Will These New Releases Be Enough for Ubisoft?

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Ubisoft (UBI.PA) will report 2H FY:13 (March) results on Wednesday, May 15 with a call at 9:15am PT (866-907-5923 or www.ubisoftgroup.com/ir). We note that the company will be reporting Q4 sales and 2H earnings.

Sales and EPS should be at the high end of guidance. We modeled Q4 sales of 181 million euro, compared with consensus of 174 million euro and guidance of 159-179 million euro. We modeled 2H EPS of 1.06 euro, compared to consensus of 1.07 euro. The company does not provide EPS guidance, but we are at the high-end of FY:13 current operating income guidance of 90-100 million euro. According to NPD, Ubisoft’s U.S. software sales for the March quarter were down 2 percent. However, we believe packaged goods weakness was offset by digital/online and free-to-play revenues. Sales will likely be positively impacted by the strengthening dollar, which increased 3 percent against the euro (Q4 average of 1.28$/euro vs. Q3 average of 1.32$/euro).

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We expect Ubisoft to guide to flattish top-line growth and positive current operating income growth in FY:14. High-profile releases will likely include Assassin’s Creed IV: Black Flag, Rainbow Six: Patriots, South Park: The Stick of Truth, Tom Clancy’s Splinter Cell: Blacklist, and Watch Dogs. Earnings growth should be driven by continued digital sales growth, but we are maintaining our current estimate for flat EPS growth pending guidance or a more firm release slate.

Despite another strong release slate, we believe Ubisoft faces an uphill battle to deliver growth in FY:14. Record Assassin’s Creed III sales and solid performance from Far Cry 3 present a difficult comparison, and we expect casual game sales to decline further as Ubisoft has historically been strong on Nintendo platforms. The Nintendo Wii U’s weak start could pose a continuing challenge to growth, particularly impacting Ubisoft should it choose to support the platform while other publishers may abandon it. In addition, unexpected game delays remain a possibility, although Ubisoft has vastly improved the predictability of its releases.

Maintaining our NEUTRAL rating, but raising our 12-month price target to 9 euro from 7 euro. Our revised price target reflects a forward P/E of 13x our FY:14 EPS estimate of 0.69 euro. This is a slight discount to the multiple of larger players in the industry due to Ubisoft’s increased exposure to Nintendo’s hardware devices. Our current Ubisoft multiple remains below the historical range of 24-30x due to dependence on Assassin’s Creed and dance games, as well as delays.

Michael Pachter is an analyst at Wedbush Securities. 

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