Keywords Studios — Update 15 April 2016

Keywords Studios (LN: KWS)

Last close As at 18/04/2024

2,920.00

50.00 (1.74%)

Market capitalisation

2,207m

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Research: TMT

Keywords Studios — Update 15 April 2016

Keywords Studios

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TMT

Keywords Studios

Synthesis acquisition ticks all the boxes

Acquisition

Software & comp services

15 April 2016

Price

245p

Market cap

£132m

£/€ = 1.25

Net cash ($m) at 31 December 2015

17.3

Shares in issue

53.9m

Free float

68%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

15.3

17.1

60.1

Rel (local)

12.1

9.8

75.8

52-week high/low

245.0p

150.0p

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

AGM

June 2016

Analysts

Dan Ridsdale

+44 (0)20 3077 5729

Eric Opara

+44 (0)20 3681 2524

Keywords Studios is a research client of Edison Investment Research Limited

The acquisition of Synthesis for up to €18m is Keywords Studios’ largest to date and significantly strengthens the company’s leadership position in both localisation and audio. It also enhances earnings by an estimated 12% and 16% for FY16 and FY17 respectively. We see ample scope for continued upside as the company continues to strengthen its position in this fragmented market with earnings enhancing acquisitions.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS**
(p)

P/E
(x)

Yield
(%)

12/14

37.3

5.1

8.5

1.0

36.2

0.4

12/15

58.0

8.0

12.5

1.2

24.4

0.5

12/16e

84.8

11.6

17.0

1.3

18.0

0.5

12/17e

98.9

13.9

20.2

1.5

15.1

0.6

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items, exchange rate effects and share-based payments. ** DPS in distributable currency

A strong strategic fit

Keywords is acquiring Synthesis, a leading player in localisation, audio and localisation testing solutions. Synthesis is the number two player in these domains, and thus the deal strengthens Keywords’ number one position, taking market share from an estimated 10% to 15%. The business’s headquarters are in Switzerland but it has a particularly strong presence in Italy, Spain, Latin America and Asia. It also gives Keywords a presence in Germany (Hamburg) and Paris and strengthens the company’s relationship with some important developer names such as Rock Star, Take Two and Bethesda.

Also earnings enhancing

Our estimate changes are shown overleaf. We forecast annualised revenues for Synthesis of €15m with PBT of €2m for FY16 (valuing the business at an undemanding 9x PBT). We are not forecasting any significant cost synergies, with consolidation of offices in some cities offset by strengthening central functions. In the longer term however, we believe that prospects should benefit from the increased scale and strengthened market position. With the benefit of the lower Swiss tax rate broadly offsetting the share dilution, the acquisition enhances our FY16 and FY17 EPS estimates by 12% and 16% respectively.

Valuation: Upside from doing more of the same

Despite the strong recent share price performance, reflecting the enhancement from acquisitions supported by the translation benefit from sterling’s weakness versus the euro, Keyword’s shares have actually derated slightly of late. At a FY16 P/E of 18.0x dropping to 15.1x in FY17, Keywords is rated in line with its broader peer group. Consequently, we see ample scope for it to continue to deliver share price upside. The company’s strong track record of execution and strengthened market position support a premium rating, while it has a long runway to continue with its consolidation strategy, strengthening its competitive position and enhancing earnings as it does so.

Estimate changes

Our estimate changes are shown in Exhibit 1.

Keywords Studios is paying up to €18m for Synthesis, of which €1m is contingent on delivering at least €15m revenue and €2m PBT within 12 months of the acquisition. €10.2m was paid in cash on completion with the remainder to be satisfied by the right to 2,376,518 new Keywords shares to be issued in two equal tranches on the first and second anniversary of completion.

In 2015 Synthesis registered revenues of €16.9m with PBT of €2m, although these figures were boosted by a major project that will not repeat in FY15. Our estimates assume an annualised contribution of €15m revenues and €2m PBT in FY16, growing at 6% organically in FY17.

Our tax rate reduces from 24% to 21% reflecting the impact of the lower tax rate in Switzerland.

We estimate that the company will have net cash of €2-3m immediately after the deal, but that the company’s robust cash generation will bring this back up to c €10m by year end.

We understand that the company is negotiating debt facilities to support working capital and further acquisitions, giving the company headroom to continue with its consolidation strategy this year without issuing substantial amounts of new equity.

Exhibit 1: Estimate changes

€000s

2015

2016e

2016e

Change

2017e

2017e

Change

Year end 31 December

Actual

Old

New

Old

New

Revenue

57,951

74,161

84,761

14%

82,874

98,904

19%

Cost of Sales

(36,172)

(45,561)

(53,315)

(50,780)

(62,111)

Gross Profit

21,779

28,600

31,446

10%

32,094

36,792

15%

EBITDA

9,459

11,896

13,340

12%

13,577

15,803

16%

Operating Profit (before amort. and except.)

8,162

10,413

11,840

14%

11,946

14,043

18%

Operating Profit

5,824

9,056

8,983

-1%

11,089

12,686

14%

Profit Before Tax (norm)

8,007

10,594

11,640

10%

12,127

13,893

15%

Profit After Tax (norm)

6,175

8,210

9,196

12%

9,460

11,115

17%

EPS - normalised fully diluted (c)

12.5

15.2

17.0

12%

17.5

20.2

16%

EPS - (IFRS) (c)

7.1

12.7

11.8

-8%

16.0

17.8

12%

Dividend per share (c)

1.5

1.7

1.7

0%

1.8

1.8

0%

Closing net debt/(cash)

(17,284)

(21,563)

(9,852)

-54%

(29,184)

(17,566)

-40%

Source: Keywords Studios data, Edison Investment Research

Exhibit 2: Financial summary

€'000s

2013

2014

2015

2016e

2017e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

16,185

37,293

57,951

84,761

98,904

Cost of Sales

(10,570)

(24,566)

(36,172)

(53,315)

(62,111)

Gross Profit

5,615

12,727

21,779

31,446

36,792

EBITDA

 

 

2,691

6,027

9,459

13,340

15,803

Operating Profit (before amort. and except.)

2,419

5,159

8,162

11,840

14,043

Intangible Amortisation

0

(468)

(857)

(1,357)

(1,357)

Exceptionals

(1,124)

(1,461)

(1,089)

(1,500)

0

Other

(71)

(156)

(392)

0

0

Operating Profit

1,224

3,074

5,824

8,983

12,686

Net Interest

(66)

(106)

(264)

(200)

(150)

FOREX

0

467

(474)

0

0

Profit Before Tax (norm)

 

 

2,352

5,053

8,007

11,640

13,893

Profit Before Tax (FRS 3)

 

 

1,158

3,435

5,086

8,783

12,536

Tax

(394)

(1,215)

(1,832)

(2,444)

(2,779)

Profit After Tax (norm)

1,959

3,838

6,175

9,196

11,115

Profit After Tax (FRS 3)

764

2,220

3,254

6,339

9,757

Average Number of Shares Outstanding (m)

36.1

45.1

49.0

53.8

54.7

EPS - normalised (c)

 

 

5.4

8.5

12.8

17.1

20.3

EPS - normalised fully diluted (c)

 

 

5.4

8.5

12.5

17.0

20.2

EPS - (IFRS) (c)

 

 

2.1

4.9

7.1

11.8

17.8

Dividend per share (c)

4,221.4

1.3

1.5

1.7

1.8

Gross Margin (%)

34.7

34.1

37.6

37.1

37.2

EBITDA Margin (%)

16.6

16.2

16.3

15.7

16.0

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

14.9

13.8

14.1

14.0

14.2

BALANCE SHEET

Fixed Assets

 

 

600

20,874

32,132

50,505

50,767

Intangible Assets

0

17,677

27,675

44,489

43,632

Tangible Assets

600

2,761

3,486

5,045

6,164

Investments

0

436

971

971

971

Current Assets

 

 

18,218

23,120

34,884

31,382

40,840

Stocks

0

0

0

0

0

Debtors

1,303

6,203

7,519

11,450

13,194

Cash

15,271

11,014

19,018

11,585

19,299

Other

1,644

5,903

8,347

8,347

8,347

Current Liabilities

 

 

(1,025)

(9,746)

(13,128)

(17,353)

(18,325)

Creditors

(1,025)

(9,746)

(11,965)

(16,190)

(17,162)

Short term borrowings

0

0

(1,163)

(1,163)

(1,163)

Long Term Liabilities

 

 

(300)

(2,607)

(3,294)

(10,293)

(6,793)

Long term borrowings

0

0

(571)

(570)

(570)

Other long term liabilities

(300)

(2,607)

(2,723)

(9,723)

(6,223)

Net Assets

 

 

17,494

31,642

50,594

54,241

66,488

CASH FLOW

Operating Cash Flow

 

 

2,705

2,412

4,768

14,140

15,101

Net Interest

(59)

11

(58)

181

181

Tax

(359)

(522)

(1,362)

(2,444)

(2,779)

Capex

(394)

(1,252)

(1,635)

(3,712)

(3,984)

Acquisitions/disposals

(13)

(8,889)

(7,409)

(14,871)

(3,500)

Financing

10,280

4,594

13,627

0

3,500

Dividends

(781)

(609)

(737)

(717)

(806)

Net Cash Flow

11,378

(4,256)

7,194

(7,424)

7,714

Opening net debt/(cash)

 

 

(3,892)

(15,271)

(11,014)

(17,284)

(9,852)

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)

(9,852)

(17,566)

Source: : Keywords Studios data, Edison Investment Research. Note: Adjusted PBT and PAT exclude FOREX

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