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MERRYLL LYNCH TAPS EIDOS COVERAGE
Copyright 2001 AFX News

[ October 8th 2001 ]

Shares in Eidos PLC were leading the mid-cap risers at midday, bucking the weak market trend after Merrill Lynch restarted coverage with an upbeat note on the computer games maker and its Europe-wide sector with a medium-term 'buy' stance and a long-term 'neutral' in a morning note to clients. It said Eidos offers a "pure, operationally geared play" on the games industry with a focused approach, a solid balance sheet, and clean accounting policies.

Merrill commented that Eidos had in the past an over-reliance on Tomb Raider, its long-running action adventure series fronted by Lara Croft. But the broker forecasts this reliance to continue to decline in spite of the movie this year, with Tomb Raider seen to provide less than 10% of revenues in 2002.

Eidos is targeting 20% growth excluding Tomb Raider products, with a Tomb Raider related title every other year which will boost this target for underlying business in release years. Some 21 titles are planned for launch in 2002, rising to 24 titles in 2003 - a Tomb Raider year.

Merrill also highlighted Eidos's strategy of developing high volume genres and in-house content and properties, while out-sourcing peripheral areas such as distribution and mobile gaming. However, the broker noted that Eidos must 'bulk up' over the longer term to gain a greater number of steady, lower volume entertainment titles.

This would reduce risk and also begin the move into new long term growth areas such as mobile and online gaming, it said. Merrill's 'buy' rating on Eidos therefore reflected a low relative rating and improving management. Its long-term 'neutral' stance reflected that benefits are seen offset by longer term issues over lack of diversification and concerns over the industry.

Specific risk is high on a title by title basis and cyclical industry weaknesses continue to be a feature, it said. The broker believes investors should be prepared to bail out of Eidos and other software stocks "near the top" of the market, which it projects to occur in 1-2 years time.

These comments came as Merrill restarted coverage of European companies within the $18 billion global leisure software industry; it estimates that around $14 billion of this consumer spending moves towards the mass market companies, even despite the recent slowdown ahead of new console launches.

Consumers are thought to have delayed decisions ahead of the launch of new hardware from the likes of Sony, Nintendo and Microsoft - the latter two do not launch systems in Europe until after Christmas. But Merrill now believes we are near the bottom of the current console downcycle. It sees market growth in Europe of 5-10% this year and 20% a year over the following 2 years.

Growth in 2001 is still risky due to lower consumer confidence following Sept 11 and due to a low installed base of new consoles, the broker said. But it believes any disappointment might be looked through by investors keen to share in upside as console volumes increase.

The new console launches should stimulate software demand in 2001-02, while new software releases should also accelerate to support these launches, boosting growth further, it said. Merrill also restarted coverage of Ubi Soft Entertainment with a medium-term 'neutral' and long-term 'accumulate' stance, due to the group appearing relatively highly valued.

Infogrammes, meanwhile, was initiated with a near-term 'accumulate' and a long-term 'neutral'. At 12.12 pm, shares in Eidos PLC were trading up 12-1/2 pence to 201. This extends gains seen last week after rival broker Goldman Sachs initiated coverage on the UK group with a 'market outperformer' stance.

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