TinyBuild needs to start generating real cash

There is no obvious reason for TinyBuild’s (TBLD) dramatic share price decline in the past year. One broker said its failure to publish organic growth figures was limiting confidence, while another blamed the poor reviews for recent game Hello Neighbour 2. There is also the company’s tendency to capitalise its game development costs so that they don't hit the profit line. 

The area that causes most concern is how quickly the company capitalises development costs. Capitalised software development rose from $15.1mn to $35.8mn due to investment in new games. Normally, these would be amortised over several years, with an exception made for products that become commercially viable very quickly. The short-term impact is to improve the profit line by not expensing those costs through the income statement, but this contributed to the net cash position falling from $48.8mn to $26mn.  

TinyBuild may yet see a return on this development expenditure. After all, it said that back-catalogue sales represented 80 per cent of revenue last year, which suggests the assets have a long shelf life. Management promises that the net cash position will rise above $26.5mn by the end of December 2023.

Investors will be waiting for the day it brings in more cash than it spends. The flipside is that TinyBuild trades at a big discount to its peers – broker Numis has it on a forward price/earnings ratio of just six times. TinyBuild generated a 1.9 times return on its game releases last year and Numis thinks this can rise to over two times in 2023. At this valuation, we are happy to believe the story. Buy.

Last IC View: Buy, 110p, 27 Sep 2022