tinyBuild is executing well on its acquisition strategy says Zeus Capital

tinyBuild plc (LON:TBLD) announced the acquisition of Versus Evil, a publisher based in the US, and Red Cerberus, its development services subsidiary in Brazil. Zeus Capital estimate the company is paying only 5.4x 2022 EBITDA, based on upfront payment only and estimates that do not lead to earnout payments.  We raise our 2022 EPS estimate by 10% (see overleaf). The acquisition provides the company with access to talent and IP in Latin America as well as in-house Quality Assurance, testing and localisation capabilities.

tinyBuild is paying $12.5m cash upfront and up to $18.8m in shares based on earnout targets over three years. The acquisitions offer multiple benefits:

  • The acquisitions provide access to both game IP and talent in Latin America. Versus Evil’s staff of 10, led by a pioneering founder (Steve Escalante with 20 years experience), increases the group’s ability to discover exciting new game IP. Red Cerberus adds over 250 productive staff based in Brazil and its strong presence in Latin America provides a beachhead for TBLD to economically attract more talented developers and IP in the region. They now has over 400 staff globally.
  • Red Cerberus provides Quality Assurance, testing and localisation capabilities. Having these resources in-house should allow the company to better coordinate with game development to optimise tinyBuild’s  final game production. Also, Red Cerberus plans to continue providing outsourced services to third-party customers, allowing it to manage capacity between in-house and third-party projects and operate more efficiently.
  • Versus Evil further diversifies the company’s exposure to different game genres and broadens the group’s pipeline. Versus Evil has a portfolio of 32 titles focused on publishing role-playing and turn-based games, which increases TBLD game portfolio to over 70 titles.
  • The transaction expands tinyBuild into a high growth region of the video game market. Latin America is the fastest growing region in the world, forecasted to grow video games revenues 12% CAGR 2020-2024 compared to 6% CAGR for the global market, according to PwC.
  • tinyBuild is executing well on its acquisition strategy. The company has now acquired/ acquihired seven companies in 2021. These transactions have added considerable IP, been executed at less than 10x EBITDA and been earnings accretive. The company has the track record and capacity to continue making acquisitions. tinyBuild expects to have over $40m of cash plus an undrawn $25m credit facility post acquisition. Shares trade at 21.9x EBIT 2022 based on consensus estimates, representing discounts to all direct UK sector peers. Based on our forecast, which is 16% ahead of consensus, tinyBuild trades at only 18.4x EBIT 2022
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