tinyBuild Inc “We are increasingly optimistic on the outlook for 2022” says Zeus Capital

Secret Neighbor

We see a strong buying opportunity in tinyBuild Inc (LON:TBLD) after an unwarranted decline in its share price. Shares have fallen 29% since 14 September (after H1 results) despite company fundamentals remaining very strong. tinyBuild is now the cheapest (lowest EV/EBIT) video game company in the UK. Accretive acquisitions and a potential trading update are potential price catalysts.

Current trading appears strong. One of company’s major new releases for H2 2021, Potion Craft, has been a strong success. The game has been a global top seller on Steam with over 100k downloads in its first three days alone and reviews have been very positive (93%). Another planned release, Despot’s Game, is trending well on Steam and has 89% very positive reviews after its early release. We expect tinyBuild to release at total of seven new games in H2 compared to three in H1, which supports our estimated 38/62 H1/H2 2021E revenue split.

Improving outlook: We are increasingly optimistic on the outlook for 2022, driven by Hello Neighbor 2, strong pipeline growth and the Bad Pixel acquisition:

  • The year’s results should be underpinned by the release of Hello Neighbor 2. The early release has already been downloaded over 70m times.
  • 2022 revenues are supported by a strongly expanding pipeline, which has grown to 29 games at H1 results release from 23 at the beginning of the year. tinyBuild has released four games but has more than offset these with ten additions to its pipeline.
  • We believe tinyBuild’s Bad Pixel acquisition could significantly outperform expectations. We forecast $1.2m of EBITDA in 2022, while the company generated $3m of EBITDA in 2020. We believe Bad Pixel has the potential to approach 2020 profit levels again after its early release game, Deadside, is officially launched. 
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Shares offer compelling value. Team17, Frontier Development and Keywords have fallen 4%, 6% and 6%, respectively, while tinyBuild has dropped 29% on no news. As a result, tinyBuild now trades at sharp discounts to peers: 19x Zeus Capital 2022 EBIT estimates and 21x consensus EBIT, compared to 27x for both Team17 and the peer group median. Despite its low multiples, tinyBuild offers higher earnings growth (EBIT 21-23 CAGR: 27% v 19%) and margins (average EBIT margin 21-22: 37% v 22%) than peers.

Catalysts: Further accretive acquisitions and a potential trading update are potential price catalysts. tinyBuild plans to provide a trading update in Q1 and is making strong progress on acquihires. tinyBuild has acquihired five companies year-to-date and added a $25m credit facility to facilitate larger acquisitions. Combined with net cash of $62m at the end of H1, the company would have $87m of acquisition funding which can be deployed to enhance earnings. If this amount can be used to acquire $8.7m of EBITDA (10x) and then be valued at 20x then the company can add net $87m of value or 31p per share (+16%).

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