SpinX Games Acquisition to Enhance Earnings Stability
The author is an analyst of KB Securities. He can be reached at drlee@kbfg.com. -- Ed.
2Q21 review: Earnings shock due to increases in marketing expense, labor cost
— Netmarble reported 2Q21 revenue of KRW577.2bn (+1.2% QoQ, -15.8% YoY) and OP of KRW16.2bn (-70.1% QoQ, -80.2% YoY), missing the market consensus by 8.5% and 71.3%, respectively.
— 2Q21 revenue of KRW577.2bn is on par with 1Q21 revenue. Revenue from Cross Worlds (Jun 10 release) was reflected in 2Q21. However, the company saw revenue declines for major games, such as Seven Deadly Sins: Grand Cross (-12.3% QoQ), Lineage 2: Revolution (-24.1% QoQ), Seven Knights 2 (-54.0% QoQ) and Blade & Soul Revolution (-15.7% QoQ).
— Operating expenses rose 8.7% QoQ, as an increase in labor costs (+7.8% QoQ) was fully reflected in 2Q21 and marketing expenses related to Cross Worlds expanded sharply (+29.4% QoQ).
Several new titles from subsidiaries to be released in 2H21
— Starting with MARVEL Future Revolution on Aug 25, several new titles developed by subsidiaries are scheduled for release in 2H21 (e.g., Seven Knights 2 Global, Seven Knights 2 Revolution, BTS Dream, Merge Kuya Island). Also, subsidiary Kabam plans to launch Disney Mirrorverse (Disney IP-based action RPG) this year. The full reflection of Cross Worlds revenue from 3Q21 and revenue contribution from new titles should bolster earnings in 2H21. The effects of the SpinX Games acquisition should be partially reflected in 3Q21 and fully in 4Q21.
SpinX Games acquisition to enhance earnings stability
— On Aug 2, Netmarble disclosed that it will acquire Leonardo Interactive Holdings (holding company of SpinX Games) for KRW2.5tn. The deal will be funded with short-term borrowings (KRW1.8tn) and the disposal of Netmarble’s KakaoBank stake (KRW430.1bn). Based on Netmarble’s 2021E revenue/NP guidance of KRW700.0bn/KRW140.0bn, this would represent 18.0x P/E.
— In terms of 2021 Netmarble revenue/NP, SpinX Games, the world’s third-largest social casino game company, should account for 25.7%/43.2%. Even when stripping away the positive effects of the pandemic, the game developer with strong cash-generating capabilities should enhance earnings stability. In addition, Netmarble is expected to generate synergies with North America-based subsidiaries (i.e., Kabam, Jam City) via IP alliances.
Valuations still demanding; new games and subsidiary IPOs to generate stock momentum
— The SpinX Games acquisition is expected to lower 2021E P/E from 36.2x to 25.3x. However, valuations are still demanding relative to peers. The results of new titles and potential IPOs by subsidiaries are expected to generate stock momentum.