tinyBuild: Building resilience

tinyBuild plc (LON:TBLD) – Solid results, strong pipeline, rising resilience and high-value acquisition:

Revenue was $18.6m, in line with expectations. H1 revenue represents 38% of our full year forecast, indicating an H2-weighted year as previously flagged. We expect tinyBuild to release seven new games in H2 compared to three in H1. Moreover, tinyBuild plans higher-profile releases in H2 (Potion Craft and Despot’s Game), which are already generating strong KPIs. EBITDA was $7.9m, slightly ahead of management’s expectations. EBITDA margin rose to 42% from 36% a year ago, largely driven by acquihires pushing contribution from own-IP games to 78% from 67% a year ago.

Strong pipeline and resilient outlook: The company continues to see strong KPIs for its near term game releases and its pipeline is growing strongly. (See overleaf.) As a result, the company reiterated its outlook for full year results to be at least in line with expectations, plus accretive acquisitions. We are increasingly confident in tinyBuild’s growth outlook. The company is growing less dependent on new release revenues and increasing revenue visibility. tinyBuild has been able to monetise strong demand indicators ahead of actual game releases. Rising competition between gaming platforms is leading distributors to increasingly offer publishers pre-release payments. In addition, revenue reliability is increasing due to rising developer, geographic, genre and game diversification. The company has made three acquires in the US and two in Russia and signed five new games to be developed in Eastern Europe and Russia, four in the US and one in New Zealand (10 total). The company’s game releases have been across multiple genres.

Acquisitions: The company is making strong progress on acquihires. The company announced a high value-added acquihire today called BadPixel. tinyBuild is paying only $6.6m upfront (75% cash/ 25% shares) and the business generated $3m of EBITDA in 2020 (2x EBITDA). Going forward we conservatively estimate 2021 EBITDA declines to $1.2m after the game’s early access release in 2020. Even based on this conservative estimate, tinyBuild is paying only 5x EBITDA. As a result, the transaction is highly accretive to earnings. We raise 2022 EBITDA by 5% to $24.2m from $23.0m. tinyBuild has now acquihired five companies year-to-date. In addition, today the company announced a new $25m credit facility with Bank of America to further accelerate acquisitions. The credit facility allows tinyBuild the ability to move quickly on larger acquisitions. Combined with net cash of $62m, the company would have $87m of acquisition funding. The company continues to review acquisition opportunities including larger targets.

Undervalued: Shares trade above UK peers but offer much higher earnings growth (EBIT 21-23 CAGR: 16% v 10%) and margins (Ave EBIT margin 21-22: 40% v 22%). We see the potential for earnings upgrades and further accretive acquisitions to drive shares higher.

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