tinyBuild “outperformance of 2021 expectations gives it a stronger base for growth” says Zeus Capital

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tinyBuild plc (LON:TBLD) outperformed earnings expectations and has reacted quickly and effectively to the crisis in Ukraine. All staff have been moved out of the riskiest areas. The company’s strong results, pipeline, low staff turnover and acquisition performance should lead to an upgrade to 2022 estimates. However, in the current geopolitical and macroeconomic environment, we leave our forecasts unchanged at this time.

¨ Results ahead of expectations: Revenue was $52.2m, 3% ahead of our estimate of $50.6m. EBITDA was $22.2m (margin: 42.5%), 6% ahead of our forecast of $21.0m (41.5%). Outperformance was driven by strong back catalogue sales and the successful release of Potion Craft towards the end of the year. Back catalogue share of revenue rose to 83% in 2021 from 75% in 2020.

¨ Net cash was $49m, 15% ($8m) below our expectation of $57m due to working capital timing differences and, to a lesser extent, increased investment in upcoming titles. Receivables and prepaids increased by $6.1m while accrued expenses and other current liabilities increased by $1.9m. However, most December receivables have now been collected. Capitalized software development costs increased from $10.0m to $15.4m.

¨ Key game performance: Hello Neighbor 2 will be in beta release on 7 April across PC, PlayStation and Xbox, with full release before year end. The company released an update for Deadside, which drove it to be its best-selling game for the past few weeks.

¨ Forecast revisions: The company’s outperformance of 2021 estimates leads us to consider upgrading our 2022 forecasts. In addition, the pipeline being mostly first and second-party titles, gives us enhanced confidence in margins and we believe the continued strong sales of the recently acquired title, Deadside, could be a catalyst for outperformance. Despite our optimistic operational outlook, we leave our estimates unchanged at this time due to the uncertain geopolitical and macroeconomic environment. The company reiterated its expectation to deliver “results at least in line with expectations, plus accretive acquisitions.”

¨ Valuation: We see the dip in tinyBuild’s share price, partly driven by geopolitical and macroeconomic concerns, as a buying opportunity. The company’s outperformance of 2021 expectations gives it a stronger base for growth and its effective management of the crisis in Ukraine and Russia further reduces risk. In addition, tinyBuild’s pipeline of high quality, high IP/ margin titles further enhances its outlook, in our view. As a result, we remain confident in our 2022 forecasts despite the geopolitical and macroeconomic environment.

¨ tinyBuild offers investors high margins and growth at low multiples. Shares trade at the bottom of the peer group range (2022 EV/EBIT: 14x v 22x peer median) yet the company offers EBIT margin at the top of the peer group range (2023: 35% v 27% peer average) and EBIT growth in line with the peer group median (2023: 19%).

Summary financials