When GDP falls, cash-strapped households will be hunkering down in their homes to save a few pennies. These are ideal conditions for Ubisoft, the French video games developer best known for its blockbuster Prince of Persia franchise.
Ubisoft sports a first-class slate of new titles, such as the Michael Jackson Experience. Additionally, it is launching a stream of new 3D, high-definition games, such as Avatar, which has already sold millions and should boost growth further over the next three years. Microsoft and Sony are also planning to revolutionise games this Christmas when they release their new Kinect and Move consoles. Combining state-of-the-art software, motion cameras and 3D depth sensors, these platforms create the most realistic virtual reality yet.
So why are Ubisoft’s shares languishing at near five-year lows? Mainly because its 2009 performance was lacklustre as the sector slumped. But things are looking up: the firm’s share in its core geographical regions has bounced by about 2% to around 7%. This improvement is expected to drive first-half sales up 47% to €244m for the period ending in September.
Ubisoft Entertainment (Euronext: UBI), rated OUTPERFORM by Exane BNP
Net debt should be €70m-€100m. And after the predicted strong Christmas, I would expect Ubisoft to move back into the black on full-year sales of €900m and end with net cash of €50m.
So I’d rate the group on one-times sales and an intrinsic worth of €9.50 per share. And let’s not forget that this is an industry where huge synergies can be created through mergers (by eliminating duplicate distribution channels and back-office operations). So a trade buyer could realise savings of around €200m a year. After being taxed at 35% and discounted back at 12%, that adds a chunky €950m (or about €10 per share) to the enlarged entity. Obviously an acquirer would aim to retain the bulk of these synergies, but even so, a price-tag of above €12 per share looks plausible.
Ubisoft faces tougher competition, foreign-exchange fluctuations and the unpredictability of developing expensive new franchises. However, with a softer euro and a growing market from 2011 onwards, Ubisoft rates as a neat counter-cyclical play. Exane/BNP have a €10 price target.
Recommendation: Buy at €7.00