11 bit studios: Power boost (BUY - initiation of coverage)

We initiate coverage of 11 bit studios with a BUY recommendation and a price target (PT) of PLN 560/share. 11 bit studios is a well-known games developer in Poland, and one of the biggest studios developing independent games (indie) in the country. The company was founded in 2010 and launched its first game in 2011 (Anomaly, c.1m copies sold), its second in 2014 (This War of Mine, TWoM, c.3.5m copies sold), and its most recent in 2018 (Frostpunk, 4.8m copies in four years, on our estimates). With every new title, 11 bit has levelled up its games quality, sales volumes, revenues and profits generated. We like the company as it: i) has a track record in developing very good games and plans to increase the frequency of new releases; ii) is already a significant game developer in the indie market, with over 5m copies sold; and iii) is attractively valued vs. its peers (a 33% discount on average 2018-19E P/Es), while generating higher returns (1.6-1.9x higher ROE and EBITDA margin). We believe that, this year, 11 bit is likely to generate its highest results historically (PLN 109m of sales vs. PLN 64m of net income), which we would see as a power boost to take it to a higher level with its future products.