Keywords Studios — French audio and localisation consolidation

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 — French audio and localisation consolidation

The acquisition of four French companies gives Keywords Studios strong capabilities across all major European languages for localisation and voice-over recording. The transactions boost our FY18 EPS by 5%, although some investment in integrating the entities will be required. The expanded offering should also support organic growth, through helping secure more centrally procured, multi-language contacts.

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TMT

Keywords Studios

French audio and localisation consolidation

Acquisition

Software & comp services

9 August 2017

Price

1,190.00p

Market cap

£664m

€1.10/£

Net cash (€m) as 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

57.5

49.7

237.6

Rel (local)

53.4

45.4

202.7

52-week high/low

1,190.0p

337.5p

Business description

Keywords Studios provides localisation, testing, artwork, community support and 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

Interim results

September 2017

Analysts

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

The acquisition of four French companies gives Keywords Studios strong capabilities across all major European languages for localisation and voice-over recording. The transactions boost our FY18 EPS by 5%, although some investment in integrating the entities will be required. The expanded offering should also support organic growth, through helping secure more centrally procured, multi-language contacts.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS**
(p)

P/E
(x)

Yield
(%)

12/15

58.0

8.0

12.6

1.2

103.9

0.1

12/16

96.6

14.9

20.3

1.3

64.5

0.1

12/17e

135.1

20.5

28.6

1.5

45.8

0.1

12/18e

158.8

24.3

33.5

1.6

39.1

0.1

Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **DPS in distributable currency.

Consolidating French audio and localisation

Keywords Studios has further consolidated its leadership position in the European localisation and audio service lines through the acquisition of four Paris-based businesses – La Marque Rose (audio), Around the Word (game localisation), Dune Sound and Asrec (both audio recording) – for a total consideration of up to €7.6m (details overleaf). The transaction strengthens the company’s French language capability, which had been a relative weakness, and gives the company strong capabilities across all major European languages, which should enable Keywords to win larger and more comprehensive contracts as clients increasingly look to source all voice-over recording work from a single provider. The plan is to integrate the acquired businesses into the company’s existing recording studio in Paris, with c €1m expected to be invested in equipment and offices for the combined facilities.

5% EPS upgrade, likely more to come

In aggregate, the businesses had revenues of €9.0m and PBT of €0.9m. Aggregate margins (10% at the PBT level) are currently below Keywords’ group level (15.4% in FY16), but management expects to bring margins in line with the rest of the group within a couple of years. The acquisitions represent a trailing PBT multiple of 8x, in line with the company’s historical norms. This should drop to close to 5x as margins are brought to group level. We upgrade our FY17 and FY18 EPS by 2% and 5%, respectively, with our forecast FY17 year-end net cash dropping back by €7.8m to €6.4m. We believe that there is scope for more organic upgrades, while more earnings-enhancing acquisitions should be expected, with remaining acquisition capital giving the potential to generate EPS of 58-63c exiting FY18 if historical 7-9x current year EV/PBT multiples are maintained.

Valuation: Premium rating deserved

Keywords’ rating of 39x FY18e earnings (vs peer average of 19x) factors in further accretion from acquisitions or organic upgrades. If Keywords were to achieve our notional post-acquisitions EPS of 58-63c, the rating would drop to 20-22x – a modest premium to the sector. We believe a wider premium would almost certainly be maintained.

Changes in estimates

The transactions involve the acquisitions of La Marque Rose SARL, Asrec SAS, Dune Sound and Around the Word; the latter two were subsidiaries of Dune Media SAS. All are Paris based. 

The maximum aggregate consideration is €7.6m, with €6.6m paid on completion and a further €1m over the two years to 31 December 2019 contingent on meeting performance targets. Of the initial €6.6m, €5.7m is being paid in cash with the remainder in shares, 9,534 of which are to be issued on 10 August.

Our estimate changes are shown below. Our FY18 estimates assume that the PBT margin for the acquired businesses expands to 12.3% and therefore FY19 estimates (not yet published) should benefit from further earnings accretion as margins are expanded towards the 15% group level.

Exhibit 1: Estimates changes

€000s

2016

2017e

2017e

Change

2018e

2018e

Change

Actual

Old

New

Old

New

Revenue

96,585

132,136

135,136

2%

148,894

158,794

7%

Cost of sales

(59,907)

(85,815)

(87,825)

2%

(97,486)

(104,347)

7%

Gross profit

36,678

46,322

47,312

2%

51,408

54,447

6%

EBITDA

16,893

22,688

23,006

1%

25,807

27,021

5%

Operating profit (before amort. and except.)

15,090

20,613

20,931

2%

23,525

24,739

5%

Profit before tax (norm)

14,864

20,153

20,471

2%

23,065

24,279

5%

Profit after tax (norm)

11,641

15,921

16,172

2%

18,452

19,424

5%

EPS - normalised fully diluted (c)

20.3

28.1

28.6

2%

32.0

33.5

5%

EPS - (IFRS) (c)

11.2

24.6

25.1

2%

28.6

30.2

6%

Dividend per share (pence)*

1.3

1.5

1.5

0%

1.6

1.6

0%

Closing net debt/(cash)

(8,650)

(14,195)

(6,371)

-55%

(26,333)

(19,171)

-27%

Source: Keywords Studios data, Edison Investment Research. Note: *DPS in distributable currency.

Exhibit 2: Financial summary

€000s

2014

2015

2016

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

37,293

57,951

96,585

135,136

158,794

Cost of Sales

(24,566)

(36,172)

(59,907)

(87,825)

(104,347)

Gross Profit (inc multimedia tax credits)

12,727

21,779

36,678

47,312

54,447

EBITDA

 

 

6,027

9,459

16,893

23,006

27,021

Operating Profit (before amort. and except.)

 

 

5,159

8,162

15,090

20,931

24,739

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

18,616

22,424

Net Interest

(106)

(264)

(287)

(460)

(460)

FOREX

467

(474)

(1,737)

0

0

Profit Before Tax (norm)

 

 

5,053

8,007

14,864

20,471

24,279

Profit Before Tax (FRS 3)

 

 

3,435

5,086

9,435

18,156

21,964

Tax

(1,215)

(1,832)

(3,223)

(4,299)

(4,856)

Profit After Tax (norm)

3,838

6,175

11,641

16,172

19,424

Profit After Tax (FRS 3)

2,220

3,254

6,212

13,857

17,109

Average Number of Shares Outstanding (m)

45.0

48.2

55.9

55.3

56.7

EPS - normalised (c)

 

 

8.5

12.8

20.9

29.3

34.3

EPS - normalised fully diluted (c)

 

 

8.5

12.6

20.3

28.6

33.5

EPS - (IFRS) (c)

 

 

4.9

7.0

11.2

25.1

30.2

Dividend per share (p)

1.10

1.21

1.33

1.46

1.61

Gross Margin (%)

34.1%

37.6%

38.0%

35.0%

34.3%

EBITDA Margin (%)

16.2%

16.3%

17.5%

17.0%

17.0%

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

13.8%

14.1%

15.6%

15.5%

15.6%

BALANCE SHEET

Fixed Assets

 

 

20,874

32,132

61,873

75,184

78,756

Intangible Assets

17,677

27,675

55,495

66,628

66,349

Tangible Assets

2,761

3,486

5,498

7,676

11,527

Investments

436

971

880

880

880

Current Assets

 

 

23,120

34,884

38,677

41,674

57,267

Stocks

0

0

0

0

0

Debtors

6,203

7,519

13,879

17,933

19,726

Cash

11,014

19,018

17,020

14,741

27,541

Other

5,903

8,347

7,778

9,000

10,000

Current Liabilities

 

 

(9,746)

(13,128)

(27,830)

(31,534)

(32,862)

Creditors

(9,746)

(11,965)

(19,805)

(23,509)

(24,837)

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

79,133

96,971

CASH FLOW

Operating Cash Flow

 

 

2,412

4,768

17,168

22,326

26,677

Net Interest

11

(58)

(58)

(460)

(460)

Tax

(522)

(1,362)

(2,129)

(4,299)

(4,856)

Capex

(1,252)

(1,635)

(2,306)

(4,839)

(6,133)

Acquisitions/disposals

(8,889)

(7,409)

(21,104)

(14,180)

(1,500)

Financing

7,342

14,199

643

0

0

Dividends

(609)

(737)

(825)

(817)

(927)

Net Cash Flow

(4,256)

7,194

(8,611)

(2,268)

12,800

Opening net debt/(cash)

 

 

(15,271)

(11,014)

(17,284)

(8,650)

(6,371)

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)

(6,371)

(19,171)

Source: Keywords Studios accounts, Edison Investment Research. Note: DPS in distributable currency

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

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

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

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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