Après Berenberg, Seeking Alpha est aussi très positif sur Ubisoft

Seeking Alpha : n’a pas trop d’influence sur le cours j’estime, MAIS en général, ils sont vraiment excellents !

UBISOFT : A BUY AFTER LOOKING AT VALUATION
Feb. 28, 2015 4:35 PM ET

A summary on Q3 earnings

UbiSoft (OTCPK:UBSFY), a video game publisher and developer known for its franchise Assassin’s Creed, released its Q3 earnings on February 12th. The company posted very strong Q3 results: sales at €810m ($906.92m U.S.), vs. 730m ($817.34m U.S.) guided (up 56% yoy). Good performances from its franchises helped those results: AC sold 10m units vs 9m estimated, 4m for Just Dance vs 3.5me, FC4 in line with expectations at 7m units, 2m for The Crew vs 1.5me. UbiSoft also posted strong back-catalog sales of +26% to €67m.

Following these results, the company raised its FY2015 sales guidance by €40m from « at least €1400m » to « around €1440m. » Quite a conservative raise after a €80m beat in Q3. This suggests a €146m sales guidance for Q4, down 25% versus last year, mainly because Q4’14 benefited from the release of South Park: The Stick of Truth. UbiSoft also said they expect €150m FCF for FY2015 vs 80m previously.

Just to give a rough idea of the figures in USD, considering the spot rate of approximately $1.12, this would mean sales in Q3 of $907m, sales guidance for the FY of around $1613m and an expected FCF of $168m.

Expectations for the next fiscal year

In light of this publication, what should we expect for 2015/16? FY2015’s strong performance was driven by three main IP: Assassin’s Creed, Far Cry and Watch Dogs. A natural question is: can the group do better in FY2016? Well, UbiSoft has so far only announced the release of The Division (a third-person shooter) and Rainbow Six: Siege (a tactical multiplayer first-person shooter). The group also said they will launch a new Assassin’s Creed game next fiscal year. According to a leak last December, the game would take place in London during the Victorian era. Half of the reason I wanted to play to Unity is because I’m French and it took place in Paris. The strongest sales ever for the AC franchise were from Assassin’s Creed III which took place in the US (UbiSoft has roughly more than 40% of their sales in the US). This is my personal opinion, but considering gamers’ joy to play in a known environment, I expect next AC game to be a good hit because it takes place in a Victorian period.

Is that all for the incoming releases? There’s a rumor about five AAA games for FY2016, but when asked about it by an analyst during the last conference call, the management said they have not mentioned anything more than the three games above. Therefore, the five AAA games for next fiscal year are not confirmed.

Looking at next year sales, we can easily expect the new AC title to perform at least as well as Unity & Rogue. I know Unity started its sales with difficulties because of several technical issues (as I explained in my previous article) but management said they learned their lesson from the development, and that the new engine which powers Unity is now created and ready to be used for the next title. I believe UbiSoft will pay extra attention to the quality of the incoming release and the issue from last AC release should not happen again. Continuing on sales, The Division could perform as well as Far Cry 4 (7m units sold so far). It feels that the game gathers many players’ interest. If we consider that Rainbow Six could perform as well as The Crew, the main question remaining is: what game will fill the performance of Watch Dogs? The game has sold to date 10m units, and I feel a new IP would face many challenges to meet the same success. The easy answer: Watch Dogs 2? But when? Could it be for FY2016 considering the time between announcement and release? Hence one of my points to worry about: next fiscal year needs something else. In my following valuation, I believe UbiSoft will bring us something to fill the Watch Dogs performance and maintain its sales level.

Before going into valuation I would like to mention digital sales. In Q3, the company reported a 157% surge in digital revenues. Digital sales represent 21.2% of total sales vs 15.3% last year. During the Q&A, the management said they are « moving closer and closer to 50% » of revenue being digital and therefore, a gross margin above 80% should be a long-term trend. This is not a surprise. Figures are there: digital sales grow rapidly. The gross margin on digital is higher than physical sales. FY2014 gross profit margin of 72% will be easily beaten this year, and the years after. This is good news for the company’s future.

DCF valuation

I began to work on UbiSoft’s model before Q3 results. At that time I anticipated sales of around €1,500m (~$1,680m) for FY2015. As I previously said, their guidance for FY2015 (around €1440m) made me lower my sales estimate, but on the other hand made me increase my FCF one. The result of my discounted cash flow valuation is shown below and is based on my own estimates:

« …. »

I’m using a terminal growth of +2% and a WACC of 6.8%. The results suggest around +20% upside potential.

Multiples valuation

Now let us have a look at the valuation of UbiSoft through its multiples. I used three multiples: EV/Revenue, EV/EBITDA and Price/sales. Let us start with EV/Revenue. The company’s ratio is 1.52x (trailing twelve months) which already appears lower than its peers, suggesting the company is undervalued. Sector average is calculated as 2.90. This would imply a price of €33.4.
(source: Yahoo Finance)

Moving on to EV/EBITDA, the company has a multiple of 5.43x which again is lower than most of its peers. But here we find several peers with negative EBITDA, therefore lowering the average of 5.76x which gave me an implied TP of €19.0.

« … »

(source: Yahoo Finance)

Finally, looking at price/sales. Again the company already has a lower ratio than its peers – 1.48x vs 3.61x – implying a price of €40.2.
« … »

(source: Yahoo Finance)

Because of the volatility of some of the multiples, I recalculated the implied prices with a lower mean for each multiple. The following give us the final results:

« … »

And even after processing to a strong adjustment, UbiSoft still appears undervalued. The average of the above results gives us a price of €22.59. The company is then currently trading at a discount to the calculated price of approximately -26%.

Risks

There are several risks to the attainment of the share price for a company in the gaming industry. Because the company is strongly dependent on its releases, the main risk in my opinion is a delay which would alter the share price. And as I previously said, looking into FY2016, we are still waiting for an announcement for Watch Dogs’ performance in FY2015. The impact of competition is another risk and even more for next fiscal year because the current fiscal year benefited from several delays from competitors. I have compiled some of the big games to be released in 2015 by competitors in the following:
(Source: Metacritic)

Other risks include macroeconomic factors and consumer demand for video games.

Conclusion
According to my valuation, the stock retains some upside potential. DCF valuation gave a target price of €19.8 and a multiple price above €20. As I place a stronger weight to the DCF valuation, I will retain a target price of €19.8, confirmed by the multiples, and recommend to buy. But looking at the incoming months, I expect UbiSoft to still trade in its current €16-17 price range, at least until May/June (the publication of the full year results, and the E3) because of the lack of announcements releases. I believe UbiSoft is well positioned with its portfolio of franchises and its growing margin thanks to an increase digital sales. The following weeks/months are a perfect entry point.

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