Initiation of coverage Mindark PE: Renewal and improvements followed by growth

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Renewal and improvements followed by growth

Since 2003, MindArk PE,  (“MindArk” or “the Company”) has been developing and operating the PC game Entropia Universe. Recently, the company implemented changes to streamline game development processes and boost profitability. An ongoing process of migrating Entropia Universe to the modern game engine Unreal Engine 5 is underway, which is expected to significantly enhance the overall gaming experience and expand the game’s reach to a broader audience. Carlsquare Equity Research initiates coverage of MindArk PE with a fair value of SEK 4.3 per share.

New game engine for growth and reorganization for improved profitability

Entropia Universe (“Entropia”, “the game”, or “the platform”) is an MMORPG renowned in gaming for its unique integration of virtual- and actual currency. This unique feature has fostered deep player engagement, making Entropia a popular choice despite fierce competition in the gaming industry. Currently, the company is actively working on migrating the game to a more modern game engine, Unreal Engine 5. This transition will significantly enhance game quality, poised to increase the interest of its existing player base. Also, this change is anticipated to broaden the game’s distribution, reaching out to potential new gamers through distribution on Epic Games Store (EGS). In addition to the transition to Unreal Engine 5, the Company has initiated a comprehensive staff rationalisation in 2023. That is aimed at optimising business operations by strategically harnessing AI-driven game development. This approach is expected to yield substantial benefits, including increased efficiency in game development and improved game quality. As a direct outcome of the staff restructuring efforts, the Company anticipates saving approximately 1.5 million in personnel costs per month, starting from Q2 2024.

Large market with high growth rates

The gaming market is huge. Despite its size, it is still expected to grow at 10-13 per cent annually. The global aggregated gaming market (PC, video, mobile) was valued at approximately USD 190-200 billion in 2022. Today, it is only possible to play Entropia on PC, limiting the Company’s addressable market, as PC represents just over 22 per cent of the total gaming market.

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 29 and 22 per cent, respectively. We expect the EBITDA margin to rise from around 10 per cent in 2023 to around 24 per cent 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 4.3 per share for the coming 6-12 months. Our valuation corresponds to a EV/Sales multiple NTM of 1.9x and 1.4x 2025. The reference group of comparable gaming companies is currently trading at an EV/Sales NTM of 1.8x.

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