Remedy: Forecasts updated for Control 2

This report is a summary translation of the report “Ennusteet päivitetty Control 2:n osalta” published on 9/5/2024 at 7:52 am EEST.

We have updated our forecast to include the strategic partnership agreement signed last week with Annapurna for Control 2. We had previously assumed that Remedy would fund the game entirely on its own and raise additional funds to do so. This agreement is more balanced from a risk perspective and has eliminated the need for additional funding that we had anticipated. At the same time, the deal offers good royalty potential and a low-risk opportunity to reach new audiences through movies and TV series. Overall, we think the deal is good for Remedy, and it is likely that we will hear about decisions regarding Condor soon as well. We reiterate our Accumulate recommendation for Remedy and revise our target price to EUR 21.0 (was EUR 20.0).

A balanced deal from a risk/reward perspective

Under the terms of the agreement, Annapurna will fund 50% of the development budget for Control 2 (we estimate 50 MEUR) and will have the rights to extend the Control and Alan Wake franchises into film and television. Remedy and Annapurna will split the game's revenue equally until the game's production budget is recouped. Remedy will then receive a larger share of game sales, since as the publisher of the game, the company is also responsible for marketing costs (at least 10-30% of the production budget for a typical AAA game). Thus, Remedy's share after recouping the development budget could be estimated at around 60-75% of sales revenues. In return, Annapurna will receive a greater share of audiovisual productions in which Remedy does not have to invest capital. We expect the contract to result in development fees of 7 MEUR for Q3, retroactively, in proportion to the development done so far on Control 2. Considering this and future development fees, Remedy's cash position (Q2'24: 26.1 MEUR) appears to be sufficient to finance the next projects and to pay the two remaining installments for the Control rights to 505 Games.

Annapurna deal provides development fees for the next few years, but takes a cut of Control 2 royalties

As a result of the agreement, Remedy will receive 25 MEUR of development fees from the development of Control 2 between 2024 and 2027, which has increased the revenue and profit forecasts for the coming years. If the payments we expect from the Condor contract are realized at the end of the year, we forecast that the operating result for the current year will turn positive at 5.4 MEUR. In turn, Control 2 royalty forecasts have been lowered (expected release H1'27). After recouping the development budget, we now assume that Annapurna's share of sales revenues will be 30%. We will update our forecasts again once the negotiations on Condor are completed. At that time, Remedy should also provide a revised outlook for this year.

The long game remains interesting

Due to the timing of game releases, Remedy's earnings development, and therefore valuation multiples, will continue to fluctuate on an annual basis for a long time in our estimates, and the more consistent strong earnings performance enabled by the multi-project model will not materialize until the 2030s. Based on our projections, earnings multiples for the coming years do not support the valuation and EV/S multiples (2024e-2025e ~4x) are quite high. The value of our DCF model, which assumes successful game releases in the long term, is now EUR 22.6. Naturally, the model is very sensitive to key assumptions, and in Remedy’s case, a single game can generate a big surprise in both directions. Overall, Remedy’s steps toward taking greater responsibility for its game projects increase the long-term potential, compared to which the current valuation of the stock appears interesting.