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11 Bit Studios – The Behemoth Awakens
11 bit is a pure-play self-publisher and game developer with a rare and exceptional track-record of IP-
building and game releases (80+ Metacritic scores). The company is currently in a pivotal growth
transformation phase powered by larger high-impact game projects and a yearly recurring release
model. The market is yet to appreciate and recognize the associated highly substantial value magnitude
of the transformation phase and upcoming releases enabled by the deep and evolving track-record of
the studio that is rapidly bound to unleash value on the market.
• The upcoming near-term evolved release pipeline, rare and proven IP-building, along with a clear
gradual road-map to AAA productions – will most likely change the overly ignored and pessimistic
perception of the company’s value.
• We assess the intrinsic value range at approx. 1400-1900 PLN per share, representing an upside
relative to the current share price of approx. 200-300%, set to converge progressively higher as the
market perception is set to be altered for in conjunction with its next project “P8”, the numerous
value-driving events and the gradual publishing business emergence.
The Road of Burdensome Challenges
11 bit is a company we have followed since 2017 located in
Warsaw, Poland. The company has a rare wide and strong track-
record within the games industry, in fact 30 years of game
development in its former entity Metropolis Software (Acquired
by CDPR), with several sales failures, delays and a bumpy
enlightening road with publishers to the progression for self-
published games. These mistakes has been invaluable to 11 bit’s
progression. It was not until the separation between the CDPR
and the 11bit team in 2010 that the 11bit growth story begun to
materially unfold – the company decided to first pursue self-
publishing within the popular RTS segment – the tower-defense
game “Anomaly Warzone” became its first title while it was also
a published game it became the foundation for successfully
transitioning itself to self-publishing.
Game releases has been sporadic, years apart historically, but
the company has provided immense and rare longevity and
player value by nurturing the fanbase through downloadable
content (DLC) and other activities. Indeed, the third final DLC-
story for This War of Mine (TWOM) was released in 2019 while
the game was first released itself in 2014. The momentum of
nurturing its longevity on its existing well-received games +80 in
MCS is impressive and Frostpunk being the inflection point of
propelling the company to unleash its resources on making
progressively larger and recurring yearly games.
The Growth Transformation is Imminent
Firstly, the track-record of 11bit games is highly rare in the
industry, few players in the industry can compare themselves
with several MCS 80+ consecutive titles along with its sales
successes is in its least form highly impressive. While the road
has been choppy with delays, there is a clear fundamental
strength and evolution of its game development.
Key Stats
Stock Price 470 PLN
Nr. of Shares
Mcap
2.4M*
SEK 2670 million
Net debt SEK -300 million
EV SEK 2370 million
Sector Games
Market List Warsaw Stock Exchange
Insider ownership
CEO
~15-20%*
Grzegorz Miechowski (~7% ownership)
*Including 5% allocation of options for insiders
Company Description
11 bit is a console and computer game development
and publishing company. Founded and based in
2009, Warsaw, the company is growing heavily and
currently employing 135 game industry
professionals.
The company is most known for emotionally linked
high-quality games. The games are self-published
designed for a broad audience and the intent for the
future is to deliver continuously larger multi-
platform games.
11bit has created games such as Frostpunk, This War
of Mine and Anomaly Warzone. The intent is to have
one yearly self-published internal game release
going forward.
11 Bit Studios – The Behemoth Awakens
Continued
Indeed, when TWOM went gold, in 2014, it sold 700k copies
from release within a year – a solid nurtured life-time profile
enabled the company to reach approximately 4.5 million
copies five years later of the actual release - not the least was
this success also for the mobile audience.
Similarly, in 2018 Frostpunk delivered sales rapidly within a
year - 1.4 million copies (250K copies within 3 days) - while
still delivering strong results in the after-sales period without
a MP-component.
The company is now most likely at a pivotal point - with all the
rare and proven prerequisites to actually perform the
transformation - the transformation involves both releasing
larger AA+ project and in the longer term given its step-by-
step strategy we expect AAA productions to materialize.
The success of its previous releases and the overarching
ambition with the exceptional reputation of the studio is
further attracting international talent to its studio. The
founders Grzegorz Miechowski, Michał Drozdowski,
Przemysław Marszał have certainly played core roles in
evolving the growth story trajectory. Furthermore, from
addressing the rare creative and cultural side to the
operational leverage standpoint while also heavily
incentivized to continue the journey. The new upcoming
game will most likely push the price-point from Frostpunk’s 30
to 40 USD. Albeit, so far the journey has been without
multiplayer compatibility and we think the company will likely
add at some point multiplayer capacity.
11bit is often associated with releases such as TWOM
(Metacritic Score (MCS: 83) and Frostpunk (MCS: 84), there
are also other well-known releases such as Anomaly Warzone
Earth (MCS: 80) and larger successful DLCs in its portfolio. The
company wants to breach and evolve itself within in the
“meaningful entertainment” category i.e you will likely reflect
upon the games long after you finished the game – the
inception of this transition was This War Of Mine and then
Frostpunk which was a step in its evolution in the strategy
franchise.
Modelio assesses that the company will not stick to the so-far
core strategy theme and most likely will transition itself to
experiences within the FPS/ RPG realms in the near to
midterm. Indeed, there has been several signals of job ads
that derives such an interest, including a request for a combat
designer with experience within FPS combat.
The extensive, proven and rare track-record within all fields
relevant to a game developer and publisher from the game
design to marketing the company is set to capitalize heavily
on the ongoing game evolution the coming years. Its
important to underline that the company is not only a rare
top-class evolving developer but also its publishing division is
showing rare execution capacity and significant results which
we asses as most likely be valued as 11bit in a few years.
Next Project Bound For A Major Perception
Change
Project 8 (P8) being its next project little is known
conceptually but the company will most likely move to a
higher price point, will broaden its appeal further and will be a
day-one all-platform release. According to 11Bit signifies the
stated evolution of the P8-project ”With the next one, we
want to raise the bar even higher not only when it comes to
quality but also in terms of ability to be something more than
a game.”.
Indeed, it will materially evolve from Frostpunk and likely
differ materially as this interview depict from Marta Fijak the
Lead Game Designer on P8 "those Frostpunk [city-building]
mechanics aren't the best ones to express what we want to
say and make you feel the things we want you to feel, so we
changed it - more than slightly!“. We expect a initial sales
price of 40 USD. Indeed, this project will further propel and
evolve investments as we have seen before but on a scale
that will enable the company to produce a top-class title per
year.
While Frostpunk and TWOM has cemented its profile within
strategy-based games, the competence, unexpectedly, far
expands these realms to first-person-shooter and role-playing
games. Indeed, many senior people in the 11 bits core team
have been senior officials in CD Projekt Red from lead
producers to lead programmers. Metropolis (11bit previous
form) indeed developed its take on FPS “Infernal”(Scored 60
on MCS) and subsequently tried to take these learnings into
its new project “They”- showcased on E3 2007 with early and
impressive gameplay.
Nevertheless, CD Projekt Red, the entity that acquired
Metropolis, decided to concentrate on Witcher and
subsequently decided to discontinue the project. The
upcoming projects will most likely once again reinvent and
further evolve the understanding of the business to the
current market perception outlining clearly the 11bit road to
larger projects.
11 Bit Studios – The Behemoth Awakens
Continued
The risk does most likely not lie in the execution but rather
that the game release itself might be too much of a niche in
terms of the genre chosen – nevertheless, the developers
plan for a broad appeal should most likely mitigate that risk.
Indeed, we assess, that’s its highly likely that the company is
prone from a market perspective for a perception change as
the company will likely in 1-3 years evolve itself to FPS/RPG
experiences and P8, P9 (that is in pre-production with the old
TWOM team that is in sort a more simple table-top RPG
experience) could be those projects and the subsequent
expansion to larger projects are not what is expected by the
market rather a strong strategy-release similar to Frostpunk.
While this evolution is about to unfold with the highest
probability along with the rare prerequisites of capability to
perform this transformation - the associated perception of
this change is yet still far from understood.
The Rapidly Emerging Hidden Publishing Segment
The case has also another emerging high-value pillar that is
about to bloom out considerably and currently ignored –
namely the publishing business, that is now transitioning itself
from successful indie title releases to larger projects.
Indeed, the publishing business has been challenging as the
first Indie title Beat Cop released in 2017 was not properly
reflected and executed upon – it took the learnings of these
mistakes and with Moonlighter (500k sales in its first year)
and Children of Morta (50-100k within a couple of days) the
company has taken powerful steps to complement its internal
development projects. Indeed, the leverage of having a
renowned top-class developer as a publisher, in the
negotiation phases especially, triumphs many small/mid sized
publishers with little or non-proven internal track-record
outside of its publishing arm. Currently the projects is
spearheaded by former CD-Projekt and 11-bit veteran Pawel
Feldman.
Accompanied with a rarely strong reputation within the
games industry, many likewise highly passionate game
developers, would love to join forces thus leveraging their
publishing opportunities globally. The strategy is clear a few
very thorough picks per year - we believe that at least two
titles per year will be released from 2021 but the strategy is
not the quantity but rather to a great game and to build a
fruitful relationship with the studio – as Pawel Feldman puts it
below:
"We’re still an extremely picky publisher. We’re probably
even pickier than we were before if you can believe it! There
won't be 20 to 30 titles per year from our publishing division.
11 bit is not about throw a lot of darts hoping that a few will
hit the bullseye. Ultimately, we plan to have four games per
year, but only the ones that fit our philosophy.“
Short briefing of the upcoming pipeline for the
publishing segment
The above rare fundamental prerequisites along with a lifted
no-limit cap investments shows the confidence in this growth
journey ahead with the withdrawal 450K Euro per game cap
and is likely engaging in projects 1M Euro+. The strongest
evidence of that major value is about to unfold is the recent
deal between Fool’s Theory for the “Vitriol” project (Former
CD Projekt Red Developers) – previously the studio has
released a fairly well-received title called Seven (68MCS –
Userscore 74). The upcoming “Vitriol” project is most likely
deep in development and that the release will happen later
this year or next year. Furthermore, this project will likely be a
pillar in starting to appreciate the value of this segment
expected in late 2020 or 2021 (Seven was released in 2018) –
probably went in production in mid 18/early 19 meaning 2021
should be the year of release (announced the deal in late
2019)
Furthermore, its success and relation with the developer of
Moonlighter (500k sales for its first year) is set to continue
with a new upcoming game “Foxhole”. Indeed, we think that
some of these relations might if it goes as planned lead to a
friendly mergers or acquisitions (offered shares in 11bit but
working as separate entities within the group).
11 Bit Studios – The Behemoth Awakens
Continued
The third project is yet unannounced. In terms of Asia, the
company is still pursuing this opportunity and has relations
with Tencent and Netease in China which is yet to be
realized.
We asses that these projects will further push the
boundaries for this venture accelerating its back catalog in a
substantial for the next years – leading to a base-line EBIT for
the publishing segment between SEK 75-200 million per
annum from 2022 or likely earlier.
The Beast Is Set To Be Unleashed
From 2022 we asses that the company deliver on the yearly
recurring game release with P9 and P10 being release-ready.
Its important to note that these game will also naturally and
gradually increase their ambition and price-range. History, in
this case, in terms of studio and game evolution is most likely
a highly suitable predictor of what’s next for 11 bit. So, what
will the interpretation be in conjunction with the P8-release?
We think that the company will be more assessed as a AAA-
converging game developer, with the ambition and genre
chosen, and the associated perception of the potential +2M
copies which is substantially different to the current
interpretation of a “small developer with lumpy earnings
with some smaller interesting titles”.
This couldn’t been the case if it weren’t for the step-by-step
evolution from Anomaly to the success Frostpunk which
have fueled the now strong intent for larger games with
doubled budget with P8 breaching in its mark on AA+
production. This will most likely, naturally, elevate in 1-3
years that the company will breach itself into the AAA-
territory step-by-step. Indeed, its broad appeal of games and
multi-platform suitability mindset are most likely a sign that
this is in the pipeline.
The period until the P8 release will likely have several
interesting and exciting milestones, the reveal of the project
and the likely possibility of a exclusivity agreement with EPIC
for PC along with the reveal of a new or an existing
publishing project namely for example “Vitriol”.
Then, we expect further DLC support and sales activities that
will provide solid base-line earnings support. What about the
earnings potential and timeline until release for a mobile
version of Frostpunk on iOS and Android on the EU/US/Asian
market? Indeed, recently the company signed an agreement
with a undisclosed mobile publisher (We asses this partner is
Tencent not the least because Tencent is the partner already
of Moonlighter and the strong popularity and fanbase
already established in China for Frostpunk) to publish the
mobile version of Frostpunk.
Furthermore what about more mature publishing deals like
the case of Vitriol? Indeed, this might change the perception
of the company. There are indeed several known unknown
events that will reveal itself going forward, similar to what
high quality passionate companies usually naturally create by
their force.
The Growth Trajectory Is Here
A highly likely, relatively successful release of P8 at 2-2.5M
copies will be the pinnacle point to further invest in its
upcoming portfolio and set further light of the talent in the
company, similarly to the leaps Anomaly, TWoM, Frostpunk
contributed to. We asses that the company can deliver a
solid rapidly growing base-line earnings of 250-300 MSEK a
mix between its different operating segments - internal
development, back catalog and publishing starting from
2022.
Indeed, a intrinsic cash calculation just by P8 can likely mean
that the company will have a cash position equivalent to a
third of the market value, a success (3m+ copies) would
propel the cash position to 50%+ cash. The market is thus
implying that the future pipeline would then be worse than
its latest releases, less broad appeal and on fewer platforms
the coming few years? If you exclude and/or ignore the
track-record, the associated and justified market perception
of the company in conjunction with the reveal and release of
P8 that would likely be a reasonable conclusion. but there
are so-far strong evidence suggesting the company has an
rarely immense and untapped operating leverage in its
fundamental business creating value-driving events
regularly.
Furthermore, we assess that this base-line earnings will be
more appreciated in conjunction with the reveal within a
year and other direct value-driving events stated, from this
aspect we see it highly likely that the market can trade the
company around 25-40x EV/EBIT at the intrinsic value range
of approx. SEK 8-11bn - with the rapidly growing base-line
earnings of SEK 250-300 million in 2022. This valuation is
further supported by the rapidly increasing, especially the
upcoming years, cash position that will shred the multiple.
11 Bit Studios – The Behemoth Awakens
Continued
We asses further that the 3-4M sales copies per year,
equivalent to a >50-100% cash position depending on the
gradually increasing price-point, is not as unlikely as the
market expects, which more of the reasoning by the market is
a non-existent probability. Indeed, we asses that the market is
clearly ignoring the unique fundamental that the position in
currently and is building on its growth. Is it likely that 11bit
will stop its evolution on Frostpunk – 1.4M copies in a year-
that was released on one platform (PC) with no MP
compatibility and a lower price range?
We deem its highly unlikely that the next project with more
than doubled investments on the project will not bear fruit in
relation to its previous project from all the solid previously
mentioned prerequisites.
Indeed, this is similar to the situation in CD Projekt Red in
2016 with the upcoming release of W3 basically being the
whole market cap in cash, but these are different from a
strategy standpoint while the growth ambitions in terms of
the sizing of projects are similar. The companies also share
arguably proven and equally strong strategies with similar
rare quality characteristics that can enable this kind of growth
trajectory.
Eyes on The Target
We asses its highly likely that international institutional
interest will significantly rise the coming year, similarly seen in
CDPR, with the rare quality studio the company is and the
step-by-step value-triggers ahead that will most likely
materialize in short to mid-term and most likely close parts of
the larger value gap. Given that around 15-20% of ownership
is held by active owners, given the aim and passion and the
growth story with its associated value creation far outweighs
the price of an acquisition of the studio along with their
understanding of this value creation its unlikely that these
players would accept an offer at this stage. Nevertheless, we
think 11bit is on the target list and will become increasingly
embraced by larger developers and publishers whom seek to
leverage a growth journey in its early stages.
The Best Is Yet To Come
Finally, we asses that a most likely trajectory involves that the
company will surprise the market with a 500MSEK+
operational EBIT (25% of current market cap.) during one of
the individual years the coming three years. Indeed, even the
bearish-biased long-term recurring earnings is not even in the
range of SEK 100 million which is why there is an interesting
risk to reward profile. Indeed, we asses pessimistically with
the talent in-house that the company can achieve the former
mentioned earnings - basically pinpointing toward that the
company would stop its evolution today and start reversing its
growth trajectory leading to flat earnings in the mid-term.
Albeit, we haven’t seen evidence of this but rather that the
growth story is in its early stages and about to start flourish.
Indeed, we have identified several key pillars that indicate
that only a few of the non-main value points materialize the
price/value gap will be extensive.
Indeed, we do asses that the publishing business can provide
SEK 150-200 million in EBIT around in three years time – this
is far from what the market expects but rather low
expectations on the company’s future operational
performance even pricing a failure of the P8 project and the
upcoming pipeline. In this regard there are several key value-
moments ahead amongst them is the overly pessimistic
interpretation of the upcoming and associated longevity of
the games, perception change in conjunction with the reveal
of the pipeline, the results from the pipeline, the deals that
can be associated with the pipeline and the publishing
business evolution.
Its seldom that a case involves both a operational and
business mindset – management and owners likewise show
great tendencies to play this story as a growth story as they
know they have the track-record and the prerequisites to
actually do it properly. Indeed, we think it’s more of a matter
of time in 1-3 years that one of value-events materializes and
adjusting the market interpretation to a highly likely growth
value trajectory the company is on.
11 Bit Studios – The Behemoth Awakens
The Value Proposition?
So, what is priced in today? If one inverts the market’s expectations it’s a studio that will systematically fail with existing and
new game releases the coming five years along with having a low and lumpy earnings profile, the absolute failure to release one
yearly recurring multi-platform game along with evolved sales. Furthermore, the failure to bind and execute on a larger and on
publishing projects where the internal or publishing segment stand-alone can contribute to SEK 200 million in bottom-line EBIT
after covering the company’s whole investment.
The associated current perception is that the company has a negligible track-record, nor the capacity to deliver a release of
1.5M the coming five years with the current proven pricing strategy along with the intended price-point to 40 USD.
Furthermore, definitely not the perception of the 60 USD price-point evolution span that we asses will likely materialize within
the end of the next 3 year period or at the latest a five-year period. We asses overall that this overly ignores, the aim and the
rare associated prerequisites that the company has.
In order to take substantial margin-of-safety in the intrinsic value range - the P8-project has been treated as a PC game release
(Frostpunk was developed for PC) while it has been stated that the game will have a broader multi-platform appeal. If they
succeed on the multi-platform strategy the earnings power and revenues would most likely be substantially higher, we have not
taken this into account but we asses there is high probability of achieving this either through P8 or future projects - thus this
acts as a margin of safety in all of our sales estimates.
P8 being the next project will most likely generate between 2-2,5M in sales copies the first year with a operating profit of
approximately 200-300 million (Frostpunk 1.4M during its first year on PC) after the majority of the groups investment costs has
been covered. In a sense this is all well but it’s still a pessimistic scenario that does not evolve their game evolution substantially
but rather step-by-step. Nevertheless, the uptick have strong material effect on the bottom-line. The sales covers the absolute
majority 80-100% of the total costs including the maintenance and growth investments costs. Thus, the rest of operations the
back catalog and the publishing business should be considered close to bottom-line accretive businesses, especially the back
catalog that does not have major variable investment costs associated with it. In total the EBIT with the back catalog, publishing
and new releases would most likely be in the release year of P8 be around SEK 300-500 million equivalent to EV/EBIT multiple of
4-7.
Breakdown of Earnings Power-EBIT by Segment
The earnings power of a normalized year from 2022, on a group level, should be in a bear case scenario around 250-300M SEK
thus valuing the business at around 6-7x earnings at that point in time (30-40% cash) – is that reasonable given the company’s
rare quality profile, recurring earnings power in back catalog, publishing projects and upcoming releases? Furthermore, its
highly likely that the cash position will expand to nearly half of the market cap. by 2022 (SEK 850-1.2bn SEK in end 2022), at that
point in time the valuation of bear case earnings of 200-250M SEK would oscillate around 5x, which in other words means a
tremendous lack of confidence in 11bits capacity to evolve by its track-record in the light of having delivering results and
associated future perception of the upcoming pipeline. Similarly, this type of risk reward scenario where a substantial earnings
power led to a unsustainably large cash situation relative to the market cap arose in CDPR before the Witcher 3 launch.
Similarly, the perception change was far from understood, enabled by several intrinsic reasons such as lack of communication
regarding the ambition of the project, pipeline direction and execution fundamentals.
Core New Releases EBIT (2.5M Sales Copies - 2021) 2020 2021 2022
Annualized 20 298 100
Full 12m EBIT of P8 450
Backlog EBIT Annualized (covering growth costs)
TWOM,Anomaly, FP, publishing backlog 25-30 50-70 100-150
New Releases Publishing Division EBIT 1 Minor release Release of Seven 2021 Similar game to Seven
Copies sold assumptions 0,5-1Mcopies 0,5-1Mcopies
Publishing projects 3-4 or 1 major per year from 2022
25MEBIT 75-150MEBIT 75-150MEBIT
2018 2019
Group Total EBIT 116 59 70 300-500 250-300
Cash Position Build Up 300,00 600-800 850-1200
% of market cap 11% 22-30% 32-45%
11 Bit Studios – The Behemoth Awakens
Continued
Breakdown “P8” PC Sales Assumptions 2021 (SEK M)
Below is the breakdown of the most likely scenarios 2-2.5 million copies and its associated EBIT implications, a reasonable
success will cover the absolute majority of future investments into its pipeline while providing a decent earnings profile even in
the bearish sense of the case circa SEK 150 million in EBIT contribution while the total portfolio of the company will contribute
with EBIT close to likely at least SEK 300 million earnings during the release year.
The Dawn Has Begun
Indeed, the company will have several opportunities to prove itself apart from P8 but with the solid fundamental prerequisites it
would be highly uncharacteristic of the evolution that 11bit has been acquainted with. In fact, we would prefer that the
company “failed” for the P8 project around <1M copies sold, ending abruptly its long successful track-record putting confidence
pressure. This would most likely significantly alter the perception negatively providing a downside of 50% in that scenario.
Nevertheless, 1M copies would still mean the company would be able to provide one yearly recurring release, another shot at
pushing the growth bar during the next few years. Along with the publishing option playing out its highly likely that there is an
substantial margin-of-safety already priced in at the current price.
So, what should a developer of this sort with several value realizing options that can unfold in the upcoming year be valued at?
Arguably, if you take the route of estimating the back catalog, publishing and new releases from 2022 estimated to be around
SEK 250-300 million and given altered reasonable expectations based on future releases at that point in time we expect it to be
traded at the intrinsic value range at approx. PLN 1400-1900 per share or c. 25-40x EV/EBIT as the bottom-line will further be
enhanced from that point, along with the support of a rapidly growing SEK 1 billion in cash position by end 2022.
We further expect that the multiple above can be skewed conservative as its likely that the multiple from that point in time
have altered the expectations in a major way. For example, we think the company will tilt upon the AAA arena and the market
interpretation of such action, given a successful outcome of P8, will intensify from end 2020-2021 in steps and be interpreted
more as such giving the company potential to elevate itself to the 1bn SEK+ EBIT area (4M sales copies potential)/approximately
half of todays market cap in bottomline).
Sales Copies (M)
Sales Copies First Year PC 2 2,5
ASP First Year Eur 30 35
Net Revenues
Bear case 383 558
Annualized 268 390
Base case 449 655
Annualized 314 458
Investment costs group level
Bear case 235 137
Base case 141 160
2021Base Case 170 170
Costs covered by sales 83% 94%
EBIT after investment costs
Bear Case 147 254
Base Case 173 298
11 Bit Studios – The Behemoth Awakens
Conclusion
11 bit is a pure-play self-publisher and game developer with a rare and exceptional track-record of IP-building and
game releases (80+ Metacritic scores). The company is currently in a pivotal growth transformation phase powered by
larger high-impact game projects and a yearly recurring release model. The market is yet to appreciate and recognize
the associated highly substantial value magnitude of the transformation phase and upcoming releases enabled by the
deep and evolving track-record of the studio that is rapidly bound to unleash value on the market.
To briefly summarize, we asses that the company is prone for a perception change in the near-term 1-2 years with a number of
events including the evolution to a pureplay AA+ and AAA pipeline internally, along with several publishing deals and releases,
likely multiplayer orientation of its pipeline - the associated perception change with the bottom-line effect as a pure-play self-
publisher in conjunction with especially the internal release (SEK 300-500 million EBIT contribution). The current baseline
earnings around SEK 100 million provides a decent margin of safety in the case and arguably per se holds substantial upside,
nevertheless this indicates that the market have lack of any attention to the pipeline or even moderate associated success.
Thus, we asses that the market focuses more on the current business rather on where the business is most likely heading
operationally and financially in the near term 1-3 years which have created a substantial price to value gap. It is assessed with
the reveal of the pipeline both internally and on the publishing side the coming year and associated deals with these the
substantial price to value gap will gradually close. Nevertheless, execution is key a relative failure of P8 can likely provide
another attractive opportunity point similar to today but with more execution risk - the track-record strongly suggests otherwise
they rather delay their game then release a mediocre-release.
In other terms the road to a high-quality rapidly evolving mid sized game developer is paved from a fundamental perspective
but is barely appreciated in the current valuation as an undiscovered and non-understood case. We, asses that this large
intrinsic discrepancy is caused by lack of understanding and attention to the associated value related directly to the operational
design and materialization of the upcoming pipeline along with several value driving events in relation to its intended growth
trajectory. Albeit, a string of negative fundamental events like the loss of a of key personnel, failure of handling the back catalog
along with substantial delays of future releases are most likely to a reasonable extent priced in but if these risks become
prominent as in major material negative impact there is a 50% downside.
The substantial discrepancy between the price and value today, can be seen from the light of the rapidly increasing cash
situation, by end 2022 the cash position, conservatively estimated, will be approximately 30-45% of the current market
capitalization with a substantially improved and different earnings profile. Finally, we assess that a stabilized EBIT of SEK 250-
300 million from 2022 with a altered perception of non-lumpy earnings, the associated material perception change to a larger
emerging high-quality game developer will likely mean that the company will start to oscillate in the intrinsic value range of
approx. PLN 1400-1900 per share (approx. 200-300% upside) equivalent to c. 25-40x EV/EBIT - of the aforementioned earnings
sooner than the market expects. Its important to note that we asses that the rapidly growing cash position along with the
fundamental trajectory of the company will quickly shred that multiple more than half in the subsequent years, providing
substantial margin of safety. While 11bit faces many great challenges as also history have shown, we asses that 11bit has the
rare prerequisites to substantially leverage itself on these challenges and evolve altering again the whole current perception of
the company. Nevertheless, we deem that it is most likely that we are too conservative in the fundamental trajectory of the
company leading to a significantly greater intrinsic value range than the above stated, which acts as a solid margin of safety
pillar.
Disclaimer
Modelio Equity AB (publ), www.modelioequity.com, hereinafter referred to as Modelio, publishes information
on companies and including analyzes. The information has been compiled based on sources that Modelio
deems reliable. However, Modelio cannot guarantee the accuracy of the information. Nothing written in the
analysis should be regarded as a recommendation or invitation to invest in any financial instrument, option or
the like. Opinions and conclusions expressed in the analysis are intended only for the recipient.
The content may not be copied, reproduced or distributed to any other person without the written approval
of Modelio. Modelio shall not be held responsible for any direct or indirect damage caused by decisions made
on the basis of information contained in this analysis. This document was prepared for information purposes
for general distribution and is not intended to be advisory. The information contained in this analysis is based
on sources deemed reliable by Modelio. However, Modelio cannot guarantee the accuracy of the information.
The forward-looking information in the analysis is based on subjective assessments about the future, which
constitutes a factor of uncertainty. Modelio cannot guarantee that forecasts and forward-looking statements
will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be
one of a number of tools that can be used in making an investment decision. Investments in financial
instruments provide opportunities for value increases and profits. All such investments are also associated with
risks. Risks vary between different types of financial instruments and combinations of these. Historical returns
should not be considered as an indication of future returns. Modelio does not perform any service to the
company nor recieves any compensation from the company.
Modelio owns shares in 11bit Studios S.A.

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11 Bit Studios Analysis

  • 1. 11 Bit Studios – The Behemoth Awakens 11 bit is a pure-play self-publisher and game developer with a rare and exceptional track-record of IP- building and game releases (80+ Metacritic scores). The company is currently in a pivotal growth transformation phase powered by larger high-impact game projects and a yearly recurring release model. The market is yet to appreciate and recognize the associated highly substantial value magnitude of the transformation phase and upcoming releases enabled by the deep and evolving track-record of the studio that is rapidly bound to unleash value on the market. • The upcoming near-term evolved release pipeline, rare and proven IP-building, along with a clear gradual road-map to AAA productions – will most likely change the overly ignored and pessimistic perception of the company’s value. • We assess the intrinsic value range at approx. 1400-1900 PLN per share, representing an upside relative to the current share price of approx. 200-300%, set to converge progressively higher as the market perception is set to be altered for in conjunction with its next project “P8”, the numerous value-driving events and the gradual publishing business emergence. The Road of Burdensome Challenges 11 bit is a company we have followed since 2017 located in Warsaw, Poland. The company has a rare wide and strong track- record within the games industry, in fact 30 years of game development in its former entity Metropolis Software (Acquired by CDPR), with several sales failures, delays and a bumpy enlightening road with publishers to the progression for self- published games. These mistakes has been invaluable to 11 bit’s progression. It was not until the separation between the CDPR and the 11bit team in 2010 that the 11bit growth story begun to materially unfold – the company decided to first pursue self- publishing within the popular RTS segment – the tower-defense game “Anomaly Warzone” became its first title while it was also a published game it became the foundation for successfully transitioning itself to self-publishing. Game releases has been sporadic, years apart historically, but the company has provided immense and rare longevity and player value by nurturing the fanbase through downloadable content (DLC) and other activities. Indeed, the third final DLC- story for This War of Mine (TWOM) was released in 2019 while the game was first released itself in 2014. The momentum of nurturing its longevity on its existing well-received games +80 in MCS is impressive and Frostpunk being the inflection point of propelling the company to unleash its resources on making progressively larger and recurring yearly games. The Growth Transformation is Imminent Firstly, the track-record of 11bit games is highly rare in the industry, few players in the industry can compare themselves with several MCS 80+ consecutive titles along with its sales successes is in its least form highly impressive. While the road has been choppy with delays, there is a clear fundamental strength and evolution of its game development. Key Stats Stock Price 470 PLN Nr. of Shares Mcap 2.4M* SEK 2670 million Net debt SEK -300 million EV SEK 2370 million Sector Games Market List Warsaw Stock Exchange Insider ownership CEO ~15-20%* Grzegorz Miechowski (~7% ownership) *Including 5% allocation of options for insiders Company Description 11 bit is a console and computer game development and publishing company. Founded and based in 2009, Warsaw, the company is growing heavily and currently employing 135 game industry professionals. The company is most known for emotionally linked high-quality games. The games are self-published designed for a broad audience and the intent for the future is to deliver continuously larger multi- platform games. 11bit has created games such as Frostpunk, This War of Mine and Anomaly Warzone. The intent is to have one yearly self-published internal game release going forward.
  • 2. 11 Bit Studios – The Behemoth Awakens Continued Indeed, when TWOM went gold, in 2014, it sold 700k copies from release within a year – a solid nurtured life-time profile enabled the company to reach approximately 4.5 million copies five years later of the actual release - not the least was this success also for the mobile audience. Similarly, in 2018 Frostpunk delivered sales rapidly within a year - 1.4 million copies (250K copies within 3 days) - while still delivering strong results in the after-sales period without a MP-component. The company is now most likely at a pivotal point - with all the rare and proven prerequisites to actually perform the transformation - the transformation involves both releasing larger AA+ project and in the longer term given its step-by- step strategy we expect AAA productions to materialize. The success of its previous releases and the overarching ambition with the exceptional reputation of the studio is further attracting international talent to its studio. The founders Grzegorz Miechowski, Michał Drozdowski, Przemysław Marszał have certainly played core roles in evolving the growth story trajectory. Furthermore, from addressing the rare creative and cultural side to the operational leverage standpoint while also heavily incentivized to continue the journey. The new upcoming game will most likely push the price-point from Frostpunk’s 30 to 40 USD. Albeit, so far the journey has been without multiplayer compatibility and we think the company will likely add at some point multiplayer capacity. 11bit is often associated with releases such as TWOM (Metacritic Score (MCS: 83) and Frostpunk (MCS: 84), there are also other well-known releases such as Anomaly Warzone Earth (MCS: 80) and larger successful DLCs in its portfolio. The company wants to breach and evolve itself within in the “meaningful entertainment” category i.e you will likely reflect upon the games long after you finished the game – the inception of this transition was This War Of Mine and then Frostpunk which was a step in its evolution in the strategy franchise. Modelio assesses that the company will not stick to the so-far core strategy theme and most likely will transition itself to experiences within the FPS/ RPG realms in the near to midterm. Indeed, there has been several signals of job ads that derives such an interest, including a request for a combat designer with experience within FPS combat. The extensive, proven and rare track-record within all fields relevant to a game developer and publisher from the game design to marketing the company is set to capitalize heavily on the ongoing game evolution the coming years. Its important to underline that the company is not only a rare top-class evolving developer but also its publishing division is showing rare execution capacity and significant results which we asses as most likely be valued as 11bit in a few years. Next Project Bound For A Major Perception Change Project 8 (P8) being its next project little is known conceptually but the company will most likely move to a higher price point, will broaden its appeal further and will be a day-one all-platform release. According to 11Bit signifies the stated evolution of the P8-project ”With the next one, we want to raise the bar even higher not only when it comes to quality but also in terms of ability to be something more than a game.”. Indeed, it will materially evolve from Frostpunk and likely differ materially as this interview depict from Marta Fijak the Lead Game Designer on P8 "those Frostpunk [city-building] mechanics aren't the best ones to express what we want to say and make you feel the things we want you to feel, so we changed it - more than slightly!“. We expect a initial sales price of 40 USD. Indeed, this project will further propel and evolve investments as we have seen before but on a scale that will enable the company to produce a top-class title per year. While Frostpunk and TWOM has cemented its profile within strategy-based games, the competence, unexpectedly, far expands these realms to first-person-shooter and role-playing games. Indeed, many senior people in the 11 bits core team have been senior officials in CD Projekt Red from lead producers to lead programmers. Metropolis (11bit previous form) indeed developed its take on FPS “Infernal”(Scored 60 on MCS) and subsequently tried to take these learnings into its new project “They”- showcased on E3 2007 with early and impressive gameplay. Nevertheless, CD Projekt Red, the entity that acquired Metropolis, decided to concentrate on Witcher and subsequently decided to discontinue the project. The upcoming projects will most likely once again reinvent and further evolve the understanding of the business to the current market perception outlining clearly the 11bit road to larger projects.
  • 3. 11 Bit Studios – The Behemoth Awakens Continued The risk does most likely not lie in the execution but rather that the game release itself might be too much of a niche in terms of the genre chosen – nevertheless, the developers plan for a broad appeal should most likely mitigate that risk. Indeed, we assess, that’s its highly likely that the company is prone from a market perspective for a perception change as the company will likely in 1-3 years evolve itself to FPS/RPG experiences and P8, P9 (that is in pre-production with the old TWOM team that is in sort a more simple table-top RPG experience) could be those projects and the subsequent expansion to larger projects are not what is expected by the market rather a strong strategy-release similar to Frostpunk. While this evolution is about to unfold with the highest probability along with the rare prerequisites of capability to perform this transformation - the associated perception of this change is yet still far from understood. The Rapidly Emerging Hidden Publishing Segment The case has also another emerging high-value pillar that is about to bloom out considerably and currently ignored – namely the publishing business, that is now transitioning itself from successful indie title releases to larger projects. Indeed, the publishing business has been challenging as the first Indie title Beat Cop released in 2017 was not properly reflected and executed upon – it took the learnings of these mistakes and with Moonlighter (500k sales in its first year) and Children of Morta (50-100k within a couple of days) the company has taken powerful steps to complement its internal development projects. Indeed, the leverage of having a renowned top-class developer as a publisher, in the negotiation phases especially, triumphs many small/mid sized publishers with little or non-proven internal track-record outside of its publishing arm. Currently the projects is spearheaded by former CD-Projekt and 11-bit veteran Pawel Feldman. Accompanied with a rarely strong reputation within the games industry, many likewise highly passionate game developers, would love to join forces thus leveraging their publishing opportunities globally. The strategy is clear a few very thorough picks per year - we believe that at least two titles per year will be released from 2021 but the strategy is not the quantity but rather to a great game and to build a fruitful relationship with the studio – as Pawel Feldman puts it below: "We’re still an extremely picky publisher. We’re probably even pickier than we were before if you can believe it! There won't be 20 to 30 titles per year from our publishing division. 11 bit is not about throw a lot of darts hoping that a few will hit the bullseye. Ultimately, we plan to have four games per year, but only the ones that fit our philosophy.“ Short briefing of the upcoming pipeline for the publishing segment The above rare fundamental prerequisites along with a lifted no-limit cap investments shows the confidence in this growth journey ahead with the withdrawal 450K Euro per game cap and is likely engaging in projects 1M Euro+. The strongest evidence of that major value is about to unfold is the recent deal between Fool’s Theory for the “Vitriol” project (Former CD Projekt Red Developers) – previously the studio has released a fairly well-received title called Seven (68MCS – Userscore 74). The upcoming “Vitriol” project is most likely deep in development and that the release will happen later this year or next year. Furthermore, this project will likely be a pillar in starting to appreciate the value of this segment expected in late 2020 or 2021 (Seven was released in 2018) – probably went in production in mid 18/early 19 meaning 2021 should be the year of release (announced the deal in late 2019) Furthermore, its success and relation with the developer of Moonlighter (500k sales for its first year) is set to continue with a new upcoming game “Foxhole”. Indeed, we think that some of these relations might if it goes as planned lead to a friendly mergers or acquisitions (offered shares in 11bit but working as separate entities within the group).
  • 4. 11 Bit Studios – The Behemoth Awakens Continued The third project is yet unannounced. In terms of Asia, the company is still pursuing this opportunity and has relations with Tencent and Netease in China which is yet to be realized. We asses that these projects will further push the boundaries for this venture accelerating its back catalog in a substantial for the next years – leading to a base-line EBIT for the publishing segment between SEK 75-200 million per annum from 2022 or likely earlier. The Beast Is Set To Be Unleashed From 2022 we asses that the company deliver on the yearly recurring game release with P9 and P10 being release-ready. Its important to note that these game will also naturally and gradually increase their ambition and price-range. History, in this case, in terms of studio and game evolution is most likely a highly suitable predictor of what’s next for 11 bit. So, what will the interpretation be in conjunction with the P8-release? We think that the company will be more assessed as a AAA- converging game developer, with the ambition and genre chosen, and the associated perception of the potential +2M copies which is substantially different to the current interpretation of a “small developer with lumpy earnings with some smaller interesting titles”. This couldn’t been the case if it weren’t for the step-by-step evolution from Anomaly to the success Frostpunk which have fueled the now strong intent for larger games with doubled budget with P8 breaching in its mark on AA+ production. This will most likely, naturally, elevate in 1-3 years that the company will breach itself into the AAA- territory step-by-step. Indeed, its broad appeal of games and multi-platform suitability mindset are most likely a sign that this is in the pipeline. The period until the P8 release will likely have several interesting and exciting milestones, the reveal of the project and the likely possibility of a exclusivity agreement with EPIC for PC along with the reveal of a new or an existing publishing project namely for example “Vitriol”. Then, we expect further DLC support and sales activities that will provide solid base-line earnings support. What about the earnings potential and timeline until release for a mobile version of Frostpunk on iOS and Android on the EU/US/Asian market? Indeed, recently the company signed an agreement with a undisclosed mobile publisher (We asses this partner is Tencent not the least because Tencent is the partner already of Moonlighter and the strong popularity and fanbase already established in China for Frostpunk) to publish the mobile version of Frostpunk. Furthermore what about more mature publishing deals like the case of Vitriol? Indeed, this might change the perception of the company. There are indeed several known unknown events that will reveal itself going forward, similar to what high quality passionate companies usually naturally create by their force. The Growth Trajectory Is Here A highly likely, relatively successful release of P8 at 2-2.5M copies will be the pinnacle point to further invest in its upcoming portfolio and set further light of the talent in the company, similarly to the leaps Anomaly, TWoM, Frostpunk contributed to. We asses that the company can deliver a solid rapidly growing base-line earnings of 250-300 MSEK a mix between its different operating segments - internal development, back catalog and publishing starting from 2022. Indeed, a intrinsic cash calculation just by P8 can likely mean that the company will have a cash position equivalent to a third of the market value, a success (3m+ copies) would propel the cash position to 50%+ cash. The market is thus implying that the future pipeline would then be worse than its latest releases, less broad appeal and on fewer platforms the coming few years? If you exclude and/or ignore the track-record, the associated and justified market perception of the company in conjunction with the reveal and release of P8 that would likely be a reasonable conclusion. but there are so-far strong evidence suggesting the company has an rarely immense and untapped operating leverage in its fundamental business creating value-driving events regularly. Furthermore, we assess that this base-line earnings will be more appreciated in conjunction with the reveal within a year and other direct value-driving events stated, from this aspect we see it highly likely that the market can trade the company around 25-40x EV/EBIT at the intrinsic value range of approx. SEK 8-11bn - with the rapidly growing base-line earnings of SEK 250-300 million in 2022. This valuation is further supported by the rapidly increasing, especially the upcoming years, cash position that will shred the multiple.
  • 5. 11 Bit Studios – The Behemoth Awakens Continued We asses further that the 3-4M sales copies per year, equivalent to a >50-100% cash position depending on the gradually increasing price-point, is not as unlikely as the market expects, which more of the reasoning by the market is a non-existent probability. Indeed, we asses that the market is clearly ignoring the unique fundamental that the position in currently and is building on its growth. Is it likely that 11bit will stop its evolution on Frostpunk – 1.4M copies in a year- that was released on one platform (PC) with no MP compatibility and a lower price range? We deem its highly unlikely that the next project with more than doubled investments on the project will not bear fruit in relation to its previous project from all the solid previously mentioned prerequisites. Indeed, this is similar to the situation in CD Projekt Red in 2016 with the upcoming release of W3 basically being the whole market cap in cash, but these are different from a strategy standpoint while the growth ambitions in terms of the sizing of projects are similar. The companies also share arguably proven and equally strong strategies with similar rare quality characteristics that can enable this kind of growth trajectory. Eyes on The Target We asses its highly likely that international institutional interest will significantly rise the coming year, similarly seen in CDPR, with the rare quality studio the company is and the step-by-step value-triggers ahead that will most likely materialize in short to mid-term and most likely close parts of the larger value gap. Given that around 15-20% of ownership is held by active owners, given the aim and passion and the growth story with its associated value creation far outweighs the price of an acquisition of the studio along with their understanding of this value creation its unlikely that these players would accept an offer at this stage. Nevertheless, we think 11bit is on the target list and will become increasingly embraced by larger developers and publishers whom seek to leverage a growth journey in its early stages. The Best Is Yet To Come Finally, we asses that a most likely trajectory involves that the company will surprise the market with a 500MSEK+ operational EBIT (25% of current market cap.) during one of the individual years the coming three years. Indeed, even the bearish-biased long-term recurring earnings is not even in the range of SEK 100 million which is why there is an interesting risk to reward profile. Indeed, we asses pessimistically with the talent in-house that the company can achieve the former mentioned earnings - basically pinpointing toward that the company would stop its evolution today and start reversing its growth trajectory leading to flat earnings in the mid-term. Albeit, we haven’t seen evidence of this but rather that the growth story is in its early stages and about to start flourish. Indeed, we have identified several key pillars that indicate that only a few of the non-main value points materialize the price/value gap will be extensive. Indeed, we do asses that the publishing business can provide SEK 150-200 million in EBIT around in three years time – this is far from what the market expects but rather low expectations on the company’s future operational performance even pricing a failure of the P8 project and the upcoming pipeline. In this regard there are several key value- moments ahead amongst them is the overly pessimistic interpretation of the upcoming and associated longevity of the games, perception change in conjunction with the reveal of the pipeline, the results from the pipeline, the deals that can be associated with the pipeline and the publishing business evolution. Its seldom that a case involves both a operational and business mindset – management and owners likewise show great tendencies to play this story as a growth story as they know they have the track-record and the prerequisites to actually do it properly. Indeed, we think it’s more of a matter of time in 1-3 years that one of value-events materializes and adjusting the market interpretation to a highly likely growth value trajectory the company is on.
  • 6. 11 Bit Studios – The Behemoth Awakens The Value Proposition? So, what is priced in today? If one inverts the market’s expectations it’s a studio that will systematically fail with existing and new game releases the coming five years along with having a low and lumpy earnings profile, the absolute failure to release one yearly recurring multi-platform game along with evolved sales. Furthermore, the failure to bind and execute on a larger and on publishing projects where the internal or publishing segment stand-alone can contribute to SEK 200 million in bottom-line EBIT after covering the company’s whole investment. The associated current perception is that the company has a negligible track-record, nor the capacity to deliver a release of 1.5M the coming five years with the current proven pricing strategy along with the intended price-point to 40 USD. Furthermore, definitely not the perception of the 60 USD price-point evolution span that we asses will likely materialize within the end of the next 3 year period or at the latest a five-year period. We asses overall that this overly ignores, the aim and the rare associated prerequisites that the company has. In order to take substantial margin-of-safety in the intrinsic value range - the P8-project has been treated as a PC game release (Frostpunk was developed for PC) while it has been stated that the game will have a broader multi-platform appeal. If they succeed on the multi-platform strategy the earnings power and revenues would most likely be substantially higher, we have not taken this into account but we asses there is high probability of achieving this either through P8 or future projects - thus this acts as a margin of safety in all of our sales estimates. P8 being the next project will most likely generate between 2-2,5M in sales copies the first year with a operating profit of approximately 200-300 million (Frostpunk 1.4M during its first year on PC) after the majority of the groups investment costs has been covered. In a sense this is all well but it’s still a pessimistic scenario that does not evolve their game evolution substantially but rather step-by-step. Nevertheless, the uptick have strong material effect on the bottom-line. The sales covers the absolute majority 80-100% of the total costs including the maintenance and growth investments costs. Thus, the rest of operations the back catalog and the publishing business should be considered close to bottom-line accretive businesses, especially the back catalog that does not have major variable investment costs associated with it. In total the EBIT with the back catalog, publishing and new releases would most likely be in the release year of P8 be around SEK 300-500 million equivalent to EV/EBIT multiple of 4-7. Breakdown of Earnings Power-EBIT by Segment The earnings power of a normalized year from 2022, on a group level, should be in a bear case scenario around 250-300M SEK thus valuing the business at around 6-7x earnings at that point in time (30-40% cash) – is that reasonable given the company’s rare quality profile, recurring earnings power in back catalog, publishing projects and upcoming releases? Furthermore, its highly likely that the cash position will expand to nearly half of the market cap. by 2022 (SEK 850-1.2bn SEK in end 2022), at that point in time the valuation of bear case earnings of 200-250M SEK would oscillate around 5x, which in other words means a tremendous lack of confidence in 11bits capacity to evolve by its track-record in the light of having delivering results and associated future perception of the upcoming pipeline. Similarly, this type of risk reward scenario where a substantial earnings power led to a unsustainably large cash situation relative to the market cap arose in CDPR before the Witcher 3 launch. Similarly, the perception change was far from understood, enabled by several intrinsic reasons such as lack of communication regarding the ambition of the project, pipeline direction and execution fundamentals. Core New Releases EBIT (2.5M Sales Copies - 2021) 2020 2021 2022 Annualized 20 298 100 Full 12m EBIT of P8 450 Backlog EBIT Annualized (covering growth costs) TWOM,Anomaly, FP, publishing backlog 25-30 50-70 100-150 New Releases Publishing Division EBIT 1 Minor release Release of Seven 2021 Similar game to Seven Copies sold assumptions 0,5-1Mcopies 0,5-1Mcopies Publishing projects 3-4 or 1 major per year from 2022 25MEBIT 75-150MEBIT 75-150MEBIT 2018 2019 Group Total EBIT 116 59 70 300-500 250-300 Cash Position Build Up 300,00 600-800 850-1200 % of market cap 11% 22-30% 32-45%
  • 7. 11 Bit Studios – The Behemoth Awakens Continued Breakdown “P8” PC Sales Assumptions 2021 (SEK M) Below is the breakdown of the most likely scenarios 2-2.5 million copies and its associated EBIT implications, a reasonable success will cover the absolute majority of future investments into its pipeline while providing a decent earnings profile even in the bearish sense of the case circa SEK 150 million in EBIT contribution while the total portfolio of the company will contribute with EBIT close to likely at least SEK 300 million earnings during the release year. The Dawn Has Begun Indeed, the company will have several opportunities to prove itself apart from P8 but with the solid fundamental prerequisites it would be highly uncharacteristic of the evolution that 11bit has been acquainted with. In fact, we would prefer that the company “failed” for the P8 project around <1M copies sold, ending abruptly its long successful track-record putting confidence pressure. This would most likely significantly alter the perception negatively providing a downside of 50% in that scenario. Nevertheless, 1M copies would still mean the company would be able to provide one yearly recurring release, another shot at pushing the growth bar during the next few years. Along with the publishing option playing out its highly likely that there is an substantial margin-of-safety already priced in at the current price. So, what should a developer of this sort with several value realizing options that can unfold in the upcoming year be valued at? Arguably, if you take the route of estimating the back catalog, publishing and new releases from 2022 estimated to be around SEK 250-300 million and given altered reasonable expectations based on future releases at that point in time we expect it to be traded at the intrinsic value range at approx. PLN 1400-1900 per share or c. 25-40x EV/EBIT as the bottom-line will further be enhanced from that point, along with the support of a rapidly growing SEK 1 billion in cash position by end 2022. We further expect that the multiple above can be skewed conservative as its likely that the multiple from that point in time have altered the expectations in a major way. For example, we think the company will tilt upon the AAA arena and the market interpretation of such action, given a successful outcome of P8, will intensify from end 2020-2021 in steps and be interpreted more as such giving the company potential to elevate itself to the 1bn SEK+ EBIT area (4M sales copies potential)/approximately half of todays market cap in bottomline). Sales Copies (M) Sales Copies First Year PC 2 2,5 ASP First Year Eur 30 35 Net Revenues Bear case 383 558 Annualized 268 390 Base case 449 655 Annualized 314 458 Investment costs group level Bear case 235 137 Base case 141 160 2021Base Case 170 170 Costs covered by sales 83% 94% EBIT after investment costs Bear Case 147 254 Base Case 173 298
  • 8. 11 Bit Studios – The Behemoth Awakens Conclusion 11 bit is a pure-play self-publisher and game developer with a rare and exceptional track-record of IP-building and game releases (80+ Metacritic scores). The company is currently in a pivotal growth transformation phase powered by larger high-impact game projects and a yearly recurring release model. The market is yet to appreciate and recognize the associated highly substantial value magnitude of the transformation phase and upcoming releases enabled by the deep and evolving track-record of the studio that is rapidly bound to unleash value on the market. To briefly summarize, we asses that the company is prone for a perception change in the near-term 1-2 years with a number of events including the evolution to a pureplay AA+ and AAA pipeline internally, along with several publishing deals and releases, likely multiplayer orientation of its pipeline - the associated perception change with the bottom-line effect as a pure-play self- publisher in conjunction with especially the internal release (SEK 300-500 million EBIT contribution). The current baseline earnings around SEK 100 million provides a decent margin of safety in the case and arguably per se holds substantial upside, nevertheless this indicates that the market have lack of any attention to the pipeline or even moderate associated success. Thus, we asses that the market focuses more on the current business rather on where the business is most likely heading operationally and financially in the near term 1-3 years which have created a substantial price to value gap. It is assessed with the reveal of the pipeline both internally and on the publishing side the coming year and associated deals with these the substantial price to value gap will gradually close. Nevertheless, execution is key a relative failure of P8 can likely provide another attractive opportunity point similar to today but with more execution risk - the track-record strongly suggests otherwise they rather delay their game then release a mediocre-release. In other terms the road to a high-quality rapidly evolving mid sized game developer is paved from a fundamental perspective but is barely appreciated in the current valuation as an undiscovered and non-understood case. We, asses that this large intrinsic discrepancy is caused by lack of understanding and attention to the associated value related directly to the operational design and materialization of the upcoming pipeline along with several value driving events in relation to its intended growth trajectory. Albeit, a string of negative fundamental events like the loss of a of key personnel, failure of handling the back catalog along with substantial delays of future releases are most likely to a reasonable extent priced in but if these risks become prominent as in major material negative impact there is a 50% downside. The substantial discrepancy between the price and value today, can be seen from the light of the rapidly increasing cash situation, by end 2022 the cash position, conservatively estimated, will be approximately 30-45% of the current market capitalization with a substantially improved and different earnings profile. Finally, we assess that a stabilized EBIT of SEK 250- 300 million from 2022 with a altered perception of non-lumpy earnings, the associated material perception change to a larger emerging high-quality game developer will likely mean that the company will start to oscillate in the intrinsic value range of approx. PLN 1400-1900 per share (approx. 200-300% upside) equivalent to c. 25-40x EV/EBIT - of the aforementioned earnings sooner than the market expects. Its important to note that we asses that the rapidly growing cash position along with the fundamental trajectory of the company will quickly shred that multiple more than half in the subsequent years, providing substantial margin of safety. While 11bit faces many great challenges as also history have shown, we asses that 11bit has the rare prerequisites to substantially leverage itself on these challenges and evolve altering again the whole current perception of the company. Nevertheless, we deem that it is most likely that we are too conservative in the fundamental trajectory of the company leading to a significantly greater intrinsic value range than the above stated, which acts as a solid margin of safety pillar.
  • 9. Disclaimer Modelio Equity AB (publ), www.modelioequity.com, hereinafter referred to as Modelio, publishes information on companies and including analyzes. The information has been compiled based on sources that Modelio deems reliable. However, Modelio cannot guarantee the accuracy of the information. Nothing written in the analysis should be regarded as a recommendation or invitation to invest in any financial instrument, option or the like. Opinions and conclusions expressed in the analysis are intended only for the recipient. The content may not be copied, reproduced or distributed to any other person without the written approval of Modelio. Modelio shall not be held responsible for any direct or indirect damage caused by decisions made on the basis of information contained in this analysis. This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Modelio. However, Modelio cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Modelio cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. Investments in financial instruments provide opportunities for value increases and profits. All such investments are also associated with risks. Risks vary between different types of financial instruments and combinations of these. Historical returns should not be considered as an indication of future returns. Modelio does not perform any service to the company nor recieves any compensation from the company. Modelio owns shares in 11bit Studios S.A.