release. Microsoft also bought the rights to release the
game in its subscription service Game Pass, which should mean the game is or will be
profitable, unlike Avengers. The financial performance has therefore likely been relatively bad
in the last years.

7
REDEYE Equity Research Embracer Group 8 June 2022

Directed Right Issue towards Savvy Gaming Group

Earlier today, Embracer announced that it has carried out a directed right issue of SEK
~10,300m. The shares will be solely issued to Savvy Gaming Group (SGG), which will be one
of the major shareholders and hold ~8.1% of the outstanding shares. The subscription price
was SEK~103.5 per share, corresponding to a premium of 15% compared to yesterday’s
closing price (7 June). The premium paid from SGG is once again an illustration of a strong
capital allocation from Mr. Wingefors. In total, the dilution effect will be ~8.1%.

SGG is 100% owned by the Public Investment Fund (PIF) of Saudi Arabia, focusing on the
video games and E-sport sector. The group is led by Brian Ward, former head of studios at
Activision. SGG was the acquirer of MTG’s E-sport division ESL for USD 1,050m and has also
managed to acquire 96% ownership in the Japanese game developer SNK.

Furthermore, the Public Investment Fund of Saudi Arabia has also bought significant
proportions of the outstanding shares in Nintendo, Capcom, Nexon, and Activision Blizzard.
These investments amount to 3-5% of the total shares in these companies. We can also add
that these companies are among the industry’s largest and most prominent.

The Saudi Crown Prince Mohammed bin Salman is the chairman of SGG. The Crown Prince
has a reputation problem. He was suspected of having ordered the assassination of
Washington Post journalist Jamal Khashoggi in 2018 in a high-profile case that led to high
tensions between the U.S. and its ally Saudi Arabia. Of course, Redeye sees some ethical
problems with this investment. We believe this large ownership in Embracer can potentially
open up and close some business opportunities. Perhaps both institutional and private
investors will see the new major shareholder as a problem viewed from an ESG-perspective.

However, the fact that the same money invested heavily in Activision Blizzard a year ago and
most recently Nintendo, with a 3% and a 5% stake, respectively, dampens our uncertainty on
how this investment will be perceived.

The capital injection reduces Embracer’s leverage position. We estimate the net debt to be
SEK 2,225m by the end of 2022/23. This corresponds to a Net debt / OP EBIT ratio of 0.2x
(3.2x). Embracer has an exciting funnel of potential M&A targets, and we believe that the
current market circumstances have enhanced the likelihood of value-accretive deals. In our
opinion, the improved financial flexibility and access to SGG’s network are key reasons for this
capital injection.

8
 REDEYE Equity Research Embracer Group 8 June 2022

Financial Estimates
On the back of the Q4 report, we have only finetuned our estimates and left Operational EBIT
unchanged. We still forecast high marketing and UA investments to hold back the Operational
EBIT acceleration. Embracer will report in accordance with IFRS as of its next report and is
scheduling for a change into the main Stockholm Nasdaq list by the end of 2022. We believe
these two events could be important catalysts, as they will reduce some of the accountant
risks and attract a higher inflow of foreign capital.
22/23E
SEK m Q1'E Q2'E Q3'E Q4'E 2022/23E 2023/24E 2024/25E
Games Revenue 6,160 8,858 10,595 8,671 34,285 40,364 44,488
O/W Premium Games 2,335 3,988 4,120 4,136 14,579 18,605 20,961
O/W Mobile Games 1,665 1,870 2,275 1,895 7,705 8,799 9,609
O/W Asmodee 2,160 3,000 4,200 2,640 12,000 12,960 13,919
Dark Horse - E&S 180 250 350 220 1,000 1,120 1,187
Partner Publishing - E&S 489 493 1,564 847 3,393 3,800 3,990
Total Net Sales 6,829 9,601 12,509 9,738 38,677 45,284 49,666

Revenue Split %
Premium Games 34.2% 41.5% 32.9% 42.5% 37.7% 41.1% 42.2%
Mobile Games 24.4% 19.5% 18.2% 19.5% 19.9% 19.4% 19.3%
Asmodee 31.6% 31.2% 33.6% 27.1% 31.0% 28.6% 28.0%
Dark Horse 2.6% 2.6% 2.8% 2.3% 2.6% 2.5% 2.4%
Partner Publishing 7.2% 5.1% 12.5% 8.7% 8.8% 8.4% 8.0%

P&L Statment
Net Sales 6,829 9,601 12,509 9,738 38,677 45,284 49,666
Other income 100 100 100 100 400 350 350
Work for own use / Capitalised dev 956 1,056 1,126 1,071 4,209 4,393 4,718
Total Revenue 7,886 10,757 13,735 10,909 43,287 50,027 54,734

COGS -1,981 -2,832 -3,853 -2,727 -11,392 -12,680 -13,708

Gross profit 5,905 7,925 9,882 8,182 31,894 37,347 41,026

Other external expenses -2,322 -2,592 -2,940 -2,434 -10,288 -11,230 -11,920
Personnel Expences -1,649 -1,759 -2,114 -2,320 -7,842 -9,332 -10,639
Other operating costs -3 -5 -6 -5 -19 -23 -25
Total opex -3,975 -4,356 -5,060 -4,759 -18,150 -20,586 -22,584

Associated Companies 7 7 7 7 28 30 30

EBITDA 1,937 3,575 4,829 3,430 13,772 16,791 18,473

Depreciation and amortisation -4,328 -4,976 -5,214 -5,056 -19,573 -20,328 -20,518

EBIT -2,391 -1,401 -384 -1,625 -5,801 -3,537 -2,045

Operational EBIT 1,459 2,750 3,766 2,525 10,500 12,263 13,705

Net finance -49 -49 -49 -49 -197 -212 -212

PTP -2,440 -1,450 -434 -1,675 -5,998 -3,749 -2,258

Tax -282 -540 -743 -495 -2,060 -2,410 -2,698

Net income -2,722 -1,990 -1,177 -2,170 -8,059 -6,159 -4,956

Adj Net Income 1,128 2,160 2,973 1,980 8,242 9,641 10,794
EPS adjusted 0.91 1.75 2.41 1.60 6.67 7.81 8.74

EBITDA - Capex 401 2,039 3,140 1,775 7,355 9,410 10,774

Growth y/y %
Net Sales 99% 191% 146% 86% 127% 17% 10%
Organic Growth 6% 69% 41% 16% 32% 16% 10%
EBITDA 26% 118% 224% 133% 124% 22% 10%
Op EBIT 14% 183% 236% 140% 137% 17% 12%
Adj Net Income -6% 204% 257% 78% 114% 17% 12%
Adj EPS -24% 150% 196% 63% 80% 17% 12%
Margins %
Gross margin % 71.0% 70.5% 69.2% 72.0% 70.5% 72.0% 72.4%
EBITDA margin % 28.4% 37.2% 38.6% 35.2% 35.6% 37.1% 37.2%
OP EBIT margin % 21.4% 28.6% 30.1% 25.9% 27.1% 27.1% 27.6%
Adj Net Margin % 16.5% 22.5% 23.8% 20.3% 21.3% 21.3% 21.7%
EBITDA - Capex margin % 5.9% 21.2% 25.1% 18.2% 19.0% 20.8% 21.7%
Source: Redeye research

9
 REDEYE Equity Research Embracer Group 8 June 2022

Valuation
Historical EV/EBITDA multiple and EPS.
Embracer: EV/EBITDA NTM Embracer: EPS NTM and share price
20 8 140
7 120
16
6 100
12 5
80
4
8 60
3
2 40
4
1 20
0 0 0

EV/EBITDA Average multiple EPS Share price

Source: Factset Source: Factset

Peer Valuation

EV EV/S EV/EBITDA EV/EBIT

Company name EUR m 2022 2023 2024 2022 2023 2024 2022 2023 2024
Nordics
Thunderful 275 0.9x 0.9x 0.9x 7.7x 6.1x 5.5x 15.1x 9.6x 8.6x
Paradox 1,818 9.9x 7.9x 7.5x 15.4x 12.5x 11.3x 25.7x 21.3x 18.9x
EG7 116 0.7x 0.7x 0.7x 2.9x 2.7x 2.5x 3.9x 3.9x 3.6x
Remedy 321 6.6x 6.4x 4.7x 37.5x 42.8x 13.3x 51.5x 66.0x 18.2x
Stillfront 1,160 1.7x 1.6x 1.5x 4.5x 4.1x 3.7x 5.5x 5.1x 4.6x
G5 Entertainment 179 1.3x 1.2x 1.2x 5.3x 4.0x 3.8x 8.9x 6.0x 5.7x
MTG 1,474 2.7x 2.5x 2.4x 12.0x 10.1x 9.3x 24.2x 17.7x 15.3x
Median 321 1.7x 1.6x 1.5x 7.7x 6.1x 5.5x 15.1x 9.6x 8.6x
Average 763 3.4x 3.0x 2.7x 12.2x 11.8x 7.1x 19.3x 18.5x 10.7x
International
Zynga 9,342 3.5x 3.2x na 15.3x 13.4x 10.9x 15.6x 13.6x 11.2x
Ten Square 150 1.0x 1.0x 1.1x 5.0x 5.0x 4.9x 3.7x 3.3x 5.4x
Rovio 462 1.4x 1.4x 1.3x 8.2x 7.7x 7.4x 11.0x 9.9x 9.2x
Playtika 6,673 2.6x 2.5x 2.3x 7.5x 6.7x 6.5x 13.5x 11.6x 10.3x
11 Bit Studios 250 24.1x 5.8x 4.0x 61.4x 8.9x 6.5x >100 9.3x na
Team 17 657 4.4x 4.1x 3.7x 12.7x 11.2x 10.2x 13.8x 12.0x 10.6x
KeyWords Studios 2,099 3.4x 3.1x 2.8x 17.8x 16.4x 15.2x 24.0x 21.5x 19.5x
Frontier Developments 540 3.4x 2.7x 2.3x 9.7x 6.8x 5.6x 21.8x 13.5x 10.2x
Activision 50,269 6.8x 5.6x 5.4x 17.1x 13.4x 13.0x 18.3x 13.9x 13.2x
EA 36,645 4.9x 4.6x 4.3x 13.7x 12.6x 11.8x 15.3x 13.7x 12.9x
Take Two 11,440 3.2x 2.4x 2.2x 16.0x 9.2x 7.4x 18.8x 10.4x 9.4x
CD Project 2,141 10.6x 10.2x 12.5x 21.6x 19.9x 25.6x 26.2x 25.4x 40.0x
Ubisoft 6,629 2.6x 2.4x 2.3x 5.9x 5.1x 4.7x 17.4x 13.4x 12.0x
TinyBuild 353 5.9x 5.4x 5.0x 15.5x 13.5x 12.0x 17.1x 14.9x 13.5x
Median 2,120 3.4x 3.1x 2.8x 14.5x 10.2x 8.8x 17.1x 13.4x 11.2x
Average 9,118 5.6x 3.9x 3.5x 16.2x 10.7x 10.1x 15.5x 13.3x 12.7x
Median Gaming 1,221 2.6x 2.4x 2.1x 11.1x 8.2x 7.2x 16.1x 11.5x 9.9x
Average Gaming 4,941 4.5x 3.4x 3.1x 14.2x 11.2x 8.6x 17.4x 15.9x 11.7x
Tabletop Games & Ips
Nintendo 36,329 2.9x 3.1x 3.2x 8.0x 8.1x 8.8x 8.3x 8.4x 8.8x
Hasbro 14,384 2.3x 2.2x 2.0x 11.6x 10.6x 9.6x 14.6x 13.2x 11.6x
Mattel 10,380 1.9x 1.7x 1.7x 9.9x 8.6x 7.6x 12.7x 10.5x 9.7x
Median 14,384 2.3x 2.2x 2.0x 9.9x 8.6x 8.8x 12.7x 10.5x 9.7x
Average 20,364 2.4x 2.3x 2.3x 9.9x 9.1x 8.6x 11.9x 10.7x 10.0x
Peer Group Median 1,221 2.0x 1.9x 1.8x 8.8x 7.3x 7.1x 13.9x 10.1x 9.1x

Embracer 9,947 2.8x 2.5x 2.3x 7.8x 6.6x 5.9x 10.2x 8.7x 7.8x
Source: Factset

10
 REDEYE Equity Research Embracer Group 8 June 2022

DCF Valuation

We make limited changes in our DCF model. However, on the back of the change in its
financial structure with newly raised loans, recent dilution effect, and considered full earnouts.
We slightly reduce our base case. We apply a Wacc of 9% in all our scenarios.

Bear Case SEK 95 Base Case SEK 146 Bull Case SEK 195
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: 36% 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 M argin
SEK/ Share 145.6 30.0% 32.0% 34.0% 36.0% 38.0%
10.0% 111 117 123 129 135
Wacc % 9.0% 131 138 146 153 160
8.0% 158 167 176 186 195

Source: Redeye research

11
REDEYE Equity Research Embracer Group 8 June 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.

12
REDEYE Equity Research Embracer Group 8 June 2022

2021 2022E 2023E 2024E DCF Valuation Metrics Sum FCF (SEKm)
INCOME STATEMENT 2022-2025 12972
Revenues 17,039 38,677 45,284 49,666 2026-2036 99395
Cost of Revenues 2,071 6,783 7,937 8,639 Terminal 91505
Gross Profit 14,967 31,894 37,347 41,026 Firm Value 203873
Operating Expenses 8,828 18,122 20,556 22,554 Net Debt 2225
EBITDA 6,139 13,772 16,791 18,473 Equity Value 201647
Depreciation & Amortization 9,851 19,573 20,328 20,518 Fair Value per Share 146
EBIT 4,421 10,500 12,263 13,705
Net Financial Items -101 -197 -212 -212 2021 2022E 2023E 2024E
EBT -3,814 -5,998 -3,749 -2,258 CAPITAL STRUCTURE
Income Tax Expenses 470 2,060 2,410 2,698 Equity Ratio 0.5 0.5 0.5 0.6
Non-Controlling Interest 0 0 0 0 Debt to equity 0.4 0.4 0.3 0.3
Net Income -4,284 -8,059 -6,159 -4,956 Net Debt 13907 2225 -5892 -13595
Capital Employed 71880 94422 104063 114857
BALANCE SHEET Working Capital Turnover -1.4 -3.7 -4.4 -4.9
Assets
Current assets GROWTH
Cash & Equivalents 5,810 21,492 29,609 37,312 Revenue Growth 89% 127% 17% 10%
Inventories 3,162 5,802 6,340 6,457 Basic EPS Growth -1319% 61% -24% -20%
Accounts Receivable 5,942 12,377 13,132 13,906 Adjusted Basic EPS Growth 10% 80% 17% 12%
Other Current Assets 0 0 0 0
Total Current Assets 14,914 39,670 49,081 57,675 PROFITABILITY
ROE -11% -15% -9% -6%
Non-current assets ROCE 6% 11% 12% 12%
Property, Plant & Equipment, Net 728 1,149 1,602 2,099 ROIC 10% 13% 14% 15%
Goodwill 0 0 0 0 EBITDA Margin (%) 36% 36% 37% 37%
Intangible Assets 76,071 78,794 81,195 83,628 EBIT Margin (%) 26% 27% 27% 28%
Right-of-Use Assets 0 0 0 0 Net Income Margin (%) -25% -21% -14% -10%
Shares in Associates 0 0 0 0
Other Long-Term Assets 1,741 3,345 1,911 1,969
Total Non-Current Assets 78,540 83,289 84,707 87,696 VALUATION
Basic EPS -4.1 -6.5 -5.0 -4.0
Total Assets 93,454 122,959 133,789 145,371 Adjusted Basic EPS 3.7 6.7 7.8 8.7
P/E 21.4 14.4 12.3 11.0
Liabilities EV/Revenue 6.2 3.4 2.7 2.3
Current liabilities EV/EBITDA 17.2 9.4 7.2 6.2
Short-Term Debt 0 0 0 0 EV/EBIT 23.8 12.4 9.9 8.3
Short-Term Lease Liabilities 0 0 0 0 P/B 1.8 1.6 1.3 1.2
Accounts Payable 0 6,962 8,151 8,940
Other Current Liabilities 21,574 21,574 21,574 21,574
Total Current Liabilities 21,574 28,536 29,725 30,514 SHAREHOLDER STRUCTURE CAPITAL % VOTES %
Lars Wingefors AB 23.2% 42.3%
Non-current liabilities S3D Media Inc 7.4% 11.5%
Long-Term Debt 19,717 23,717 23,717 23,717 Swedbank Robur 5.8% 3.8%
Long-Term Lease Liabilities 0 0 0 0 Canada Pension Plan 5.1% 3.3%
Other Long-Term Liabilities 7,352 7,352 7,352 7,352 PAI Partners 3.5% 2.3%
Total Non-current Liabilities 27,068 31,068 31,068 31,068
SHARE INFORMATION
Non-Controlling Interest 0 0 0 0 Reuters code Embrac
Shareholder's Equity 44,812 63,354 72,995 83,789 List First North
Total Liabilities & Equity 93,455 122,959 133,789 145,371 Share price 96.0
Total diluted shares, million 1328.4
CASH FLOW
NOPAT 3,951 8,439 9,853 11,006
Change in Working Capital 12,820 -2,112 -105 -102 MANAGEMENT & BOARD
Operating Cash Flow 4,293 11,299 15,499 15,401 CEO La rs Wi ngefors
CFO Joha n Eks tröm
Capital Expenditures -341 -421 -453 -497 Chairman
Investment in Intangible Assets -3,713 -5,996 -6,928 -7,202
Investing Cash Flow -37,896 -9,917 -7,381 -7,698
ANALYSTS Redeye AB
Financing Cash Flow 25,025 14,300 0 0 Viktor Lindström Mäster Samuelsgatan 42, 10tr
Free Cash Flow 239 4,882 8,117 7,703 Tomas Otterbeck 111 57 Stockholm

13
REDEYE Equity Research Embracer Group 8 June 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.

14
REDEYE Equity Research Embracer Group 8 June 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

15
REDEYE Equity Research Embracer Group 8 June 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
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. Accordingly, 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 Swedish Financial
Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees
are not allowed to trade in financial instruments of the company in question, from the date Redeye publishes its analysis plus one trading
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 analysis, or
from an underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of
these reports should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report
for the performance of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of
the analysis.

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 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 (2022-05-16)

Rating People Business Financials

5p 32 15 4

3p - 4p 156 138 48

0p - 2p 5 40 141

Company N 193 193 193

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 applicable 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 Company and receives/have
received compensation from the Company in connection with this.

16