TinyBuild Analyst Q&A “very well positioned for strong growth” (LON:TBLD)

TinyBuild Inc

TinyBuild Inc (LON:TBLD) is the topic of conversation when Zeus Capital’s Technology Analyst Bob Liao caught up with DirectorsTalk for an exclusive interview.

Q1: TinyBuild, it’s had an oversubscribed listing on the AIM market in March, can you just give us a brief overview of the business as you see them?

A1: They are a publisher and developer of video games. The company started as a third-party publisher but it’s settling steadily moving to first-party and second-party publishing where they actually own the studio and also own the game rather than just helping the game developer get the product to market. So, it’s moving sort of up the value chain, so to speak.

And as you said, the company’s most successful games to date have been the likes of Hello Neighbor, Graveyard Keeper, Totally Reliable Delivery Service, so some very good indie games out there and some AA games as well.

The company is growing very, very rapidly and is highly profitable. In 2020, we expect revenues to grow 28% and EBITDA margin to be about 42 and the revenue visibility of the company is also very strong, they’ve got a large and growing back catalogue which comprises about 80% of game sales. So, the company’s got a very, very interesting profile.

Q2: There are an increasing number of video games companies listed on the AIM market. What do you think makes this company unique?

A2: Yes, you’re right. There are a number on the market now and I think with this company, there’s three things I’d focus on.

The first is the social media reach that the company has, the company has over 10,000 influencer relationships and over 750,000 subscribers on the likes of Facebook, Twitter, and YouTube. So, they’re able to use this reach to help market the games that they have in their portfolio, which they can do at low cost and it’s very, very effective as well. So, I’d say that’s probably one big key differentiator for the group.

The second is that the company does achieve high operating margins, mostly because they have access to low cost and high quality talent in Eastern Europe and Russia. So, about 60% of their employees and contractors are in Eastern Europe and Russia where the cost of development, on average, is probably a quarter of what they are in the US and less than half what they are in the UK. So, it’s an a very good position there and they also benefit from high employee retention, which is quite important in the video game sector where talent is quite scarce. So, I’d say, definitely they’ve got a cost advantage in addition to the marketing advantage as well.

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The last thing I think that makes them really quite different from some of the other players in the market is that it’s had a real focus on and track record with building multimedia franchises, Hello Neighbor, the one you mentioned is one of them. They formed long-term partnerships with developers and they’re able to supplement the game sales with things like book sales and toy sales etc., which really helps sustain the franchise over a much longer period of time and allow them to build other follow-on games as well. So, they’ve got a very good track record of building sustainable franchises as well.

I’d say those are the three things, the social media reach, the access to low cost talent and the track record with building long-term franchises.

Q3: From what you’re saying, it sounds like they have some strong competitive advantages and, like you say, a good track record. How would you describe the outlook for TinyBuild?

A3: To us, it looks really, really well positioned for growth. They’ve been investing heavily in new games, given their strong market position, and they’ve seen that what they’ve been doing with all their competitive advantages is driving very high return on investment and unsurprisingly, they’re investing more in games.

They’ve got a pipeline of 23 very high quality games and development and the KPIs I’ve seen in the market have been very, very positive on these games so we’re expecting that the company actually accelerates revenue growth in 2021 to 37%, which is an acceleration from the 28% growth in 2020. So, I think it’s very well positioned for strong growth.

In addition to that, the company is positioned to make acquisitions as well and based on our calculations, we think that those acquisitions can be done at relatively low multiples, which means that those acquisitions should be very accretive to earnings, when they make them. We make a rough estimate to say that if they can acquire some of these companies at these attractive multiples, we could see a $50 million acquisition adding very significantly to shareholder value over time.

So, both in terms of growth and in terms of acquisition opportunities, we see the outlook as being very, very bright.

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