Valuation: THQ Nordic vs. Frontier Developments (50% discount for the similar profile)

THQ Nordic reported FY2016 earnings this morning.

They are similar in size and growth to Frontier so I like to compare them.

For THQ I will be using FY2016 and for Frontier I will use TTM per H1 2017 as the two companies have different financial years. But this way I will cover roughly the same calendar period.

I will translate Frontier numbers to SEK at GBPSEK 11.00

Revenue

  • THQ 302 mSEK
  • FDEV 317 mSEK

Revenue growth YoY

  • THQ +42%
  • FDEV +66%

EBITDA

  • THQ 132 mSEK
  • FDEV 94 mSEK

Net profit

  • THQ 71,9 mSEK
  • FDEV 50,6 mSEK

Market Cap

  • THQ 2,225 mSEK
  • FDEV 1,055 mSEK

Do I need to say which one I would rather own?

Frontier Developments' profits explode (AIM: FDEV). Reports +179% YoY EBITDA growth and +791% EPS Growth

Although the revenue for Frontier Developments H1 2017 earnings was already known the company surprised on the upside with strong profit growth.

  • EBITDA grew 179%
  • EPS was 10.7p compared to 1.2p for H1 2016
  • TTM EPS is 13.7p which puts the company at P/E 21. Very cheap in my world given the growth.

It is very encouraging that the company is beefing up its staffing to meet the demands of a growing listed company by adding Charles Cotton, with a track record of successfully scaling organisations listed on both LSE and NASDAQ, to the board and the appointment of Alex Bevis as CFO, who is currently CFO of a LSE company.

Looking ahead I am very excited for the PS4 launch of Elite. It will mark the debut for the company’s proprietary COBRA game development technology on Playstation 4. And of course it will be very exciting to find out what movie IP the company has licensed.

Frontier Developments announces third franchise to be a major Hollywood IP

Frontier announced this morning that their third franchise will be a Hollywood IP. 

Frontier mentions that they expect to earn money from the IP already in 2018, so it must have been in development already - further strengthening my belief that they are re-using knowledge and expertise gained during the development of The Outsider.

I cannot imagine any game based on a Hollywood IP no being a console title, which is great from a financial perspective and strengthens the case for further upside in the shares.

Frontier Developments, The revaluation journey has begun. +50% upside.

UPDATE JANUARY 2017
The stock reached my short term target price target of 300p late 2016 as Planet Coaster sales reached the anticipated 500,000 sold units at full price, of which 400,000 were sold in the first month of release. My base case revenue estimates for FY 2017 was £28m. The company recently commented in an interview that they are comfortable with full year revenue expectations of £32m which is in line with the trading update for H1 2017 where they indicated revenue of £18.1m, a 66% YoY growth. I was also very happy to see the genius introduction of aliens into Elite Dangerous which generated articles in Forbes, BBC, PC Gamer, many Youtube videos and entered many gaming podcast discussions. It boosted the Steam concurrent players number for the game by 20%.

INVESTMENT CASE UPDATE
2017 announcement of third game franchise not priced into the stock: Mid-2016 the company was valued based on 1 successful franchise. Since than it has been revalued to include the success of Planet Coaster, the second franchise. At £100m we believe the company is fairly valued as a 2 franchise game developer. But the company has confirmed both in earlier presentations and in the latest trading update that a third franchise will be announced, probably in the first half of 2017. In the trading update they hinted that the third franchise is already in development - “the Company has continued to increase its investment in development and other business activities.” We expect this third franchise to at least have the same potential as Planet Coaster, but there is good reason to believe that it will be a cross-platform mass appeal title with the potential to outsell Planet Coaster several times. Looking at peers the announcement of a promising future AAA-title alone should add about £50m to the valuation - for example Funcom is valued at about £90m based mostly on good looking trailers for their soon to be released early access game Conan Exiles.

REVALUATION TRIGGERS AHEAD

Announced
• ‘The Commanders’ multi-crew expansion for Elite Dangerous
• Playstation launch of Elite Dangerous in Q2 2017
• Planet Coaster DLC’s announced in the H1 2017 trading update (“We have a strong programme of updates in place for Planet Coaster which will be released through 2017 and beyond”)
• Reveal of third franchise (“We are now working to further the success of our existing franchises and create additional ones.”)
• CFO begins in April 2017

Speculative
• A version of Planet Coaster for console or mobile
• Playstation VR support for Elite Dangerous
• Elite Dangerous first person expansion already in 2017

Read the full write-up here.

Frontier Developments reports 66% YoY earnings growth

Frontier released its trading update for financial H1 2017 which is June-November 2016.

The company reported 66% revenue growth (to £18.1m) compared to the same period the year before.

Planet Coaster had sold over 0.5m copies by the end of the year. 

Elite Dangerous had sold another 300,000 copies since the last update now reaching 2.1m in total.

EBITDA for the 6-month period is expected at £5.7m. 

The company mentioned that they "have a strong programme of updates in place for Planet Coaster which will be released through 2017 and beyond." Together with the Playstation launch of Elite announced for Q2 2017 and the announcement of a third franchise in 2017 the stock still looks cheap from here.

Increase in Elite Dangerous players after alien encounter news

Frontier Developments' insertion of aliens into Elite Dangerous sparked news coverage from PC Gamer to the BBC and also peaked the interest in the game which saw an increase in players as seen on the Steam Players stats which can be viewed at SteamDB.

It also promted this lovely describtion in Forbes:

Elite Dangerous, otherwise known as the No Man’s Sky that’s actually good, or the Star Citizen that’s actually out, is making headlines for a rather cool reason as of last night.

From a PR perspective it was a perfectly executed action to increase interest in the game and at the same time add content into the Elite universe.

 

Frontier Developments sues Atari for $2.2m in Rollercoaster royalies

Story broke by TMZ: http://www.tmz.com/2017/01/03/atari-video-game-royalties-lawsuit/

The suit is related to the development of RollerCoaster Tycoon 3 which Frontier developed for Atari back when Frontier was not self-publishing.

Apperantly the dispute is around how much RCT3 has actually sold. The article is refering to "a website" showing higher salesfigures than Atari was showing Frontier. Might this website be SteamSpy?

Planet Coaster now above 400,000 sold copies & FDEV shares hit 300p

According to SteamSpy Planet Coaster has now sold in 411,000 copies, which was close to my estimate for 2016. And it is standing strong in the Steam Winter Sale, currently at number 3.  But remember, 400,000 is still about 9.6m less than the approximately 10m units sold of the RollerCoaster Tycoon series, which was developed but not distributed by Frontier. So I am expecting Planet Coaster sales to continue to grow and grow and grow...

On the back of the success of Planet Coaster, Frontier Developments shares hit 300p last week, which happened much faster than I expected. But in my view 300 is just a pit-stop before moving to 450p which is closer to a normal valuation of the company in my view.

 

GWJ Podcast talks about Planet Coaster as one of their top-10 games of 2016

One of my favorite podcast about games, Gamers With Jobs Conference Call, recently went through their top games for 2016 and Planet Coaster was discussed.

The discussion touched on the longevity and DLC-potential of the game in a very positive way.

You can listen to the whole episode here and they start talking about Planet Coaster around the 45min mark (after Doom).

I also did an audio outtake of just the talk about Planet Coaster which you can listen to here.

Steam Winter Sale starts today - will Planet Coaster go on sale?

The Steam Winter Sale starts today. 

On a business level it will be interesting to see if Planet Coaster will go on sale. That would  help the game hit 500,000 sold copies this year.

On a personal level I like to buy stocks when they are trading on a discount - similarly I like to buy games on a discount.

The last two games I bought on Steam was Elite Horizons expansion which I picked up at the last sale and Papers,Please which was recently 60% off. Both are highly recommended.

Games I am looking to pick up if a good deal emerges:

  • Virginia - Digital Bros
  • Inside - Playdead Studio
  • Superhot - Superhot Team
  • Tyranny - Paradox
  • Ori and the Blind Forest - Microsoft
     

Frontier to report trading update already in January

Previously I was expected a mid-year update from Frontier in February as a trigger for revaluation of the shares, but according to an interview with Frontier COO David Walsh it might come earlier. Walsh comments: “There should be a brief post holiday period release which will be followed up by the more formal in-depth update in February”.

The article also highlighted that the company in its latest FY results "carries the total cost of Planet Coaster's development and as yet receives only minimal revenue" and mentions a comment by analyst at Numis that "if the game (Planet Coaster) is only moderately successful there would be a materially positive impact on the P&L." This is more or less the same view I hold and the reason for my investment in the company.

The company has previously talked about three franchises, but in the interview Walsh mentions that "going forward the next step is to scale up so as to have four or five healthy franchises." 

Both the short and the long term case seems very sound for Frontier.

 

 

Elite: Dangerous coming to PlayStation in Q2 2017

Frontier Development (AIM:FDEV) shares just got cheaper. 

See the announcement trailer here: https://youtu.be/YESNObZJTgQ

Frontier announced that Elite is coming to PlayStation in Q2 2017. 

If its launched before the end of May some of the sales will end up in the company's FY 2017 earnings (financial year ends May). Together with Planet Coaster the company will probably have a monster 2017 in terms of earnings.