Today I signed up for the THQ Nordic IPO with the aim of selling them if the stock is up more than 15% on the first days of trading. Retail investors will probably only get a few shares given the small size of the offering which is partly already subscribed to by institutional investors.
Diversified with potential
This is not a single AAA franchise dependent company, which is very positive. They have 75 brands and about 200 games in their portfolio. The game that generated most revenue in 2015 was MX vs ATV.
In 2015 still 52% of distribution was physical, but as we have seen with all game-developers, this is rapidly shrinking in favor of digital and at the same time increasing margins.
They have some titles with AAA potential in their pipeline such as Elex and Spellforce. Also in the IPO prospectus they hint that they have 2 undisclosed full priced ($59,99) titles in development. If any one of those become a success like Payday it will easily add a few SEK billions to market cap, but I view that more as a bonus.
Numbers
The IPO is priced at SEK20 per share, and the company will have 72m shares after the offering (I am counting on the over-allotment option of 2m to be fully used) -> That gives a valuation of SEK1,44bn (CD Projekt Red SEK8,5bn, Starbreeze SEK5,7bn, Paradox SEK5,2bn, Frontier Developments SEK0,8bn, Stillfront SEK0,3bn).
For first 9 months 2016 they had revenues of SEK174m compared with 115 in 2015. Growth of 50% not dependent on the success of a single AAA release. That puts FY annualized earnings at SEK232m. So P/S is 6.2, which is quite high - that is also the reason I am more looking to flip these shares rather than holding on to them. For comparison, EA and ATVI have P/S 4.5-5.0 for the current year, FDEV only 3.2 for last years earnings (that is why this is my biggest position right now) and Ubisoft and Take-Two are below 2. On the other hand CD Projekt Red is at P/S 6.8 looking at last 9 months annualized (although they are launching GWENT as we speak and have Cyperpunk 2077 in the pipeline) and Starbreeze is about 10x annualized sales of its best quarter ever. So P/S at 6.2 is not a big problem, the issues is if THQ jumps 15% in the first day of trading, than we are around 7x Sales. That is why I would look to sell on a IPO-jump with the aim to buy back lower, just like with Paradox and Stillfront.
Worth mentioning is that Paradox IPO'd at 33 a share, which was a valuation of SEK3,5bn which equaled a P/S of 5,8x (2015).
Looking at net income for 9 months was SEK34m compared to SEK24m. That puts FY annualized net income at SEK45m. But I always find it difficult to look at Net Income due to the big impact of how gaming companies account for R&D and such.
Why SEK40m dividend ahead of IPO?
I did not find any an answer in the IPO prospectus. Please help me out if somebody out there knows the answer. But I find it discomforting that the company distributed SEK40m this year in dividend (based on last years profit) only to go to the market and raise SEK440m just a few months later. If the owners of THQ thought market opportunities were so amazing, why did they just recently decide to take a dividend? Tax issues?
By the way, some really cool titles to look forward to from THQ as they have bought good old NovaLogic last month.
