Gfinity Plc (GFIN)

AIM-listed Gfinity is a leading global esports business group. Backed by gamers of the world’s 2.2 enthusiast gamers and occasion viewers, the group has a unique understanding of this fast-growing worldwide community. The group uses its expertise to offer consultancy services and to outline, create and deliver exceptional experiences and winning approach for game publishers, sports right holders, commercial partners and media companies. Gfinity base office is located in London, UK. Hargreave Hale Ltd., Ion Asset Management (Israel) Ltd., and Smith & Williamson Investment Management LLP are the major institutional shareholders in the company.

Recent Development & Share price movement
In an exchange filing made by the group as on May 08, 2019,the group notified that the group has been appointed by the HP's gaming brand HP Omen as the production partner for "The Esports Report- Season 2", an esports show. The Season 2 would comprise of six episodes and embedding the latest news from across the world of esports and gaming. The show will broadcast live from the Gfinity Arena. – (Post this announcement made by the group, its shares ended approximately 13.3% higher against the previous day closing price).

As on May 03, 2019, the group appointed John Clarke as Global Brand and Marcomms Officer with immediate effect. (On the date of John’s appointment, shares of the Gfinity Plc traded 11.1% higher against the previous day closing price.)

In the exchange filing made by the gaming group as on May 02, 2019, Gfinity forayed into a partnership with Truxtun Capital, to provide managed services and consultancy services for the launch Esports Wega World Cup. (Shares of Gfinity Plc ended 7.32% higher on the date of announcement at LSE)

Financial Highlights – H1 FY19

Revenue breakup
During the period under review, Gfinity’s revenue reported a stellar growth of 143% on YoY basis and revenue stood at £4.4 mn. As compared to the full year revenue of FY18, first-half revenue of FY19 was 3% above full-year FY18 revenue. This growth was primarily contributed by the 2.0x growth in the Managed Services segment against the corresponding period of the previous financial year. Revenue from Managed Services stood at £3.2 mn and revenue from Own content recorded a 4.9x growth versus H1 FY18 and stood at £1.2 mn respectively.

Profit/loss
In the first half of FY19, Gfinity Plc recorded a gross profit of £0.5 mn. However, the group's Managed Services recorded a gross profit of £1.3 mn, which was partially offset by £0.8 mn loss recorded in its Own Content segment. Adjusted EBITDA was a loss of £4.4 mn, but 39% lower than the loss recorded in the year-ago period.

Cash Flows and Cash Position
During the period under consideration, the group recorded an operating net cash outflow of £2.8 mn, and the cash balance of the group stood at £6.4 mn at the end of the H1 FY19 period.

Valuation Methodology
   

Stock Performance

Daily price chart (as on June 19, 2019), before the market close. (Source: Thomson Reuters).

At the time of writing (before the market close, at 11:40 AM GMT), shares of the GFIN were quoting as GBX 4.71 and added 5.6% against the previous closing price. In the past 52wks, shares have registered a high of GBX 14.10 and a low of GBX 3.25. The outstanding market capitalisation of the stock stood at £16.12 mn,which ranks it among the penny cap listed on the Alternative Investment Market of the London Stock Exchange.

Conclusion
Gfinity has a scalable business model backed by the company’s value creation. The group is aiming to be at break-even within 2021 and estimating a gross margin of 30-40% and EBITDA margin of 15-25% by the end of 2021. The group recorded stellar top-line growth and secured several good contracts, during the H1 FY19. However, its shares have recorded a steep plunge on YoY basis and trading considerably below its 200-day Simple Moving Average Price (SMA). Although, on a month-on-month basis, the stock has recorded a decent surge in the price at LSE. Therefore, based on the above rationale and valuation done using the above methodology, we have given a "Speculative Buy" recommendation on the stock, at the closing price of GBX 4.45 (as on June 18, 2019), with lower double-digit upside potential, based on the 2.5x EV/Sales (approx.) on the FY19E Sales (approx.)

Team17 Group Plc

AIM-listed Team17 Group Plc is engaged in the development of video games. The group’s game portfolio comprises of more than 100 games including Overcooked, The Escapists and Worm franchise. As on May 23, 2018, its shares got listed on the Alternative Investment Market of the London Stock Exchange for trading. Team17’s base office is located in Wakefield, UK. Standard Life Investments Ltd., Henderson Global Investors Ltd. and BlackRock Advisors (UK) Ltd. are the major institutional investors in the company.

Trading Updates
As on June 18, 2019, the leisure company reported its trading update for the first half of the FY19. The premium video game developer witnessed strong consumer traction during the period under review and estimating adjusted EBITDA and revenue for full-year FY19 to be above the market expectations. In the exchange filing, the group reported a strong performance during the period on account of strong sales momentum and decent performance of new release titles and a higher proportion of license income. – (post this announcement, shares of the Team17 Group Plc ended 9.91% higher against the previous closing price.)

Financial Performance – FY18
As on March 19, 2019, the gaming group recorded its full-year financial results for the year ended December 31, 2018.

Revenue during the year under consideration surged by 46% to £43.2 mn against £29.6 mn recorded in the year-ago period. Gross profit during the year stood at £19.8 mn and recorded a growth of 18% against the FY17. However, gross margin narrowed to 46% from 57% recorded in the year-ago period, and this was mainly because of increased contribution from third-party sales. Adjusted EBITDA improved by 18% to £15.3 mn.

Basic and diluted earnings per share surged to 6.1 pence from 4.3 pencerecorded in the year-ago period. However, adjusted earnings per share increased to 8.1 pence from 4.9 pence recorded in FY17.

Net Cash and cash equivalents expanded approximately 2.8x of the FY17 net cash and cash equivalents and stood at £23.5 mn.

Valuation Methodology


Stock Performance

Daily price chart (as on June 19, 2019), before the market close. (Source: Thomson Reuters).

At the time of writing (before the market close, at 12:41 PM GMT), shares of the Team17 Plc were quoting at GBX 281.50 and added 2.3% against the previous day close price. In the past 52wks, shares of the company have recorded a high of GBX 295 and a low of GBX 175.0.

Conclusion
At the current trading levels, the stock was trading at a PE (x) of 39.7x, whereas industry average stood at 28x, this indicates Tema17 stocks were trading at a higher premium against its peer group. Also, its gross margin of 46% was considerably below the industry average of 84% approximately and return on equity (ROE) of the company stood at 20.56% whereas industry average stood at 30% approximately.

Also, from the technical standpoint, the stock was trading considerably above the upper Bollinger Band®, which indicates that the price could correct in short-term.

Therefore, based on the above discussion and valuation done using the above methodology, we have given a “Watch” recommendation at the current market price of GBX 281.50 (as on June 19, 2019, before the market close) based on the 22x Price-to-Cash flow per share (approx.) on the FY19E Cash flow per share (approx.) 
 
*The “Speculative Buy” recommendation is also valid for the current market price (as on June 19, 2019)

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