Equity Research Mindark PE, Q3 2023: Growth as expected

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In Q3 2023, Mindark PE (“Mindark” or the “Company”) showed net turnover aligning with our estimates at 22.9 MSEK, showcasing a growth of 7.1%. Notably, 2.5% of this growth is credited to the impact of a robust dollar exchange rate. As the company adjusts to post-restructuring daily operations, efforts are in full swing regarding the transition to Unreal Engine 5. Carlsquare Equity Research adjusts the motivated value to SEK 4.2 per share.

Net revenues in line with estimates, but capitalisations saves the net result

In Q3 2023, net sales saw a year-on-year increase of 7.1% to SEK 22.9 million, slightly surpassing our forecast of SEK 22.7 million by about 1.1%. Increased activity in Entropia Universe, accounted for 4-5% of the growth. Mindark’s quarterly content update in Q3 is anticipated to contribute to increased platform activity in Q4 2023. Further, an ongoing sale of deeds is expected to generate approximately 6 – 6.5 MSEK in revenues in Q4 2023.

However, the company reported higher-than-expected capitalised development costs. While our forecast was around SEK 3-4 million, the actual figure stood at SEK 6.1 million. Consequently, capitalisations played a crucial role in achieving a positive result for Q3, which, excluding capitalisations, would have been approximately SEK -3.9 million. The cash flow for the period was SEK -5.7 million, leaving a cash balance of about SEK 18 million at the end of Q3. This amount is sufficient to sustain the company until the expected positive cash flow in 2024.

Ongoing transition to new game engine provides positive outlook

Mindark’s game, Entropia Universe (“Entropia”), is an MMORPG that has long been recognised in the gaming world for its unique integration of virtual and real currency. The company is actively working on transferring the game to a more modern game engine, Unreal Engine 5. As we do not expect large leaps in growth with the current game engine. The game engine change is expected to result in a significant quality improvement, which is expected to increase interest and activity among existing players. The change is also expected to expand the game’s reach to new potential players through distribution via the Epic Games Store (“EGS”).

Low valuation given profitability potential

We expect a limited growth rate in 2023 and 2024. After the game engine change, we expect growth to accelerate and net sales for 2025 and 2026 to increase by 28.5 and 22.4%, respectively. We expect the adjusted EBITDA margin to rise from around -12% in 2023 to around 25% in 2032. Suppose the company also succeeds in getting Entropia Universe as a selected and highlighted game on the front page of EGS. In that case, there is a significant upside in our forecasts and valuation.

Combining a DCF model with a multiple valuation, we calculate a fair value of SEK 4.2 per share for the coming 6-12 months. Our valuation corresponds to a EV/Sales multiple 2025 of 1.4x and an adjusted EV/EBIT 2025 of 8.9x. The reference group of comparable gaming companies is currently trading at an EV/Sales NTM of 1.9x.

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