• Q3 sales growth of 26% y-o-y
  • We still see potential to double revenues
  • New DCF valuation range of SEK 17-28 (17-29)

Q3: The quarter that lays the foundation for ’22-’23
Flexion reported Q3 revenues of GBP 7.8m (6.2m), corresponding to 28% y-o-y growth but flat q-o-q. This was 8% behind our forecast, and we think the deviation was caused to some extent by seasonality but even more by lower promotions in the channel stores. Gross margin was 13.1%, the same as last year, but a 1.1 p.p. improvement from Q2 on the deal with its largest customer in the US. We expected a gross margin of 12%, so gross profit was therefore in line with our estimate. EBIT was GBP -0.02m (0.05m), behind ABGSCe at GBP 0.1m. The shortfall stems from higher overhead costs that were mainly an effect of FX movements. Although Q3 was softer on numbers, we must acknowledge that Flexion signed four top-tier games during the quarter, which we believe will set the company up for two exciting years ahead.

Live top-tier games seem to be nearing maturity…
The four top-tier games signed in the quarter generate USD 36m per month on Google Play, according to Sensor Tower. This can be compared to the current live portfolio of 22 games, which generates USD 40m per month on Google Play. However, our research indicates that two of the newly signed games have yet to reach their peak, which leads us to believe that these four games could bring in as much revenues as the entire current live portfolio. Following the Q3 miss, we lower our ’22-‘23e sales by ~4% and EBIT by 8-5% for the same period. We will look for monetisation data on the top-tier games in Q4 to see if this was just a temporary setback caused by seasonality and lack of promotions, or if the current portfolio is in fact starting to decline.

…but large potential in newly signed games
We make slight adjustments to our DCF valuation range that yields a range of SEK 17-28 (17-29).

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Financial Snapshot (ABGSC Estimates)

GBPm 2020 2021e 2022e
Sales 21 31 45
Sales growth (%) 146,8 51 44,5
EBITDA 0 0 6
EBITDA margin (%) -0,1 0,4 12,3
EBIT adj -1 0 2
EBIT adj margin (%) -6,2 -0,5 4,5
Pretax profit -1 0 2
EPS rep -0,03 -0,01 0,04
EPS growth (%) 38,2 79,3 745,5
EPS adj -0,03 -0,01 0,04
DPS 0 0 0
EV/EBITDA (x) -2660,9 426,1 10,6
EV/EBIT adj (x) -62,5 -343,4 28,9
P/E (x) -74,9 -242,4 37,6
P/E adj (x) -74,9 -242,4 37,6
EV/sales (x) 3,9 1,9 1,3
FCF yield (%) 1,7 0,3 7,4
Dividend yield (%) 0 0 0
Net IB debt/EBITDA 409,7 -102 -2,4
Lease adj. FCF yield (%) 1,7 0,2 7,4
Lease adj. ND/EBITDA 414,7 -154,6 -2,5

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Original post: Introduce