Sumo Group (LON:SUMO) announced FY18 figures today that revealed better than expected organic, cfx sales growth of 31% year on year and adj. EBITDA that was slightly ahead of our (and consensus) expectations. Adjusted sales were £38.9m vs Zeus/cons. £37.3m/£36.5m, adj. EBITDA was £10.4m Vs Zeus and cons. at £10.3m and adj. PBT was £9.04m Vs Zeus and cons. of £9.1m. The quoted adj EPS, per the press release was 5.6p (basic) but using a lower tax charge than we modelled. Adjusted for this it is in line with Zeus/cons. EPS of 4.9p (assuming 19% corporation tax rate / 150m shares in issue). Adjusted figures are pre IFRS 15 and 16. Importantly our forecast for FY19 remain unchanged and are increased slightly for FY20. Post IFRS 15 and 16 estimates are also shown as a footnote to the p&l, where it is possible to quantify at this stage.
EBITDA forecasts upgraded for FY20 to £16.3m (from £16.1m). This increase is a result of upgraded sales forecasts (by 3 to 5% for FY19/20). In turn because of the strong expected market growth dynamics with streaming and store initiatives from Google, Apple and Microsoft, the acquisition of The Chinese Room and Red Kite Games and, crucially, the signing of a handful of major new contracts by Sumo in Q418.
EBITDA margins declined to just under 27%, some 50 bps lower than Zeus estimates. This was partly a consequence of lower high margin Royalties/Own IP revenue streams, but also because of the material investment following the acquisitions of CCP and The Chinese Room. We forecast a c30bps increase going forward to over 27%. Sumo continues to align interest with its clients and therefore the amount of royalty income expected in FY19 should increase. Similarly, the Own IP sales should increase including “Spyder” for Apple arcade.
Visibility is the highest ever at the end of Q119. Visibility is currently 88% over development fee income estimates (the main revenue stream). Normally this is in the sixties at this stage, but the major contracts awarded in Q418 have been key. Utilisation rates in the UK were c95% in FY18 and we expect these rates to be sustainable.
Several major new clients were won in Q418, including Apple. This means that the customer concentration will further reduce in 2019. In 2018, the top 3 clients accounted for c52% of revenues. The list of major new clients includes several undisclosed names.
The cash flow in FY19 should see a positive WC result. In FY18 there was a large outflow due to material prefunding of a game subsequently successfully released at the end of 2018, IPO costs and an agreed, delayed payment to a client. These impacts will either not be present or reverse in FY19. Net cash at December 2019 is estimated to be well ahead of prior year at around £17m (down from our original estimate of £19m, due to £2m extra capex).
IFRS 15 impact is difficult to model at this stage but should be greater than the £ (0.2)m cost in FY18, as the value of the “new” type of development contracts should increase (whereby most of the development funding will be done by the publisher and only a minority by Sumo, but with an upside to the lifetime value to Sumo). Any negative, as yet unquantified, IFRS 15 accounting impact in FY19 would be expected to reverse in FY20. IFRS 16 will be adopted for FY19 and should result in a positive impact to EBITDA of c£1.0m, but a negligible impact to PBT once the increased depreciation and finance cost is considered.
We believe that the valuation remains attractive at these levels. Current year EV/EBITDA and PE ratios are 13.9x and 20.9x respectively and represent around 16 to 18% discount to the UK (sub) sector