Keywords Studios — Keywords goes to Hollywood

Keywords Studios (LN: KWS)

Last close As at 18/03/2024

2,920.00

50.00 (1.74%)

Market capitalisation

2,207m

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Research: TMT

Keywords Studios — Keywords goes to Hollywood

Keywords’ acquisition of Blindlight for up to $10m gives the group the ability to apply Hollywood movie production resources to the games industry. Factoring in Blindlight and the May acquisition of Fire without Smoke, EPS is enhanced by 2% and 4% for FY18 and FY19 respectively. With the €75m revolving credit now secured, with scope to extend to €105m, the company has plenty of headroom to continue its consolidation strategy while enhancing earnings.

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TMT

Keywords Studios

Keywords goes to Hollywood

Acquisition

Software & comp services

11 June 2018

Price

1808p

Market cap

£1,139m

£/€1.13 US$/€0.85

Net cash (£m) at end FY17

£11.1

Shares in issue

63.0m

Free float

83%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.7)

8.0

127.4

Rel (local)

(5.3)

1.5

118.9

52-week high/low

1878.0p

730.5p

Business description

Keywords Studios is now the largest and most diverse supplier of outsourced services to the games industry. Through regular acquisitions, the company is building its scale, geographic footprint and delivery capability. Its ambition is to become the ‘go-to’ supplier across the industry.

Next events

Interim results

September 2018

Analysts

Dan Ridsdale

+44 (0)20 3077 5729

Alasdair Young

+44 (0)20 3077 5700

Keywords Studios is a research client of Edison Investment Research Limited

Keywords’ acquisition of Blindlight for up to $10m gives the group the ability to apply Hollywood movie production resources to the games industry. Factoring in Blindlight and the May acquisition of Fire without Smoke, EPS is enhanced by 2% and 4% for FY18 and FY19 respectively. With the €75m revolving credit now secured, with scope to extend to €105m, the company has plenty of headroom to continue its consolidation strategy while enhancing earnings.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

96.6

14.9

20.3

1.3

101.7

0.07

12/17

151.4

23.0

29.9

1.5

68.9

0.08

12/18e

252.3

37.3

47.7

1.6

43.2

0.09

12/19e

283.3

42.5

52.8

1.8

39.0

0.10

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

Adding Hollywood production capability

Based in Hollywood, US, Blindlight supports game publishers and developers by procuring talent and managing the production process for the parts of games that benefit from Hollywood production resources. Services include celebrity acquisition and rights management, game writing, music, sound design, motion capture and in particular, original voice production complementing Keyword’s well-developed audio services.

Multiple looks in line with historical norms

Keywords is paying $3.64m cash with 64,521 shares ($1.4m at today’s share price) to be issued on the first anniversary of the deal with up to $4.8m deferred consideration to be paid out on the first and second anniversaries depending on performance. The business has made on average $1m over the past three years, although we understand the recent year was somewhat below this as a result of the actor’s strike, from which a recovery is expected going forward. The structure suggests that Keywords will ultimately pay a mid- to high- single digit multiple of PBT over the next couple of years, in line with its historical acquisition averages.

FY19 EPS upgraded by 4%

We revise our estimates to reflect both the Blindlight and Fire Without Smoke (May) acquisitions, with FY18 and FY19 EPS increasing by 2% and 4% respectively. We continue to see good potential for organic estimates to increase as the year progresses. Further acquisitions should also further enhance earnings. While the first half of the year has been comparatively quiet for acquisitions, the company has now secured an initial €75m revolving credit facility with scope to increase this to €105m. Hence we would expect acquisition activity to accelerate in H2.

Valuation: Sustained execution should deliver returns

The 39x FY19 P/E clearly prices in continued strong progress, but acquisitions and organic upside can bring this down substantially. Over the past five years, Keywords has generated revenue and EPS CAGR of 77% and 53% respectively. We believe that sustained execution should continue to deliver returns.

Investment summary

Exhibit 1: Summary of estimate changes reflecting the Blindlight and Fire Without Smoke acquisitions

€'000s

2016

2017

2018e

2018e

%

2019

2019e

%

31-December

Actual

Actual

Old

New

Old

New

PROFIT & LOSS

Revenue

 

 

96,585

151,430

248,526

252,008

1

276,041

282,785

2

Cost of Sales

(59,907)

(96,345)

(159,270)

(161,585)

1

(177,015)

(181,486)

3

Gross Profit

36,678

55,085

89,256

90,423

1

99,026

101,298

2

EBITDA

 

 

16,893

26,645

42,320

43,196

2

47,066

49,059

4

Operating Profit (before amort. and except.)

 

 

15,090

23,915

37,531

38,340

2

41,747

43,610

4

Profit Before Tax (norm)

 

 

14,864

23,043

36,659

37,293

2

40,875

42,438

4

Profit After Tax (norm)

11,641

18,312

29,401

29,909

2

33,109

34,375

4

EPS - normalised fully diluted (c)

 

 

20.3

29.9

46.8

47.6

2

50.9

52.7

4

EPS - (IFRS) (c)

 

 

11.2

12.4

33.3

34.1

2

41.2

43.2

5

Dividend per share (pence)

1.3

1.5

1.6

1.6

0

1.8

1.8

0

Closing net debt/(cash)

 

 

(8,650)

(11,094)

(25,990)

(19,106)

(26)

(47,438)

(38,848)

(18)

Source: Company data, Edison Investment Research

Exhibit 2: Financial summary

€'000s

2016

2017

2018e

2019e

31-December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

96,585

151,430

252,254

283,276

Cost of Sales

(59,907)

(96,345)

(161,749)

(181,812)

Gross Profit (inc multimedia tax credits)

36,678

55,085

90,505

101,464

EBITDA

 

 

16,893

26,645

43,249

49,134

Operating Profit (before amort. and except.)

 

 

15,090

23,915

38,389

43,676

Intangible Amortisation

(1,629)

(3,038)

(4,000)

(4,400)

Exceptionals

(1,316)

(3,016)

(2,784)

0

Other

(686)

(1,426)

(1,854)

(2,410)

Operating Profit

11,459

16,435

29,751

36,866

Net Interest

(287)

(872)

(1,047)

(1,172)

FOREX

(1,737)

(3,569)

0

0

Profit Before Tax (norm)

 

 

14,864

23,043

37,342

42,504

Profit Before Tax (FRS 3)

 

 

9,435

11,994

28,704

35,694

Tax

(3,223)

(4,731)

(7,394)

(8,076)

Profit After Tax (norm)

11,641

18,312

29,948

34,428

Profit After Tax (FRS 3)

6,212

7,263

21,310

27,618

Average Number of Shares Outstanding (m)

55.9

58.7

62.4

63.9

EPS

 

 

20.9

31.2

48.0

53.9

EPS - normalised (c)

 

 

20.3

29.9

47.7

52.8

EPS - (IFRS) (c)

 

 

11.2

12.4

34.2

43.2

Dividend per share (p)

1.33

1.46

1.61

1.77

Gross Margin (%)

38.0%

36.4%

35.9%

35.8%

EBITDA Margin (%)

17.5%

17.6%

17.1%

17.3%

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

15.6%

15.8%

15.2%

15.4%

BALANCE SHEET

Fixed Assets

 

 

61,873

143,872

153,084

153,047

Intangible Assets

55,495

132,555

140,061

139,119

Tangible Assets

5,498

10,111

11,817

12,722

Investments

880

1,206

1,206

1,206

Current Assets

 

 

38,677

80,182

96,823

120,231

Stocks

0

0

0

0

Debtors

13,879

27,473

36,053

39,659

Cash

17,020

30,374

38,435

58,237

Other

7,778

22,335

22,335

22,335

Current Liabilities

 

 

(27,830)

(52,503)

(47,466)

(43,515)

Creditors

(19,805)

(33,560)

(28,523)

(24,572)

Short term borrowings

(8,025)

(18,943)

(18,943)

(18,943)

Long Term Liabilities

 

 

(6,016)

(10,420)

(10,365)

(10,365)

Long term borrowings

(345)

(337)

(337)

(337)

Other long term liabilities

(5,671)

(10,083)

(10,028)

(10,028)

Net Assets

 

 

66,704

161,131

192,076

219,398

CASH FLOW

Operating Cash Flow

 

 

17,168

18,373

36,434

40,390

Net Interest

(58)

(253)

(1,047)

(1,172)

Tax

(2,129)

(4,731)

(7,394)

(8,076)

Capex

(2,306)

(3,803)

(6,121)

(6,364)

Acquisitions/disposals

(21,104)

(87,074)

(12,784)

(3,842)

Financing

643

82,936

0

0

Dividends

(825)

(867)

(1,026)

(1,134)

Net Cash Flow

(8,611)

4,581

8,062

19,802

Opening net debt/(cash)

 

 

(17,284)

(8,650)

(11,094)

(19,155)

Forex gain on cash

1

(1)

0

0

Other

(24)

(2,136)

(1)

0

Closing net debt/(cash)

 

 

(8,650)

(11,094)

(19,155)

(38,957)

Source: Edison Investment Research, Company data

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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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.
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Sydney +61 (0)2 8249 8342

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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

295 Madison Avenue, 18th Floor

10017, 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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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

295 Madison Avenue, 18th Floor

10017, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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