Sega Sammy: Initiating Coverage With a Narrow Moat Rating and Fair Value Estimate of JPY 2,630

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.