* Cost savings to offset sales decline in 2026e...
* ...but we cut 2027e-2028e adj. EBIT by 3-6% on sales trajectory
* Trading at 4x NTM EV/adj. EBIT
Cost savings now offsetting the sales decline
Q2 showed that cost savings can offset the sales decline. Adj. EBIT was in line with us despite an 8% sales miss, due to opex reductions. With full effect of the savings in coming quarters, we expect margins to recover. The larger-than-expected sales drop was partly driven by temporary headwinds for Hidden City, where management hopes to see a recovery. Meanwhile, Sherlock continued to show softness despite efforts to stabilise it - as a result, management withdrew its ambition from Q1 to increase user acquisition costs to stabilise it in the near term. The 'Jewels of' series also remained soft, with sales -30% y-o-y. In accordance with what was said last quarter, G5 is therefore implementing another wave of cost cuts. With the new cost cuts reaching full effect in the coming quarters, we expect that it will better offset the sales decline and help improve margins (5% in Q3 and 9% in Q4 compared to ~0% in the last three quarters).
Estimate changes
Even though we lower sales by 7%/9%/10% for '26e-'28e on a larger sequential drop in Q2, larger cuts to the organisation combined with lower user acquisition costs because of management's communication around Sherlock means that adj. EBIT is less affected. 2026e is unchanged and 2027e cut by 3%. However, the effect of the weaker sales trajectory weighs a bit more on 2028e where we cut adj. EBIT by 6%.
Navigating troubled waters prudently
The sales trajectory is arguably the most important long-term factor supporting earnings and the valuation. However, shorter term and in this situation specifically, acting to restore margins combined with prudent capital allocation is key. We think the decision to downsize the organisation by a third whilst distributing all the FCF as dividends and buybacks this year is evidence of that.