tinyBuild “has a strong acquisition pipeline, supported by a strong cash balance” says Zeus Capital

tinybuild - Hello Neighbor 2

tinyBuild plc (LON:TBLD) delivered a strong 2021 trading update. Results are expected to be ahead of expectations, with strength in both new releases and the back catalogue. Outperformance was driven by both existing and acquired businesses. Looking forward, TBLD sees very encouraging early indicators of demand for its game pipeline, including Hello Neighbor 2, and prospects are well supported by diversified game portfolio and revenue sources.

Performance in H2 was above expectations. The company’s emphasis on its own-IP strategy and achieving its highest ever level of profitability in FY21 indicates to us that performance at the EBITDA level was particularly strong.

New release and back catalogue strength: tinyBuild’s top selling games on Steam continue to be supported by stalwart back catalogue titles such as Graveyard Keeper, Speedrunners and Streets of Rogue. At the same time, tinyBuild’s recent game launches have progressed well and have received strong reviews (see overleaf). On the Steam platform, five of TBLD’s six releases in H2 2021 have received “Very Positive” reviews and have received 85% positive reviews on average. The two highest rated releases, Potion Craft (94% positive and 500k downloads) and Happy’s Humble Burger Farm (93%), are among tinyBuild’s top five sellers on Steam.

Strong pipeline: The company has over ~30 games in its pipeline, up from 23 at the start of 2021. The company’s upcoming releases have solid KPIs and strong reviews:  Hello Neighbor 2 has “very encouraging” KPIs (>100m franchise downloads, up from >80m in December 2021, and c. 1m views of Hello Neighbor 2 trailer), Not For Broadcast on early access has over 300,000 downloads and Black Skylands and Despot’s Game, both early access titles, received 87% positive reviews Steam.

Increasing diversification: The company now has a portfolio of over 70 games across a broad revenue base. tinyBuild’s top selling new releases in previous years would represent less than 10% of our 2022 revenue estimate. The company has diversified its revenue sources from premium game sales to also include licence revenue from game platforms, downloadable content and Games as a Service (GaaS). New revenue sources provide revenue visibility and de-risk investments.

Forecasts and valuation: We lift our Adjusted EBITDA forecasts by 5%. We believe tinyBuild is significantly undervalued against peers. TBLD trades at ~20% discount to peers (Consensus: 20x 2022 EBIT v 26x UK median), while offering similar sales growth and higher margins.

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Acquisitions performed ahead of expectations in H2. The company is developing a strong track record of eight acquisitions/ acquihires and has a strong acquisition pipeline, supported by a strong cash balance and an undrawn $25m credit facility.

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Zeus Capital Ltd.

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