TinyBuild is "highly undervalued"

Not For Broadcast is a dark comedy propaganda simulator game published by TinyBuild (TBLD). In the game, players must keep the masses subdued by controlling what appears on the TV. It encapsulated the rebellious nature of the independent gaming world and has been downloaded 400,000 times since it was released in 2019.

The impressive thing about TinyBuild is the continuing popularity of its games. Back catalogue sales made up 99 per cent of total gaming revenues. Higher-margin IP games now also contribute to 83 per cent of sales, up from 78 per cent last year.

Despite the rise in own IP games, group operating margin actually decreased to 34 per cent from 43 per cent because of the consolidation of “structurally lower-margin services” Red Cerebus and third-party publisher Versus Evil.

Through these acquisitions, TinyBuild has expanded into publishing for other developers. This is lower-margin work than developing but is less risky. However, this doesn't mean the company has cut back on its own development. To boost its pipeline of own IP games, TinyBuild increased software development costs from $5.6mn (£5.12mn) to $14.2mn. In the coming months, it is going to release up to five new games – including Hello Neighbour 2 (a sequel to popular game Hello Neighbour).

Due to the strong pipeline of games, broker Peel Hunt believes TinyBuild is “highly undervalued”. The broker has forecast a 2023 PES of 8.9p which has it trading a 2023 PE ratio of 12.7. We have to agree with Peel Hunt. A developer with a strong track record and this much strong IP looks good value at this price. We stick with buy.

Last IC View: Buy, 151p, 29 Mar 2022