Keywords Studios — A new string to the bow

Keywords Studios (LN: KWS)

Last close As at 18/03/2024

2,920.00

50.00 (1.74%)

Market capitalisation

2,207m

More on this equity

Research: TMT

Keywords Studios — A new string to the bow

Keyword’s acquisition of GameSim for $4.76m marks the company’s long planned entry into engineering. We expect follow-on acquisitions as it replicates its strategy of building a service line through consolidating the fragmented games outsourcer market. As with the company’s Art service line, GameSim’s teams work closely with the core engineering teams of its games developer customers, creating cross-selling opportunities and deeper relationships with customers. Incorporating GameSim, together with the earlier $0.9m acquisition of XLOC, we upgrade FY17e EPS by 3%.

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TMT

Keywords Studios

A new string to the bow

Acquisition

Software & comp services

18 May 2017

Price

792p

Market cap

£441m

£/€1.17

Net cash (€m) at 31 December 2016

8.7

Shares in issue

55.8m

Free float

69%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.8)

27.7

183.9

Rel (local)

(2.9)

23.6

134.7

52-week high/low

830.0p

260.0p

Business description

Keywords Studios provides localisation, testing, artwork, community support and now engineering services exclusively to the video games industry. It provides services to 20 of the top 25 games developers and is leading consolidation of this fragmented industry.

Next events

H1 trading update

July 2017

Analyst

Dan Ridsdale

+44 (0)20 3077 5729

Victoria Pease

+44 (0)20 3077 5700

Keywords Studios is a research client of Edison Investment Research Limited

Keyword’s acquisition of GameSim for $4.76m marks the company’s long planned entry into engineering. We expect follow-on acquisitions as it replicates its strategy of building a service line through consolidating the fragmented games outsourcer market. As with the company’s Art service line, GameSim’s teams work closely with the core engineering teams of its games developer customers, creating cross-selling opportunities and deeper relationships with customers. Incorporating GameSim, together with the earlier $0.9m acquisition of XLOC, we upgrade FY17e EPS by 3%.

Year
end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(p)

P/E
(x)

Yield
(%)

12/15

58.0

8.0

12.6

1.2

73.5

0.1

12/16

96.6

14.9

20.3

1.3

45.6

0.1

12/17e

119.6

18.0

25.2

1.5

36.8

0.2

12/18e

130.6

19.8

27.5

1.6

33.7

0.2

Note: *PBT and EPS (fully diluted) are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Landing point for building an engineering service line

GameSim is a Florida-based provider of engineering services for the games industry (c 70% of revenues), but also for the defence and geospatial industries. Its range of services for the games industry includes its proprietary technology for creating 3D simulated environments, which is core to its other service lines. The business has some similarities with Keywords’ Art service line in that teams of specialised staff work closely with the clients’ core games developer teams. Hence management sees good scope for cross-selling between engineering and art and for deeper customer relationships at this level. As a reminder, Keywords entered the art segment through the €3.2m acquisition of Lakshya Digital in 2014. Spending a total of €16.5m on Lakshya, Mindwalk and Liquid Development, the company has built this into an estimated €22m run rate service line. Management envisages a similar build-out profile for engineering.

Reasonable multiples, further earnings enhancement

GameSim’s FY16 revenues were $4.1m. As with the Art service line, gross margins are higher than the group average, but a higher relative fixed cost base (lower use of contract staff to deal with demand peaks and troughs) offsets this at the operating level. We understand that operating margins were slightly below Keywords’ group level during the year, but with synergies management expects to normalise margins within a year. The valuation equates to reasonable 1.16x historic sales and sub 10x EBIT multiples and the company has a good track record of accelerating growth under the group’s umbrella.

Valuation: Continued execution key to further upside

At 35x FY18e earnings, Keywords’ rating is a substantial premium to peers (average 19x for FY18) and, in our view, further strong progress is now priced in for this year. Nevertheless, the company has a compelling platform and strategy for growth in a games industry growing at a healthy 6.6% pa. Consequently, we believe continued execution should deliver share price value in the longer term.

Estimate changes

Our estimate changes are shown below and incorporate the acquisitions of both GameSim and XLOC, a provider of localisation services acquired for $0.9m (€0.63) on 10 April 2017.

Our FY17 revenue estimate implies a mere 3% like-for-like growth – although if we adjust for the c €4m of above run rate revenues from Synthesis this increases to 7% – still significantly below the 20% (Synthesis adjusted) level from FY16. We assume 8% like-for-like growth in FY18.

The company had €8.7m of cash at end FY16. It has a €35m revolving credit facility with Barclays and generates robust free cash flows, giving it plenty of firepower to make more earnings-enhancing acquisitions.

Exhibit 1: Estimate changes

€000s

2015

2016

2017e

2018e

Actual

Actual

Old

New

Change (%)

Old

New

Change (%)

Revenue

57,951

96,585

116,671

119,551

2

126,096

130,605

4

Cost of Sales

(36,172)

(59,907)

(73,203)

(74,833)

2

(79,314)

(81,843)

3

Gross Profit

21,779

36,678

43,468

44,718

3

46,782

48,761

4

EBITDA

9,459

16,893

19,919

20,414

2

21,556

22,438

4

Operating Profit (before amort. and except.)

8,162

15,090

17,845

18,339

3

19,274

20,156

5

Profit Before Tax (norm)

8,007

14,864

17,558

18,029

3

18,987

19,846

5

Profit After Tax (norm)

6,175

11,641

13,871

14,243

3

15,190

15,877

5

EPS - normalised fully diluted (c)

12.6

20.3

24.5

25.2

3

26.3

27.5

5

EPS - (IFRS) (c)

7.0

11.2

20.9

21.6

3

22.8

24.0

5

Dividend per share (pence)

1.2

1.3

1.5

1.5

0

1.6

1.6

0

Closing net debt/(cash)

(17,284)

(8,650)

(19,538)

(15,720)

(20)

(29,858)

(25,731)

(14)

Source: Company data, Edison Investment Research

Exhibit 2: Financial summary

€'000s

2014

2015

2016

2017e

2018e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

37,293

57,951

96,585

119,551

130,605

Cost of Sales

(24,566)

(36,172)

(59,907)

(74,833)

(81,843)

Gross Profit (inc multimedia tax credits)

12,727

21,779

36,678

44,718

48,761

EBITDA

 

 

6,027

9,459

16,893

20,414

22,438

Operating Profit (before amort. and except.)

 

 

5,159

8,162

15,090

18,339

20,156

Intangible Amortisation

(468)

(857)

(1,629)

(1,629)

(1,629)

Exceptionals

(1,461)

(1,089)

(1,316)

0

0

Other

(156)

(392)

(686)

(686)

(686)

Operating Profit

3,074

5,824

11,459

16,024

17,841

Net Interest

(106)

(264)

(287)

(310)

(310)

FOREX

467

(474)

(1,737)

0

0

Profit Before Tax (norm)

 

 

5,053

8,007

14,864

18,029

19,846

Profit Before Tax (FRS 3)

 

 

3,435

5,086

9,435

15,714

17,531

Tax

(1,215)

(1,832)

(3,223)

(3,786)

(3,969)

Profit After Tax (norm)

3,838

6,175

11,641

14,243

15,877

Profit After Tax (FRS 3)

2,220

3,254

6,212

11,928

13,562

Average Number of Shares Outstanding (m)

45.0

48.2

55.9

55.3

56.5

EPS - normalised (c)

 

 

8.5

12.8

20.9

25.8

28.1

EPS - normalised fully diluted (c)

 

 

8.5

12.6

20.3

25.2

27.5

EPS - (IFRS) (c)

 

 

4.9

7.0

11.2

21.6

24.0

Dividend per share (p)

1.10

1.21

1.33

1.46

1.61

Gross Margin (%)

34.1%

37.6%

38.0%

37.4%

37.3%

EBITDA Margin (%)

16.2%

16.3%

17.5%

17.1%

17.2%

Operating Margin (before GW and except.) (%)

13.8%

14.1%

15.6%

15.3%

15.4%

BALANCE SHEET

Fixed Assets

 

 

20,874

32,132

61,873

61,102

62,791

Intangible Assets

17,677

27,675

55,495

54,191

52,562

Tangible Assets

2,761

3,486

5,498

6,031

9,349

Investments

436

971

880

880

880

Current Assets

 

 

23,120

34,884

38,677

49,745

62,295

Stocks

0

0

0

0

0

Debtors

6,203

7,519

13,879

16,655

18,195

Cash

11,014

19,018

17,020

24,090

34,101

Other

5,903

8,347

7,778

9,000

10,000

Current Liabilities

 

 

(9,746)

(13,128)

(27,830)

(31,236)

(32,449)

Creditors

(9,746)

(11,965)

(19,805)

(23,211)

(24,424)

Short term borrowings

0

(1,163)

(8,025)

(8,025)

(8,025)

Long Term Liabilities

 

 

(2,607)

(3,294)

(6,016)

(6,190)

(6,190)

Long term borrowings

0

(571)

(345)

(345)

(345)

Other long term liabilities

(2,607)

(2,723)

(5,671)

(5,845)

(5,845)

Net Assets

 

 

31,642

50,594

66,704

73,421

86,447

CASH FLOW

Operating Cash Flow

 

 

2,412

4,768

17,168

20,864

22,304

Net Interest

11

(58)

(58)

(310)

(310)

Tax

(522)

(1,362)

(2,129)

(3,786)

(3,969)

Capex

(1,252)

(1,635)

(2,306)

(4,308)

(5,600)

Acquisitions/disposals

(8,889)

(7,409)

(21,104)

(4,565)

(1,500)

Financing

7,342

14,199

643

0

0

Dividends

(609)

(737)

(825)

(814)

(915)

Net Cash Flow

(4,256)

7,194

(8,611)

7,081

10,011

Opening net debt/(cash)

 

 

(15,271)

(11,014)

(17,284)

(8,650)

(15,720)

Forex gain on cash

0

0

1

0

0

Other

(1)

(924)

(24)

(11)

0

Closing net debt/(cash)

 

 

(11,014)

(17,284)

(8,650)

(15,720)

(25,731)

Source: Company data, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Keywords Studios and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Keywords Studios and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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