Keywords Studios — Update 8 November 2016

Keywords Studios (LN: KWS)

Last close As at 19/04/2024

2,920.00

50.00 (1.74%)

Market capitalisation

2,207m

More on this equity

Research: TMT

Keywords Studios — Update 8 November 2016

Keywords Studios

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Written by

TMT

Keywords Studios

Exceptional trading continues

Trading update/estimates upgrade

Software & comp services

8 November 2016

Price

460p

Market cap

£250m

GBP/EUR 1.12

Net cash (€m) at 30 June

3.5

Shares in issue

54.4m

Free float

68%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.7

29.9

116.5

Rel (local)

6.2

29.7

103.9

52-week high/low

462.5p

197.0p

Business description

Keywords Studios provides localisation, testing, artwork and community support services exclusively to the video games industry. It provides services to 20 of the top 25 games developers and is looking to consolidate the currently fragmented industry.

Next events

Capital Markets Day

8 November 2016

Analysts

Dan Ridsdale

+44 (0)20 3077 5729

Jane Anscombe

+44 (0)20 3077 5740

Keywords Studios is a research client of Edison Investment Research Limited

Keywords has announced that the strong trading in localisation and audio services has continued into H216. In particular, the Synthesis business acquired in April continues to benefit from exceptionally strong trading. Full-year results are now expected to be materially ahead of consensus and we upgrade our FY16e EPS by 13%. Erring on the side of caution, we have not changed our FY17 estimates significantly. Nevertheless, we believe the company does have a platform to sustain double-digit earnings growth, and hence medium-/long-term prospects for further share appreciation remain good.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(p)

P/E
(x)

Yield
(%)

12/14

37.3

5.1

8.5

1.10

60.9

0.2

12/15

58.0

8.0

12.5

1.21

41.1

0.3

12/16e

93.0

14.2

20.1

1.33

25.7

0.3

12/17e

105.3

15.4

21.6

1.46

23.8

0.3

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

Robust trading, Synthesis driving FY16e upgrades

Trading has been robust across the group, but especially in the localisation and audio businesses, which both have strong seasonal peaks during the summer. Synthesis, which was acquired in September, has enjoyed exceptionally strong trading, boosted by full release schedules from key developer customers. We have upgraded our FY16 sales forecast by 7% to €93m with PBT and EPS both moving up by 18% to €14.2m and 20.1c respectively. Erring on the side of caution, our estimates for FY17 have not changed materially – assuming that Synthesis revenues drop back to historical levels following the exceptional FY16. The company is also increasing investment into this business.

Positive prospects, although flux reduces visibility

The market opportunity for Keywords looks very positive in the medium term, although there is a degree of flux within the company’s global games developer customer base, which clouds near-term visibility. Management is now seeing some developers and publishers look to consolidate their suppliers. This should be a positive trend for Keywords as the market leader with the most extensive portfolio of solutions, but the timing of wins and losses adds an element of uncertainty to forecasts. VR and AR are strong medium-term opportunities for Keywords but development activity may initially divert some budget away from Keywords services as the first generations of games are relatively small in terms of game play time.

Valuation: Supported by EPS growth prospects

While the shares are rated at a premium to peers, we believe the company’s growth prospects justify this and further acquisition activity or upgrades could quickly bring the rating back in line. In the longer term, we believe that Keywords has a platform to deliver sustained double-digit earnings growth and hence prospects for share price appreciation look very attractive.

Investment summary

Estimate changes

Our estimate changes are shown in Exhibit 1. The exceptional trading at Synthesis combined with generally robust trading across the group prompts a 7% upgrade to FY16 sales. This is accentuated in earnings due to operational gearing and exceptional utilisation rates at Synthesis, with PBT and EPS upgrades by 16% and 13% respectively.

We now expect annualised FY16 sales at Synthesis to reach c €19m versus €15m at the time of acquisition and, with capacity utilisation at exceptionally high levels, this strength will drop strongly through to profitability. Management also plans to increase investment in the business.

Our estimates for FY17 have not changed substantially. A minor increase in revenues is partly organic and partly due to the October acquisition of Player Research (for a purchase price up to £1.3m, of which the initial consideration was £700k plus 65k shares).

Exhibit 1: Estimate changes

€'000s

2015

2016e

2016e

Change

2017e

2017e

Change

31-December

Actual

Old

New

Old

New

PROFIT & LOSS

 

 

Revenue

 

 

57,951

87,031

93,031

7%

102,789

105,317

2%

Cost of Sales

(36,172)

(54,661)

(58,429)

(62,701)

(64,243)

Gross Profit

21,779

32,370

34,602

7%

40,088

41,074

2%

EBITDA

 

 

9,459

13,971

15,981

14%

16,900

17,224

2%

Operating Profit (before amort. and except.)

8,162

12,471

14,481

16%

15,140

15,464

2%

Operating Profit

5,824

8,022

10,032

25%

13,391

13,715

2%

Profit Before Tax (norm)

 

 

8,007

12,211

14,221

16%

14,990

15,364

2%

Profit After Tax (norm)

6,175

9,646

11,234

16%

11,993

12,293

2%

EPS - normalised fully diluted (c)

 

 

12.5

17.8

20.1

13%

21.8

21.6

-1%

EPS - (IFRS) (c)

 

 

7.1

9.7

12.2

26%

18.7

18.6

0%

Dividend per share (pence)

1.2

1.3

1.3

0%

1.5

1.5

0%

Closing net debt/(cash)

 

 

(17,284)

(8,892)

(9,927)

12%

(14,394)

(15,921)

11%

Source: Edison Investment Research, company data

Valuation: Secular growth and upgrade potential justify premium

Keywords’ shares are valued at the top end of the peer group (Exhibit 5) although the premium for FY16 has reduced with our estimates upgrade. We believe this premium rating is justified by the company’s strong strategic position and growth prospects. Further accretive acquisition activity or organic upgrades could bring the rating back in-line. In the longer term, we believe the company has a platform for generating sustained double-digit earnings growth through a combination of healthy organic growth and earnings-enhancing acquisitions.

Exhibit 2: Peer valuation comparison

Company

 

Share price (local)

Market cap (local m)

Current EV/sales (x)

Next EV/sales (x)

Current EV/ EBITDA

Next EV/ EBITDA

Current P/E

Next P/E

Keywords Studios

 

460.0

250

2.4x

2.6x

13.8x

16.0x

25.7x

23.8x

Lionbridge Technologies Inc

 

4.8

294

0.6x

0.6x

6.8x

6.1x

8.6x

7.1x

SDL

 

432.0

352

1.4x

1.4x

11.2x

9.5x

18.3x

15.9x

RWS Holdings

 

270.0

582

4.5x

4.0x

17.4x

15.4x

24.3x

21.8x

Capita

 

565.0

3,769

1.2x

1.2x

8.4x

8.0x

8.4x

8.1x

Serco Group

 

136.5

1,500

0.5x

0.6x

12.1x

14.0x

29.7x

45.5x

Wipro

 

9.4

22,873

2.6x

2.4x

12.4x

11.0x

17.5x

16.2x

Capgemini

 

74.0

12,743

1.2x

1.1x

8.8x

8.2x

13.9x

12.8x

Average

1.7x

1.6x

11.0x

10.3x

17.3x

18.2x

Source: Edison Investment Research, Bloomberg. Note: Prices at 7 November 2016.


Exhibit 3: Financial summary

€'000s

2013

2014

2015

2016e

2017e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

16,185

37,293

57,951

93,031

105,317

Cost of Sales

(10,570)

(24,566)

(36,172)

(58,429)

(64,243)

Gross Profit

5,615

12,727

21,779

34,602

41,074

EBITDA

 

 

2,691

6,027

9,459

15,981

17,224

Operating Profit (before amort. and except.)

2,419

5,159

8,162

14,481

15,464

Intangible Amortisation

0

(468)

(857)

(1,357)

(1,357)

Exceptionals

(1,124)

(1,461)

(1,089)

(2,700)

0

Other

(71)

(156)

(392)

(392)

(392)

Operating Profit

1,224

3,074

5,824

10,032

13,715

Net Interest

(66)

(106)

(264)

(260)

(100)

FOREX

0

467

(474)

(1,200)

0

Profit Before Tax (norm)

 

 

2,352

5,053

8,007

14,221

15,364

Profit Before Tax (FRS 3)

 

 

1,158

3,435

5,086

9,772

13,615

Tax

(394)

(1,215)

(1,832)

(2,986)

(3,073)

Profit After Tax (norm)

1,959

3,838

6,175

11,234

12,293

Profit After Tax (FRS 3)

764

2,220

3,254

6,785

10,543

Average Number of Shares Outstanding (m)

36.1

45.1

49.0

55.7

56.6

EPS - normalised (c)

 

 

5.4

8.5

12.8

20.2

21.7

EPS - normalised fully diluted (c)

 

 

5.4

8.5

12.5

20.1

21.6

EPS - (IFRS) (c)

 

 

2.1

4.9

7.1

12.2

18.6

Dividend per share (p)

1.00

1.10

1.21

1.33

1.46

Gross Margin (%)

34.7

34.1

37.6

37.2

39.0

EBITDA Margin (%)

16.6

16.2

16.3

17.2

16.4

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

14.9

13.8

14.1

15.6

14.7

BALANCE SHEET

Fixed Assets

 

 

600

20,874

32,132

54,174

54,545

Intangible Assets

0

17,677

27,675

48,059

47,202

Tangible Assets

600

2,761

3,486

5,144

6,372

Investments

0

436

971

971

971

Current Assets

 

 

18,218

23,120

34,884

35,351

38,458

Stocks

0

0

0

0

0

Debtors

1,303

6,203

7,519

12,979

13,984

Cash

15,271

11,014

19,018

14,025

16,127

Other

1,644

5,903

8,347

8,347

8,347

Current Liabilities

 

 

(1,025)

(9,746)

(13,128)

(21,216)

(18,736)

Creditors

(1,025)

(9,746)

(11,965)

(16,653)

(17,573)

Short term borrowings

0

0

(1,163)

(4,563)

(1,163)

Long Term Liabilities

 

 

(300)

(2,607)

(3,294)

(10,497)

(6,793)

Long term borrowings

0

0

(571)

(570)

(570)

Other long term liabilities

(300)

(2,607)

(2,723)

(9,927)

(6,223)

Net Assets

 

 

17,494

31,642

50,594

57,813

67,475

CASH FLOW

Operating Cash Flow

 

 

2,705

2,412

4,768

15,827

17,373

Net Interest

(59)

11

(58)

181

181

Tax

(359)

(522)

(1,362)

(2,986)

(3,073)

Capex

(394)

(1,252)

(1,635)

(3,977)

(4,275)

Acquisitions/disposals

(13)

(8,889)

(7,409)

(18,271)

(3,500)

Financing

10,280

4,594

13,627

2,600

100

Dividends

(781)

(609)

(737)

(723)

(813)

Net Cash Flow

11,378

(4,256)

7,194

(7,349)

5,994

Opening net debt/(cash)

 

 

(3,892)

(15,271)

(11,014)

(17,284)

(9,927)

HP finance leases initiated

0

0

0

0

0

Other

0

(1)

(924)

(8)

0

Closing net debt/(cash)

 

 

(15,271)

(11,014)

(17,284)

(9,927)

(15,921)

 Source: Company Data, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). 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 2016 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 2016. “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.

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US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

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NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). 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 2016 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 2016. “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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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