11 bit studios - Delays, delays, delays…
We modify our forecasts for 11 bit studios due to: (i) numerous delays of debuts, (ii) slightly lower than expected sale of Frostpunk for consoles, and (iii) inclusion of the IP BOX tax relief. We currently assume that 11 bit studios will generate the adjusted net profit of PLN 31.5 million, PLN 29.9 million and PLN 117.0 million in 2019E, 2020E and 2021E, respectively, which implies adj P/E multiples of 24.9x, 26.2x and 6.7x (vs respectively 24.1x, 21.0x, and 18.4x for peer companies). We also slightly upgrade our estimate of 12M EFV of the Company to PLN 481 per share (from PLN 471) due to (i) inclusion of IP BOX tax relief, (ii) 13% growth of peer multiples, and (iii) horizon valuation forward shift.
It is true that the upcoming quarters may deliver no significant triggers that could help to close the valuation gap – the Company enters the period with no major debuts while the quarterly results should remain flattish or marginally decreasing. However, we believe that the Project 8 will become another milestone (after TWOM and Frostpunk) allowing 11 bit studios to exceed the PLN 100 million net profit threshold in 2021. With the passage of time, investors should pay more attention to 2021 profits which imply an over 50% discount vs peers. We expect to hear the first news related to Project 8 by the end of next year. Until then we would use deeper market price weaknesses to accumulate the shares.
Due to a visible valuation gap (37%) we uphold our LT fundamental Buy recommendation for the Company. However, recognizing no significant triggers on the horizon we downgrade our ST market relative recommendation to Neutral (from Overweight).
11 BIT STUDIOS SA is a Poland-based company engaged in the game development industry. Its product portfolio includes four games: Anomaly Korea, Sleepwalker's Journey, Funky Smugglers and Anomaly Warzone Earth. The Company produces video games for different devices, such as video consoles, personal computers (PC), and Apple products (iPhone, iPad), among others.
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