Keywords Studios — Affected by industry flux but still performing well

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 — Affected by industry flux but still performing well

Trading in H2 was affected in some areas by flux in the games industry, so although the overall picture remains relatively healthy (we est 8% l-f-l revenue growth, 49% EPS growth for FY18) FY18 revenues and PBT are expected to be 2% and 6% below our respective forecasts. Looking through this disruption, we still believe Keywords remains attractively positioned in a games industry that should continue to deliver robust growth. There remains plenty of scope for Keywords to continue accretive M&A, as demonstrated by the acquisition of games marketing services specialist, Sunny Side Up for C$5.9m (c €3.8m) for c 4.9x trailing EBITDA.

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TMT

Keywords Studios

Affected by industry flux but still performing well

Acquisition/trading update

Software & comp services

21 December 2018

Price

1,032p

Market cap

£658m

£/€1.11

Net cash (€m) at end June 2018

0.1

Shares in issue

63.8m

Free float

83%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(12.4)

(45.2)

(28.4)

Rel (local)

(9.0)

(39.2)

(19.2)

52-week high/low

2065p

1034p

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

Scheduled trading update

January

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

Trading in H2 was affected in some areas by flux in the games industry, so although the overall picture remains relatively healthy (we est 8% l-f-l revenue growth, 49% EPS growth for FY18) FY18 revenues and PBT are expected to be 2% and 6% below our respective forecasts. Looking through this disruption, we still believe Keywords remains attractively positioned in a games industry that should continue to deliver robust growth. There remains plenty of scope for Keywords to continue accretive M&A, as demonstrated by the acquisition of games marketing services specialist, Sunny Side Up for C$5.9m (c €3.8m) for c 4.9x trailing EBITDA.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

96.6

14.9

20.3

1.3

56.6

0.13

12/17

151.4

23.0

29.9

1.5

38.3

0.14

12/18e

250.0

37.0

44.6

1.6

25.7

0.16

12/19e

292.1

44.4

55.1

1.8

20.8

0.17

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

Healthy performance despite industry disruption

In a brief trading statement made together with the announcement of the acquisition of Canadian marketing services specialist, Sunny Side Up, Keywords flags that FY18 revenues and PBT are expected to be €250m (€258m in constant currency) vs our estimates of €254.6m and €37m (Edison old: €39.2m). This represents respective FY18 growth figures of 61% and 65% and we estimate l-f-l revenue growth was c 8%. Management does not point to one factor, but we highlight that a relatively muted H1 left some catching up to do and the industry has seen some turbulence, with the dramatic success of Fortnite counterbalanced by some studio closures and mixed title performance elsewhere.

Remains attractively positioned

We still believe Keywords is attractively positioned within a growth end market. We expect the games industry will continue growing at a high single-digit rate and Keywords should benefit from increased outsourcing. The acquisition of Sunny Side Up, for C$5.9m (c €3.8m, c 4.9x trailing EBITDA) highlights the company’s ongoing ability to enhance its portfolio and earnings with acquisitions. There is an argument that the de-rating of the sector will ease vendor price expectations. The business will complement the company’s other marketing studios – Fire-Without Smoke (acquired in May) and Trailerfarm (acquired in September).

Valuation: Undemanding given growth prospects

We reduce our FY18 and FY19 adj EPS estimates by 6% and 5% respectively, which assumes a 9% revenue growth rate from the lower base offset by the Sunny Side Up acquisition (detailed overleaf). With the recent sell off, the shares have de-rated substantially to a FY19 P/E of 21x (vs 40x at the interims). While still a growth rating, it looks undemanding given the company’s track record of generating EPS growth (52% EPS CAGR 2013–2018e) and acquisition activity should bring this down further. Gaining better visibility on trading into FY19 will likely be the key catalyst for a re-rating upwards.

Estimate changes

While FY18 revenues and PBT are expected to be somewhat below our expectations, it is worth highlighting that estimated l-f-l growth was still a relatively healthy 8% in FY18 and, factoring in acquisitions, we estimate EPS growth at 49%.

We also believe the overall outlook for the games industry remains robust, even if it is recovering from a bout of optimism and investment witnessed in H217 and H118. The dramatic success of Fortnite has likely accelerated the growth of the overall industry, but this success has also cannibalised revenues elsewhere. Whether related to Fortnite or not, H2 has seen the closure or significant scaling back of a number of studios (Telltale Games, Capcom Vancouver, Carbine). Trading at the major studios has been mixed, while a reshuffling of the games launch timetable can also disrupt near-term trading.

We highlight that none of the above factors are particularly unusual within this highly dynamic industry, but the degree of flux witnesses in H2 is above historical norms and likely reflect a bout of over optimism and investment in the preceding period.

We also highlight that while now a substantially larger and more diversified business that it was before, the company has shown its ability to recover rapidly from disruptions in the past (in FY13 related to the console replacement cycle).

On an l-f-l basis, our adj EPS estimate is brought back by 6% for FY18 and 7% for FY19. This assumes a 9% l-f-l revenue growth in FY19 from the reduced base. To calibrate, NewZoo forecasts a 8.2% CAGR for the industry through 2020 and Keywords should also continue to benefit from the trend towards outsourcing.

The acquisition of Sunny Side Up enhances FY19 EPS by 1% from the revised base. Further acquisition activity should enhance earnings, and we reiterate our view that the derating of the sector could ease vendor price expectations, providing support to the acquisition strategy. With a revolving credit facility of €105m (at 1.5% above Euribor), Keywords retains plenty of firepower for future acquisitions.

Exhibit 1: Estimate changes

€000s

2017

2018e

2018e

2019

2019e

2019e

31-December

Actual

Old

New

Change, %

Old

New pre Sunny Side Up*

% change pre Sunny Side Up

New with Sunny Side Up

Total change, %

PROFIT & LOSS

Revenue

 

 

151,430

254,570

249,967

(2)

300,212

289,024

(4)

292,111

(3)

Cost of Sales

(96,345)

(160,361)

(157,579)

(2)

(190,439)

(100)

(185,394)

(3)

Gross Profit

55,085

94,208

92,389

(2)

109,772

(100)

106,718

(3)

EBITDA

 

 

26,645

44,539

42,357

(5)

53,911

50,593

(6)

51,451

(5)

Operating Profit (before amort. and except.)

 

 

23,915

39,339

37,157

(6)

47,778

44,461

(7)

45,374

(5)

Profit Before Tax (norm)

 

 

23,043

39,196

37,014

(6)

46,843

43,737

(7)

44,439

(5)

Profit After Tax (norm)

18,312

31,435

29,685

(6)

37,943

35,427

(7)

35,996

(5)

EPS - normalised fully diluted (c)

 

 

30

47

45

(6)

58

54

(7)

55

(5)

EPS - (IFRS) (c)

 

 

12

33

30

(8)

47

44

(7)

44

(6)

Dividend per share (pence)

1

2

2

0

2

2

0

2

0

Closing net debt/(cash)

 

 

(11,094)

(3,749)

(2,783)

(9,788)

(6,196)

(3,108)

(68)

Source: Keywords, Edison Investment Research. Note: *Not in financial summary.

Exhibit 2: Financial summary

€'000s

2016

2017

2018e

2019e

31-December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

96,585

151,430

249,967

292,111

Cost of Sales

(59,907)

(96,345)

(157,579)

(185,394)

Gross Profit (inc multimedia tax credits)

36,678

55,085

92,389

106,718

EBITDA

 

 

16,893

26,645

42,357

51,451

Operating Profit (before amort. and except.)

 

 

15,090

23,915

37,157

45,374

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

26,903

37,465

Net Interest

(287)

(872)

(143)

(935)

FOREX

(1,737)

(3,569)

0

0

Profit Before Tax (norm)

 

 

14,864

23,043

37,014

44,439

Profit Before Tax (FRS 3)

 

 

9,435

11,994

26,760

36,529

Tax

(3,223)

(4,731)

(7,329)

(8,443)

Profit After Tax (norm)

11,641

18,312

29,685

35,996

Profit After Tax (FRS 3)

6,212

7,263

19,431

28,086

Average Number of Shares Outstanding (m)

55.9

58.7

63.9

64.1

EPS

 

 

20.9

31.2

46.5

56.2

EPS - normalised (c)

 

 

20.3

29.9

44.6

55.1

EPS - (IFRS) (c)

 

 

11.2

12.4

30.4

43.8

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%

16.9%

17.6%

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

15.6%

15.8%

14.9%

15.5%

BALANCE SHEET

Fixed Assets

 

 

61,873

143,872

165,787

180,005

Intangible Assets

55,495

132,555

153,103

167,036

Tangible Assets

5,498

10,111

11,477

11,764

Investments

880

1,206

1,206

1,206

Current Assets

 

 

38,677

80,182

74,516

81,205

Stocks

0

0

0

0

Debtors

13,879

27,473

37,118

40,896

Cash

17,020

30,374

22,063

22,388

Other

7,778

22,335

15,335

17,920

Current Liabilities

 

 

(27,830)

(52,503)

(47,729)

(44,017)

Creditors

(19,805)

(33,560)

(28,786)

(25,074)

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

182,209

206,828

CASH FLOW

Operating Cash Flow

 

 

17,168

18,373

35,498

38,799

Net Interest

(58)

(253)

(143)

(935)

Tax

(2,129)

(4,731)

(7,329)

(8,443)

Capex

(2,306)

(3,803)

(6,121)

(6,363)

Acquisitions/disposals

(21,104)

(87,074)

(28,387)

(21,592)

Financing

643

82,936

0

0

Dividends

(825)

(867)

(1,027)

(1,140)

Net Cash Flow

(8,611)

4,581

(7,510)

325

Opening net debt/(cash)

 

 

(17,284)

(8,650)

(11,094)

(2,783)

Forex gain on cash

1

(891)

(500)

0

Other

(24)

(1,246)

(301)

0

Closing net debt/(cash)

 

 

(8,650)

(11,094)

(2,783)

(3,108)

Source: Company 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.

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New Zealand

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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.

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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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Germany

London +44 (0)20 3077 5700

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New York +1 646 653 7026

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Sydney +61 (0)2 8249 8342

Level 12, 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

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

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 2018 Edison Investment Research Limited (Edison). All rights reserved 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.

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

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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