Keywords Studios — Opportunities in industry turbulence

Keywords Studios (LN: KWS)

Last close As at 25/04/2024

2,920.00

50.00 (1.74%)

Market capitalisation

2,207m

More on this equity

Research: TMT

Keywords Studios — Opportunities in industry turbulence

Keywords’ recent trading update indicated that the company continues to perform robustly despite industry turbulence. The acquisition of GetSocial, a cloud marketing services platform, for an undisclosed sum highlights the potential for Keywords’ M&A strategy to benefit from the weaker funding environment. We adjust our estimates to reflect slightly greater investment of profit back into the business in FY19 (EPS -3%), while adjusting working capital and deferred consideration payments upwards. We retain our view that Keywords remains strongly positioned, with an undemanding rating given the company’s leading market position, track record and potential.

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TMT

Keywords Studios

Opportunities in industry turbulence

Trading update

Software & comp services

26 February 2019

Price

1,156p

Market cap

£739m

€1.15/£

Net debt (€m) at 31 December 2018

0.4

Shares in issue

64.0m

Free float

94%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.5)

(1.4)

(25.5)

Rel (local)

(7.2)

(4.6)

(24.5)

52-week high/low

2,065p

900p

Business description

Keywords Studios is 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

FY18 results

8 April 2019

AGM

May 2019

Analysts

Dan Ridsdale

+44 (0)20 3077 5729

Richard Williamson

+44 (0)20 3077 5700

Keywords Studios is a research client of Edison Investment Research Limited

Keywords’ recent trading update indicated that the company continues to perform robustly despite industry turbulence. The acquisition of GetSocial, a cloud marketing services platform, for an undisclosed sum highlights the potential for Keywords’ M&A strategy to benefit from the weaker funding environment. We adjust our estimates to reflect slightly greater investment of profit back into the business in FY19 (EPS -3%), while adjusting working capital and deferred consideration payments upwards. We retain our view that Keywords remains strongly positioned, with an undemanding rating given the company’s leading market position, track record and potential.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

96.6

14.9

20.3

1.3

65.6

0.12

12/17

151.4

23.0

29.9

1.5

44.4

0.13

12/18e**

250.1

37.9

47.0

1.6

28.3

0.14

12/19e

293.2

43.1

53.4

1.8

24.9

0.15

Notes: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **12/18e numbers have been revised in line with the company’s trading update.

GetSocial acquisition

GetSocial represents a small acquisition (revenues and consideration not disclosed) that adds to Keywords’ technology platform and strengthens the group’s marketing services offering, particularly in the mobile and casual games space. We understand that c €9m had been invested into the technology platform over five years, but progress was hampered by a lack of scale. Management believes it will be able to generate good sales leverage through Keywords established, global platform. From a technology standpoint, management sees potential for integration of the platform with Yokozuna Data, the analytics platform acquired in July 2018. We believe that in the current unsettled market environment, other businesses may become available at attractive valuations.

Solid l-f-l growth, forecast housekeeping

Newsflow from industry majors (Activision Blizzard, Take-Two and Electronic Arts) indicates that there is still turbulence in the industry, but we believe that Keywords remains well placed. The company’s January trading update was reassuring, with like-for-like growth of 10.1% (implying a pick-up in H2 from 8.6% in H1). PBT was slightly ahead of forecast €37.8m (Edison: €37m), while acquisitions and a lower tax rate drove 51% growth in adjusted EPS to 47c (Edison: 44.6c.) We are revising our FY19 estimates (EPS -3%) to reflect slightly higher reinvestment back into growth (adjusted EBIT of 15.0% vs 15.7% previously), together with a more conservative stance on deferred consideration payments and cash conversion (see below).

Valuation: Undemanding given growth potential

Keywords has delivered an adjusted EPS CAGR of 51% from 2013 to 2018, and we believe it looks set to retain a robust double-digit trajectory. Organic growth has remained solid through a period of industry flux, while the environment for accretive acquisitions may have become more favourable. In this context, we believe the 24.9x 2019e P/E is now undemanding.

Revision to our 2019 estimates

Given the disrupted trading reported by industry majors, Keywords’ January trading update provided reassurance. FY18 revenues of at least £250m grew by 10.1% on a like-for-like basis, implying a pick-up in H2 from the 8.6% stated in H1. Adjusted PBT of €37.8m (Edison: €37.0m) grew 64% y-o-y, while adjusted EPS of 47.0c (Edison 44.6c) grew 51%, with the outperformance supported by a reduction in the tax charge (19.0% from 20.5%). Year-end net debt stands at €0.4m (Edison: €2.8m cash), while the company’s €105m facility leaves ample scope for further acquisitions.

Our estimate revisions are shown in Exhibit 1. We assume a nominal £1m of revenue contribution from the GetSocial acquisition but, in the absence of other information, we assume a negligible acquisition cost and impact on profits. The latest acquisition aside, we pare back our adjusted EBIT margin slightly (to 15.0% from 15.7%), reflecting the investment of profit back into generating sustainable growth (of which the GetSocial acquisition is an example). The reduction in our year-end 2019 net cash position from €3.1m cash to €0.2m reflects a lower cash conversion forecast (75% operating profit to cash flow from operations, from 85% previously), while we also conservatively assume two thirds of deferred/contingent payments of €15m (ie €10m) are paid out in FY19.

Exhibit 1: Estimate changes

€000s

2018e

2019e

Old

New

Change (%)

Old

New

Change (%)

PROFIT & LOSS

Revenue

 

249,967

250,080

0.0%

292,111

293,234

0.4%

Cost of Sales

(157,579)

(157,653)

0.0%

(185,394)

(186,134)

0.4%

Gross Profit (inc multimedia tax credits)

92,389

92,427

0.0%

106,718

107,099

0.4%

EBITDA

 

42,357

43,237

2.1%

51,451

50,152

-2.5%

Operating Profit (before amort. and except.)

 

37,157

38,037

2.4%

45,374

44,054

-2.9%

Profit Before Tax (norm)

 

37,014

37,894

2.4%

44,439

43,119

-3.0%

Profit After Tax (norm)

29,685

31,300

5.4%

35,996

34,926

-3.0%

EPS - normalised (c)

 

44.6

47.0

5.4%

55.1

53.4

-3.0%

EPS - (IFRS) (c)

 

30.4

32.9

8.3%

43.8

42.2

-3.8%

Dividend per share (p)

1.61

1.61

0.0%

1.77

1.77

0.0%

Closing net debt/(cash)

 

(2,783)

397

-114.3%

(3,108)

(171)

-94.5%

Source: 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

250,080

293,234

Cost of Sales

(59,907)

(96,345)

(157,653)

(186,134)

Gross Profit (inc multimedia tax credits)

36,678

55,085

92,427

107,099

EBITDA

 

 

16,893

26,645

43,237

50,152

Operating Profit (before amort. and except.)

 

 

15,090

23,915

38,037

44,054

Intangible Amortisation

(1,629)

(3,038)

(5,000)

(5,500)

Exceptionals

(1,316)

(3,016)

(3,400)

0

Other

(686)

(1,426)

(1,854)

(2,410)

Operating Profit

11,459

16,435

27,783

36,144

Net Interest

(287)

(872)

(143)

(935)

FOREX

(1,737)

(3,569)

0

0

Profit Before Tax (norm)

 

 

14,864

23,043

37,894

43,119

Profit Before Tax (FRS 3)

 

 

9,435

11,994

27,640

35,209

Tax

(3,223)

(4,731)

(6,594)

(8,193)

Profit After Tax (norm)

11,641

18,312

31,300

34,926

Profit After Tax (FRS 3)

6,212

7,263

21,046

27,017

Average Number of Shares Outstanding (m)

55.9

58.7

63.9

64.1

EPS

 

 

20.9

31.2

49.0

54.5

EPS - normalised (c)

 

 

20.3

29.9

47.0

53.4

EPS - (IFRS) (c)

 

 

11.2

12.4

32.9

42.2

Dividend per share (p)

1.33

1.46

1.61

1.77

Gross Margin (%)

38.0%

36.4%

37.0%

36.5%

EBITDA Margin (%)

17.5%

17.6%

17.3%

17.1%

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

15.6%

15.8%

15.2%

15.0%

BALANCE SHEET

Fixed Assets

 

 

61,873

143,872

166,197

175,878

Intangible Assets

55,495

132,555

151,135

157,414

Tangible Assets

5,498

10,111

13,856

17,259

Investments

880

1,206

1,206

1,206

Current Assets

 

 

38,677

80,182

86,134

98,623

Stocks

0

0

0

0

Debtors

13,879

27,473

37,134

43,985

Cash

17,020

30,374

18,882

19,450

Other

7,778

22,335

30,118

35,188

Current Liabilities

 

 

(27,830)

(52,503)

(64,319)

(53,006)

Creditors

(19,805)

(33,560)

(45,376)

(34,063)

Short term borrowings

(8,025)

(18,943)

(18,943)

(18,943)

Long Term Liabilities

 

 

(6,016)

(10,420)

(10,442)

(10,132)

Long term borrowings

(345)

(337)

(337)

(337)

Other long term liabilities

(5,671)

(10,083)

(10,105)

(9,795)

Net Assets

 

 

66,704

161,131

177,570

211,364

CASH FLOW

Operating Cash Flow

 

 

17,168

18,373

31,359

33,424

Net Interest

(58)

(253)

(143)

(935)

Tax

(2,129)

(4,731)

(5,780)

(8,193)

Capex

(2,306)

(3,803)

(8,500)

(9,500)

Acquisitions/disposals

(21,104)

(87,074)

(26,200)

(13,088)

Financing

643

82,936

0

0

Dividends

(825)

(867)

(1,027)

(1,140)

Net Cash Flow

(8,611)

4,581

(10,591)

568

Opening net debt/(cash)

 

 

(17,284)

(8,650)

(11,094)

397

Forex gain on cash

1

(891)

0

0

Other

(24)

(1,246)

(900)

0

Closing net debt/(cash)

 

 

(8,650)

(11,094)

397

(171)

Source: Keywords Studios data, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Keywords Studios and prepared and issued by Edison, in consideration of a fee payable by Keywords Studios. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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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New Zealand

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. 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 (i.e. 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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Keywords Studios and prepared and issued by Edison, in consideration of a fee payable by Keywords Studios. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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