Rovio Entertainment Oyj : Commissioned Equity Research Report by Nordea (Feb 14 2022)

Rovio

KEY DATA

Stock country	Finland
Bloomberg	ROVIO FH
Reuters	ROVIO.HE
Share price (close)	EUR 7.75
Free Float	50%
Market cap. (bn)	EUR 0.57/EUR 0.57
Website	http://www.rovio.com/
Next report date	29 Apr 2022

PERFORMANCE

8

7

6

5

4

3

Feb19	Feb20	Feb21	Feb22
		Rovio			Source: Refinitiv
		Finland OMX Helsinki All-Share (Rebased)

VALUATION APPROACH (EUR PER SHARE)

EV/EBIT			6.3				7.9
EV/EBITDA			5.3		6.5
EV/sales							10.0				12.9
DCF					7.5				10.0
2	4	6	8	10	12	14

Source: Nordea estimates

ESTIMATE CHANGES

Year	2022E	2023E	2024E
Sales	5%	6%	6%
EBIT (adj)	-19%	-5%	0%

Source: Nordea estimates

Nordea Markets - Analysts

Felix Henriksson

Analyst

Sami Sarkamies

Director

Marketing material commissioned by Rovio

Commissioned Equity Research • 14 February 2022

Media

Finland

Growth set to slingshot in 2022

Rovio's Q4 performance exceeded our expectations and guidance for 2022 provided further confidence in the improved growth momentum. We find the company's outlook favourable given the combination of highly cash- generative existing Angry Birds games and compelling growth opportunities offered by recently launched AB Journey and the soft launch pipeline (Hunter Assassin 2, Moomin: Puzzle and Design). Additionally, we argue that high capacity for M&A (EUR ~160m in cash and 9% of own shares) provides further upside and value-creation potential. The share remains attractively valued relative to western mobile gaming peers. We raise our fair value range to EUR 7.3-9.3(6.9-8.8).

Q4 performance above expectations

Rovio's Q4 report offered a 7% beat on revenue and 35% beat on adjusted EBIT relative to Infront consensus. Organic growth in Games accelerated to 9% y/y (Q3: 5%), with the largest games AB2, ABDB and AB Friends all performing above our expectations. Despite higher y/y UA, adjusted EBIT was up by 75% with a margin of 16.6% (Q4 20: 10.9%) owing to the strong top-line growth and favourable revenue mix.

Strong growth outlook for 2022

For 2022, Rovio guided for strong top-line growth but lower y/y EBIT, mainly explained by a ramp-up in UA investments to drive growth for AB Journey (launched on 20 January), which is showing strong KPIs and has scaled up to more than EUR 40m of run-rate annual gross bookings, according to Rovio. For Q1, UA costs for were guided for 40% of Games revenue (Q4 21: 27%). With Rovio's largest game AB2 on pace for EUR 115m annual run-rate bookings (2021: EUR 108m) and the much-awaited Hunter Assassin 2 in the soft launch pipeline, the growth outlook for 2022 looks promising, in our view. We raise our top-line estimates by 5-6%, but cut our EBIT by 5-19% for 2022-23E, reflecting the higher UA spend. For 2022E, we model 19% y/y growth for Games (11% organic) and a group adjusted EBIT of EUR 40.8m (2021: EUR 43.8m).

Fair value range raised to EUR 7.3-9.3(6.9-8.8)

We derive an estimated fair value range of EUR 7.3-9.3(6.9-8.8) based on an average of four separate valuation methods: EV/EBIT, EV/EBITDA, EV/ sales and DCF. We now apply a 30% discount to the median multiples for peers compared to the prior discount of 40% due to Rovio's improved growth profile.

SUMMARY TABLE - KEY FIGURES

EURm	2018	2019	2020	2021	2022E	2023E	2024E
Total revenue	281	289	272	286	337	357	364
EBITDA (adj)	48	33	65	57	54	65	71
EBIT (adj)	31	18	47	44	41	53	60
EBIT (adj) margin	11.1%	6.4%	17.3%	15.3%	12.1%	14.7%	16.5%
EPS (adj, EUR)	0.31	0.17	0.48	0.49	0.43	0.56	0.64
EPS (adj) growth	-7.1%-44.5% 180.7%	4.0%	-12.3%	28.8%	14.5%
DPS (ord, EUR)	0.09	0.09	0.12	0.12	0.13	0.14	0.15
EV/Sales	0.7	0.9	1.2	1.2	1.3	1.1	1.0
EV/EBIT (adj)	5.9	13.5	7.1	7.5	10.4	7.4	5.8
P/E (adj)	12.5	26.1	13.3	13.3	17.9	13.9	12.1
P/BV	1.9	2.1	2.8	2.4	2.6	2.3	2.0
Dividend yield (ord)	2.4%	2.0%	1.9%	1.8%	1.7%	1.8%	1.9%
FCF Yield bef A&D, lease	13.6%	1.8%	12.6%	7.7%	5.7%	8.8%	9.2%
Net debt	-120	-110	-129	-154	-142	-179	-217
Net debt/EBITDA	-2.5	-3.4	-2.2	-3.0	-2.6	-2.8	-3.1
ROIC after tax	53.6%	30.0%	79.7%	71.8%	45.8%	53.2%	63.6%

Source: Company data and Nordea estimates

14 February 2022	Rovio

Result highlights

Q4 2021 report highlights

		y Q4 revenue came in 7% above Infront consensus estimates, growing by 15% y/y
		(+5% in Q3).
		y Revenue from Games was 5% above our estimate, increasing by 19% y/y.
		Organically, Games revenue grew by 9% y/y (+5% in Q3).
		y Revenue from Brand Licencing was 30% below our estimate and down 41% y/y.
		y Adjusted EBIT of EUR 13.1m was up 75% y/y and 35% above consensus of EUR 9.7m.
		The adjusted EBIT margin stood at 16.6% compared to consensus of 13.2%. This high
		margin was a result of a larger share of ad revenues and AB Reloaded (Apple
		Arcade) revenues offsetting higher UA costs.
		y Q4 EBIT of EUR 8.1m included EUR 5.0m in non-recurring items related to changes
		in contingent liability for the Ruby Games acquisition (EUR 2.9m), write-offs	of
		expired contracts and game content assets related to the discontinued Hatch
		gaming service (EUR 1.8m), and restructuring of Brand Licensing China operations
		(EUR 0.3m).
		y EPS was EUR 0.08 compared to consensus of EUR 0.10.
		yThe dividend proposal was EUR 0.12 per share, compared to consensus of EUR 0.12
		and EUR 0.12 a year ago.
ROVIO: Q4 2021 DEVIATION TABLE (EPS in EUR)
	Actual	NDA est.	Deviation		Deviation	Actual		Actual
			vs. actual		vs. actual				y/y
	78.9	76.0	2.9		73.6	5.3		71.4	11%	68.5
	13.4	13.4	(0.0)		12.8	0.6		16.9	-21%	12.2
	16.5	13.4	3.1		12.8	3.7		17.2	-4%	12.2
	20.9%	17.7%		3.3pp	17.4%		0.0pp	24.1%	-3.2pp	17.8%	3.1pp
	8.1	10.6	(2.5)	-23%	9.7	(1.6)	-17%	14.0	-42%	2.9
	13.1	10.6	2.5		9.7	3.4		14.3	-9%	7.5
	16.6%	13.9%		2.7pp	13.2%		3.4pp	20.1%	-3.5pp	10.9%	5.7pp
	0.08	0.11	(0.03)	-30%	0.10	-0.02-21%	0.16	-48%	0.04	105%
	0.12	0.13	(0.01)	-8%	0.12	0.00	-3%			0.12	0%
Revenue	76.5	72.6	4	5%				68.6	12%	64.4	19%
	18.2	14.4	4	26%				17.6	3%	13.7	33%
	23.8%	19.9%		3.9pp				25.7%	-1.9pp	21.3%	2.5pp
	20.6	19.1	1	8%				18.1	14%	16.0	29%
UAC as % of revenue	26.9%	26.4%		0.6pp				26.4%	0.5pp	24.8%	2.1pp
Revenue	2.4	3.4	-1	-30%				2.8	-14%	4.1	-41%
	1.4	2.4	-1	-40%				2.0	-30%	2.9	-52%
	58.3%	69.1%		-10.7pp				71.4%	-13.1pp	70.7%	-12.4pp
Game KPIs
	60.9	57.2	4	7%				56.4	8%	55.7	9%
	74.0	72.6	1	2%				66.7		64.9	14%
	3.2	3.2	0.0	-1%				3.2	0%	3.2	0%
	6.5	7.0	-0.5	-7%				4.9	33%	4.4	48%
	18.1	18.2	-0.1	0%				17.9	1%	17.6	3%
	44.8	49.9	-5.1	-10%				32.0	40%	27.3	64%
	17.7%	17.9%		-0.2pp				17.9%	-0.2pp	18.2%	-0.5pp
	14.5%	14.1%		0.4pp				15.3%	-0.8pp	16.1%	-1.6pp
	420.0	407.7	12.3	3%				402.0	4%	404.0	4%
	485.0	734.4	-249.4-34%				471.0	3%	467.0	4%
	0.21	0.19	0.02	10%				0.19		0.19
	0.12	0.11	0.01	7%				0.15	-20%	0.16	-25%
	41.4	46.7 -5.3					40.6	2%	39.8	4%
	40.9	33.0	7.9	24%				40.2	2%	39.9	3%

Source: Company data, Refinitiv and Nordea estimates

Marketing material commissioned by Rovio

2

14 February 2022	Rovio

Games performance

y Games' gross bookings grew by 14% y/y and by 11% q/q.

y User acquisition (UA) investments of EUR 20.6m were above our estimate of EUR 19.1m, i.e. 27% of Games' revenue compared to 26% in Q3 2021 and 25% in Q4 2020.

y AB2, ABDB and AB Friends performed above our expectations. Small Town Murders fell 10% short of our estimate.

y AB Journey generated bookings of EUR 3.1m compared to our estimate of EUR 3.5m. However, the game has scaled up to more than EUR 40m of run-rate annual gross bookings since its global launch on 20 January, which compares to our estimate of a EUR 35m bookings contribution for 2022.

yRuby Games (Hypercasual) brought in EUR 4.1m of bookings compared to our estimate of EUR 3.5m.

Q4 2021 GROSS BOOKINGS PER GAME VS NORDEA ESTIMATES

	Actual	NDA est.	Deviation	Actual		Actual
			vs. actual				y/y
AB2	29.5	27.7	1.8	6%	26.6		26.2	13%
	16.2	15.6	0.6	4%	15.0	8%	15.2	7%
AB Friends	9.3	8.7	0.6	7%	8.5	9%	8.0	16%
AB Journey	3.1	3.5	-0.4	-10%	0.0	na	0.0	na
Small Town Murders	2.8	3.1	-0.3	-10%	4.1	-32%	3.8	-26%
Hypercasual	4.1	3.5	0.6	16%	1.0	310%	0.0	n.a.
Other	9.1	10.5	-1.4	-13%	11.5	-21%	11.7	-22%

Source: Company data and Nordea estimates

Guidance for 2022

y Building on the positive momentum in Rovio's top live games, the launch of Angry Birds Journey in January 2022 and having the full benefit of the Ruby Games acquisition from the start of the year, the company is expecting strong top-linegrowth for the year.

y Depending on the speed of growth and the investments in UA to fuel such growth (especially in the case of new games, and its larger investments in new games development), adjusted EBIT is expected to be lower y/y.

yUA investments for Q1 2022 are expected to be around 40% of Games revenue.

Takeaways from earnings call

1. The growth outlook for 2022 looks promising, with recently launched AB Journey currently delivering EUR 40m's worth of annual run-rate bookings and Rovio's largest game (AB2) accounting for EUR 115m in annual run-rate bookings. On top of this, Hunter Assassin 2 by Ruby Games seems to have enjoyed wide appeal during its soft launch (we have modelled for its global launch being in Q1 2022, but have now gained the impression that this could be too early).
2. The current game development pipeline includes eight games, most of which are still in the early stages of development.
3. UA is the main element in terms of higher opex for 2022, which is expected to translate into lower EBIT y/y. This makes sense given the strong KPIs and growth potential presently visible for AB Journey. As a reminder, Rovio uses a 12-month payback time for its UA investment decisions. Also mentioned was some incremental cost pressure from the Montreal and Toronto studio ramp ups, in addition to salary inflation.

4.The company claims to be unconcerned about AB Journey potentially cannibalising on other AB franchise games and has observed the DAU generally growing for AB franchise games, which is a testament to its IP strength.

Marketing material commissioned by Rovio

3

14 February 2022	Rovio

Estimate revisions

ESTIMATE REVISIONS (EPS AND DPS IN EUR)

	79.2	328.2	349.7	358.2	74.4	310.7	329.5	337.8	6%	6%	6%	6%
Brand Licensing	1.9	8.5	7.2	6.2	2.0	9.5	8.1	7.0	-5%		-10%	-10%
Other	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
	81.0	336.7	357.0	364.5	76.4	320.3	337.6	344.7
	6.0	49.7	61.6	69.4	11.2	58.2	63.7	69.0	-46%	-15%	-3%	1%
Brand Licensing	0.2	1.6	1.4	1.3	0.2	2.4	2.0	1.8	5%	-34%	-27%	-26%
Other	-3.0	-10.5	-10.5	-10.5	-2.9	-10.3	-10.3	-10.3	-2%	-1%	-1%	-1%
	3.2	40.8	52.6	60.3	8.4	50.2	55.4	60.4	-62%	-19%	-5%
Adj. EBIT ex Hatch	3.7	42.8	54.6	60.3	8.9	52.2	57.4	60.4	-58%	-18%	-5%
Adj. EBIT margin
	7.6%	15.1%	17.6%	19.4%	15.0%	18.7%	19.3%	20.4%	-7.4pp	-3.6pp	-1.7pp	-1.0pp
Brand Licensing	9.7%	18.7%	20.0%	21.1%	8.8%	25.1%	24.6%	25.7%	0.9pp	-6.4pp	-4.6pp	-4.5pp
Other
					11.0%				-7.0pp	-3.6pp	-1.7pp	-1.0pp
Margin ex. Hatch					11.7%				-7.1pp	-3.6pp	-1.7pp	-1.0pp
	0.03	0.43	0.55	0.63	0.09	0.54	0.60	0.65	-63%	-21%	-7%	-3%
		0.13	0.14	0.15		0.14	0.15	0.16		-7%	-7%	-6%

Source: Nordea estimates

Marketing material commissioned by Rovio

4

14 February 2022	Rovio

Detailed estimates

REPORTED ANNUAL NUMBERS AND ESTIMATES (EURm, EUR AND %)

	2017	2018	2019	2020		2021				18-21
	297.1	281.2	289.1	272.2		286.2	336.7	357.0	364.5
		-5.4%	2.8%	-5.8%		5.1%	17.6%	6.0%	2.1%
Materials and services	-81.8	-79.8	-77.3	-74.6		-74.5	-92.3	-98.3	-100.6		-2%
Employee benefits expense	-52.0	-42.6	-41.7	-48.9		-52.0	-47.7	-48.8	-49.3		7%	-2%
Other operating expenses	-104.2	-112.0	-138.4	-89.4	-109.7	-142.6	-145.2	-143.4		-1%	9%
	60.0	47.9	32.4		60.0		50.8	54.1	64.7	71.1
	64.5	47.5	32.7		60.1		54.8	54.1	64.7	71.1
	21.7%	16.9%	11.3%	22.1%	19.2%	16.1%	18.1%	19.5%
D&A	-28.6	-16.4	-14.3	-17.5		-12.9	-13.3	-12.1	-10.8
	31.4	31.5	18.1		42.5		37.9	40.8	52.6	60.3
	35.9	31.2	18.4		47.1		43.8	40.8	52.6	60.3			11%
	12.1%	11.1%	6.4%	17.3%	15.3%	12.1%	14.7%	16.5%
Adj. EBIT (excl. Hatch)	36.0	38.7	29.0		54.7		47.4	42.8	54.6	60.3
	12.1%	13.8%	10.0%	20.1%	16.6%	12.7%	15.3%	16.5%
Net financials	-4.6	0.7	-0.3		-1.8		2.7	0.0	0.0	0.0
PTP	26.7	32.2	17.7		40.7		40.6	40.8	52.6	60.3
	-6.0	-7.7	-4.5		-8.6		-10.2	-9.0		-13.3
- tax rate	22%	24%	25%		21%		25%	22%	22%	22%
	20.7	24.5	13.2		32.1		30.4	31.9	41.0	47.0
EPS, diluted	0.27	0.31	0.16		0.42		0.41	0.43	0.55	0.63
	0.06	0.09	0.09		0.12		0.12	0.13	0.14	0.15		10%	8%
Payout ratio	22%	29%	56%		28%		29%	30%	25%	24%
	-88	-120				-129		-126		-144	-182
	-1.5x	-2.5x	-3.4x	-2.2x		-2.5x	-2.0x	-2.2x	-2.6x
	-63%	-75%	-66%	-78%		-64%	-50%	-57%	-63%
	18%	16%		8%		19%		17%	15%	17%	17%
Source: Company data and Nordea estimates
REPORTED QUARTERLY NUMBERS AND ESTIMATES (EURm, EUR AND %)
	66.6	69.2	67.9		68.5	67.1	68.8	71.4	78.9	81.0	83.9	84.9	86.9
	-6.1%	-3.6%	-9.2%	-4.3%	0.8%	-0.6%	5.2%	15.2% 20.8%	21.9%	18.9%	10.1%
	-7.0%	3.9%	-1.9%		0.9%	-2.0%	2.5%	3.8%	10.5%	2.7%	3.5%	1.2%	2.3%
Materials and services	-18.1	-19.8	-18.5		-18.2	-18.2	-18.7	-18.3	-19.3	-22.3	-23.0	-23.2	-23.9
Employee benefits expense		-12.1			-14.4	-12.2	-12.9		-15.6	-12.0		-10.2	-14.0
Other operating expenses	-21.5	-21.5	-22.4		-24.0	-25.4	-28.6	-24.8	-30.9	-40.3	-35.7	-30.0	-36.5
	15.8	16.1	15.9		12.2	11.8	8.7	16.9	13.4	6.5	13.7	21.5	12.5
	16.1	15.9	15.9		12.2	12.4	8.7	17.2	16.5	6.5	13.7	21.5	12.5
	24.2%	23.0%	23.4%	17.8%	18.5%	12.6%	24.1%	20.9%	8.0%	16.3%	25.3%	14.4%
D&A	-3.1	-2.0	-3.1		-9.3		-2.2	-2.5	-2.9	-5.3	-3.3	-3.2	-3.5	-3.3
	12.7	14.1	12.8		2.9		9.6	6.2	14.0	8.1	3.2	10.4	18.0	9.2
	13.0	13.8	12.8		7.5	10.2	6.2	14.3	13.1	3.2	10.4	18.0	9.2
	19.5%	19.9%	18.9%	10.9%	15.2%	9.0%	20.1%	16.6%	4.0%	12.4%	21.2%	10.6%
Adj. EBIT (excl. Hatch)	15.8	15.6	14.2		9.1	11.5	7.5	14.8	13.6	3.7	10.9	18.5	9.7
	23.7%	22.5%	20.9%	13.3%	17.1%	10.9%	20.8%	17.2%	4.6%	13.0%	21.8%	11.1%
Net financials	-1.2	0.7	-0.7		-0.6		0.9	0.1	0.6	1.1	0.0	0.0	0.0	0.0
PTP	11.5	14.8	12.1		2.3	10.5	6.3	14.6	9.2	3.2	10.4	18.0	9.2
	-2.6	-3.7	-2.9		0.6		-3.0	-1.1	-3.1	-3.0	-0.7	-2.3	-4.0	-2.0
- tax rate	23%	25%	24%	-26%	29%	17%	21%	33%	22%	22%	22%	22%
	8.9	11.1	9.2		2.9		7.5	5.2	11.5	6.2	2.5	8.1	14.0	7.2
EPS, diluted	0.11	0.15	0.12		0.04	0.10	0.07	0.16	0.08	0.03	0.11	0.19	0.10

Source: Company data and Nordea estimates

Marketing material commissioned by Rovio

5