Company Reports

Sega Sammy's June-quarter revenue and operating income fell 3% and 15% year over year, respectively, to JPY 105 billion and JPY 19 billion, which was well anticipated, given the high base of strong pachislot sales a year ago, amid the launch of a hit product "Smart Pachislot Hohuto No Ken" in April 2023. Meanwhile, performance of the entertainment content business was solid, partly offsetting the reactionary decline in pachislot and pachinko sales. Management aims to release a few new Full Game titles in the second half, and also planned to launch its first smart Pachinko product and a featured title in the September quarter. We believe these visible pipelines will continue to support steady sales growth throughout the year, and we maintain our both our earnings forecasts and fair value estimate of JPY 2,680 per share. We think the shares are slightly undervalued currently, as the market underappreciates the firm's steady long-term growth outlook.

We raise our fair value estimate of Sega Sammy to JPY 2,680 per share from JPY 2,630, following the firm’s release of its new Medium-Term Plan through fiscal 2024-26, which reflects an improved profit growth outlook in the entertainment content business segment, more than offsetting the short-term reactionary decline in pachislot and pachinko sales. We think this is encouraging, helping to ease investor concerns over the firm’s growth potential in the video game segment. We anticipate higher mid- to long-term growth in operating profit and lift our five-year CAGR forecast of J-GAAP-based operating profit to 4.7% through fiscal 2024-28, up from 2.8% in our earlier assumptions. We continue to expect the firm to see opportunities from the globalization of its well-established IPs, with expanding platforms and markets, as well as positive synergies with its recently acquired Rovio in growing its mobile game business and expanding its global presence. We think the shares are currently undervalued relative to our long-term outlook.

We think Sega Sammy is now seeing new opportunities through the globalization of its well-established intellectual property, or IP, with expanding platforms and markets. In addition, the acquisition of Rovio has also helped to expand its IP library, providing positive synergy in growing its mobile game business, and expanding its global presence. We expect all of this to improve Sega’s competitiveness and growth outlook. Coupled with the solid operation and decent profitability at Sammy’s pachinko and pachislot machine business, this should allow it to generate economic profit well into the future, unlocking the company’s long-term value.

We think Sega Sammy is now seeing new opportunities through the globalization of its well-established intellectual property, or IP, with expanding platforms and markets. In addition, the acquisition of Rovio has also helped to expand its IP library, providing positive synergy in growing its mobile game business, and expanding its global presence. We expect all of this to improve Sega’s competitiveness and growth outlook. Coupled with the solid operation and decent profitability at Sammy’s pachinko and pachislot machine business, this should allow it to generate economic profit well into the future, unlocking the company’s long-term value.

Sega Sammy’s shares lost 11% on Feb. 9, 2024, as the company’s December-quarter 2023 result and a downward revision of full-year guidance were disappointing. Despite the near-term challenges, we maintain midcycle forecasts and our fair value estimate of JPY 2,630 per share, as we continue to expect the company to see opportunities from the globalization of its well-established intellectual property, with expanding platforms and markets. We also expect positive synergies with its recently acquired Rovio in growing its mobile game business and expanding its global presence. These will improve Sega Sammy’s growth outlook in the mid to long term. We think the shares are undervalued currently, trading at 4.2 times our forecast 2024 EV/EBITA, below the average of 6.0-6.5 times, its historical range.

We think Sega Sammy is now seeing new opportunities through the globalization of its well-established intellectual property, or IP, with expanding platforms and markets. In addition, the acquisition of Rovio has also helped to expand its IP library, providing positive synergy in growing its mobile game business, and expanding its global presence. We expect all of this to improve Sega’s competitiveness and growth outlook. Coupled with the solid operation and decent profitability at Sammy’s pachinko and pachislot machine business, this should allow it to generate economic profit well into the future, unlocking the company’s long-term value.

We initiate coverage of Sega Sammy, Japan’s leading pachislot and pachinko maker and video game developer, with a narrow moat rating and fair value estimate of JPY 2,630. We think the company is seeing opportunities from the globalization of its well-established intellectual property, or IP, with expanding platforms and markets. In addition, the acquisition of Rovio has also helped to expand its IP library, providing positive synergies in growing its mobile game business, and extending its global presence. We expect all of this to improve Sega’s competitiveness and growth outlook. Coupled with the solid operation and decent profitability at its pachinko and pachislot machine business, this should allow it to generate economic profits well into the future. We project the company's revenue and adjusted EBITDA to grow at five-year CAGRs of 6.8% and 6.7%, respectively, over the next five years between 2022 and 2027. And we think the shares are undervalued currently, as we’re more optimistic than the market on the company’s video game growth outlook.