We maintain a positive attitude to values of Forever Entertainment and we issue a BUY recommendation, setting our target price at PLN 7,2/share (the decrease in valuation is related to an increase in the risk-free rate). In the latest record results for Q2'22, which the company owes to the premiere of the game "The House of The Dead: Remake", the biggest positive surprise was the division of revenues with the game developer and the owner of this IP. Our calculations indicate a level of approx. 35-40% (vs. 67% our assumptions from the last recommendation). However, please note that it may be higher in the following quarters, due to the priority of the production and release cost recovery for this game in that quarter. We expect it to be lower than our earlier assumptions, which translates into higher profitability. The most important premiere from the current (revealed) portfolio of titles - "Front Mission 1st: Remake" is ahead of us. We forecast that in Q4'22 this title will sell approx. 120 thousand copies., which will generate revenues of PLN 9.9 million in revenues. Throughout 2022. we estimate the company's net profit at PLN 15.4m, which will translate into an attractive P/E ratio of 9x. Moreover, we expect that the year 2023. will be "packed" with strong premieres of remakes, incl. such titles as "FM2", "FM3", "THoTD 2" or "PD 2" which will bring further dynamic result progression.
Record results for Q2'22 generated thanks to the game "THoTD"
In our previous report, we forecasted lower results, assuming other important debuts in Q2'22, which, however, did not take place in this period. Hence, we are positively surprised by the results of the game "The House of The Dead: Remake", which, according to our estimates, sold around 130,000 copies in the discussed period (vs our assumptions of 240 thousand throughout 2022). In addition, we were positively surprised by the division of revenues with the game developer and the owner of IP, according to our estimates, in Q2'22 it is at the level of approx. 35-40% (vs 67% of our assumptions from the last recommendation). However, please note that it may be higher in the following quarters, due to the priority reimbursement of production and release costs for this game (Q2’22). Nevertheless, we expect that it be lower than our previous assumptions, currently we assume the level of 60% for this IP. In addition, we would like to draw your attention to the information from the MegaPixel Studio report on research on "Iight-gun", the addition of which may have an impact on a significant increase in sales of „THoTD” in the following periods.
The premiere of the largest IP in the portfolio of the company "FM 1st: Remake"
We are waiting for the premiere of the most important (in terms of moentization potential) production from the company's game portfolio, ie "Front Mission 1st: Remake". According to the company's announcements, the title will appear in November '22. Due to the fact that this production will provide a much more hours of play (approx. 35-40 hours) compared to the previous remakes, we expect a higher price, at 35 USD. In addition, we assume that the internal FOR team is responsible for the development of this IP, hence the division of revenues from each copy with the IP owner may be approx. 50%/50%. We assume that in Q4’22 this title will sell in 120 thousand. copies, which will translate into PLN 9,9 million in revenues
Further perspective of 2022
We expect that in Q3'22 FOR sold 35-40 thousand copies of the game "THoTD", and in the entire last quarter the company generated PLN 10.7 million in revenues (+ 40% y/y). Due to the further intensive expansion of teams and wage pressure, we expect a significant increase in salaries. We forecast PLN 1.6m at the EBIT level. Due to the fact that MegaPixel is very involved in other projects, we are moving "PD2" in our model to the beginning of 2023. Moreover, considering the latest information on the progress of work on "Fear Effect Reinvented", we expect the game to debut in Q1'23. Despite these shifts, we forecast that FOR throughout 2022 will generate a net profit of PLN 15.4m, which will translate into an attractive P/E ratio of 9x.
Vision of intense 2023
Due to the work on "FM2" and "FM3", which has been going on for about a year, we expect that a game publisher may attempt a new type of sales campaign for this IP. In our opinion, there is a big chance that the premiers of these three titles will take place every six months. The increase in our forecasts versus our last recommendation is due to the inclusion of "FM3" in our model. However, we assume that FM2 and 3 will have lower profitability than FM 1, due to the share in production of FOR group companies (Storm Trident, MegaPixel). Additionally, in 2023 we expect the premieres of such remakes as "THoTD 2", "Fear Effect Reinvented" or "Panzer Dragoon 2".
Further development plans of the company
In addition, we would like to point out that Forever Entertainment is in advanced talks on obtaining new licenses for the release of remakes of classic games, much larger than before. Additionally, FOR hopes that with the release of the game "Fear Effect Reinvented" it will show potential partners that apart from working on remakes, it can also create game from scratch based on licenses (eg in the same way as in the case of "Resident Evil 2".
Main risks: 1) Risk related to strategic goals 2) Risk related to the possibility of not obtaining the necessary concessions and licenses 3) The risk related to possible delays in game production 4) Risk related to the loss of key employees 5) Risk related to difficulties in acquiring experienced employees 6) The risk related to the possible failure of IT systems, telecommunications infrastructure and servers 7) The risk related to the competitive environment 8) Risk related to the development of new technologies and industry 9) Risk of volatility of foreign exchange rates
The report was prepared by Dom Maklerski BDM at the request of the WSE as part of the Exchange's Analytical Coverage Support Programme
