Keywords Studios — Gobo strengthens engineering operations

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 — Gobo strengthens engineering operations

Keywords’ acquisition of Studio Gobo and Electric Square for up to £26m meaningfully strengthens the company’s engineering service line, while enhancing our FY19 earnings by 6% based on conservative assumptions. In paying a maximum of 7.6x historic EBITDA for the business, the company looks to be buying a good asset in a high value-add service line at a very reasonable multiple.

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TMT

Keywords Studios

Gobo strengthens engineering operations

Engineering acquisition

Software & comp services

28 August 2018

Price

2,000p

Market cap

£1,272m

£/€1.11

Net cash (£m) at 31 December 2017

11.1

Shares in issue

63.6m

Free float

83%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.3

12.1

47.8

Rel (local)

6.5

15.7

47.1

52-week high/low

2,065p

1,185p

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 Studio Gobo and Electric Square for up to £26m meaningfully strengthens the company’s engineering service line, while enhancing our FY19 earnings by 6% based on conservative assumptions. In paying a maximum of 7.6x historic EBITDA for the business, the company looks to be buying a good asset in a high value-add service line at a very reasonable multiple.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(p)

P/E
(x)

Yield
(%)

12/16

96.6

14.9

20.3

1.3

109.4

0.07

12/17

151.4

23.0

29.9

1.5

74.2

0.08

12/18e

257.6

37.8

48.6

1.6

45.7

0.08

12/19e

299.2

45.5

56.0

1.8

39.6

0.09

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

Strengthening the engineering service line

Studio Gobo and Electric Square are two Brighton, UK-based games engineering studios co-founded and led by games industry veteran, Tony Beckwith. Studio Gobo has a core strength in high-end console games development, providing full development (entire games, a new capability for Keywords) or co-development (parts of games) for a range of tier one clients including Ubisoft (For Honor), Microsoft (Miami Street) and Disney Infinity (Marvel Super Heroes, Guardians of the Galaxy). Electric Square has core strengths in live ops development (developing new features and downloadable content to keep gamers engaged) and free-to-play and racing games. The addition of the 170 Brighton-based engineers in the combined group (Gobo) brings Keywords’ engineering team to 610 people. While the business does have some risk from Brexit and a relatively high customer concentration, the acquisition by Keywords will help mitigate these.

FY19 EPS upgraded by 6%

Gobo’s revenues for the 12 months to 31 July are estimated at £11.6m, up strongly from £6.2m for the year to 30 September 2017. EBITDA of £3.6m represents a healthy 31% margin, vs Keywords 17% for FY18e. The consideration was £15m up front (a mix of £10.5m cash and 255k shares), with a further £11m contingent on achieving strong EBITDA growth in the first year following completion. This equates to a maximum of 7.6x historic EBITDA, which is well within Keywords’ norms for acquisitions. Assuming a c 15% revenue growth rate for Gobo, the deal enhances our FY19 EPS by 6%.

Valuation: Sustained execution should deliver returns

The c 40x FY19e P/E (c 22x EBITDA) clearly prices in continued strong progress, but further acquisitions and organic upside could bring this down substantially. We have highlighted the company’s ability to continue to make good acquisitions at attractive multiples as a key sensitivity to the investment case, especially as it expands into higher value-added services, and we see this acquisition as encouraging in this regard. We believe sustained execution should continue to deliver returns.

Estimate changes

Our estimate changes in Exhibit 1 incorporate the acquisition of Gobo; we also include July’s small acquisitions of Snowed In and Yokozuna for the first time.

In aggregate, FY19 EPS is upgraded by 6%, which is almost entirely due to the Gobo acquisition. For Gobo our forecast FY19 revenues of €14.8m (c £13.3m) with €4.2m EBITDA implies a c 15% revenue growth rate compared to respective figures of £11.6m and £3.6m for the year to 31 July 2018. The EBITDA contribution of €1.0m for the remainder of FY18 is more modest due to investment into the business, with a pick-up expected in H119 supported by the timing of projects already in the pipeline.

Similar to other companies providing full and co-development services (eg Sumo), Gobo’s customer base is relatively concentrated but these customers are sticky and Keywords’ broad customer network should help diversify this. The company also benefits from UK Video Games tax credits, which will be accounted for in the same way as the company’s multi-media tax credits, as a credit to cost of goods sold.

Snowed In and Yokozuna together add €2.5m to FY19 revenues but nothing to PBT on our forecasts, with forecast losses (€0.4m) from Yokozuna (currently pre-revenue) offsetting the positive contribution from Snowed In.

Our underlying P&L estimates are unchanged. However, factoring in the weaker dollar, the organic growth required to reach our full year number is now c 11% versus 7.5% were the USD dollar/euro rate to remain unchanged. Give the company’s recent positive trading update, we feel this forecast remains well supported.

Exhibit 1: Estimate changes incorporating acquisitions of Gobo, Yokozuna and Snowed In

€000s

2017

2018e

2019e

31-December

Actual

Old

New

Change

Old

New

Change

PROFIT & LOSS

Revenue

 

 

151,430

252,254

257,610

2

283,276

299,177

6

Cost of Sales

(96,345)

(161,749)

(165,311)

2

(181,812)

(192,355)

6

Gross Profit

55,085

90,505

92,300

2

101,464

106,823

5

EBITDA

 

 

26,645

43,249

44,210

2

49,134

53,545

9

Operating Profit (before amort. and except.)

 

 

23,915

38,389

39,246

2

43,676

47,780

9

Profit Before Tax (norm)

 

 

23,043

37,342

37,849

1

42,504

45,509

7

Profit After Tax (norm)

18,312

29,948

30,355

1

34,428

36,862

7

EPS - normalised fully diluted (c)

 

 

29.9

47.7

48.6

2

52.8

56.0

6

EPS - (IFRS) (c)

 

 

12.4

34.2

33.1

(3)

43.2

44.9

4

Dividend per share (pence)

1.5

1.6

1.6

0

1.8

1.8

0

Closing net debt/(cash)

 

 

(11,094)

(19,155)

(4,840)

(75)

(38,957)

(14,823)

(62)

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

257,610

299,177

Cost of Sales

(59,907)

(96,345)

(165,311)

(192,355)

Gross Profit (inc multimedia tax credits)

36,678

55,085

92,300

106,823

EBITDA

 

 

16,893

26,645

44,210

53,545

Operating Profit (before amort. and except.)

 

 

15,090

23,915

39,246

47,780

Intangible Amortisation

(1,629)

(3,038)

(5,000)

(5,500)

Exceptionals

(1,316)

(3,016)

(2,784)

0

Other

(686)

(1,426)

(1,854)

(2,410)

Operating Profit

11,459

16,435

29,609

39,870

Net Interest

(287)

(872)

(1,397)

(2,271)

FOREX

(1,737)

(3,569)

0

0

Profit Before Tax (norm)

 

 

14,864

23,043

37,849

45,509

Profit Before Tax (FRS 3)

 

 

9,435

11,994

28,212

37,599

Tax

(3,223)

(4,731)

(7,494)

(8,647)

Profit After Tax (norm)

11,641

18,312

30,355

36,862

Profit After Tax (FRS 3)

6,212

7,263

20,717

28,952

Average Number of Shares Outstanding (m)

55.9

58.7

62.5

64.5

EPS

 

 

20.9

31.2

48.5

57.2

EPS - normalised (c)

 

 

20.3

29.9

48.6

56.0

EPS - (IFRS) (c)

 

 

11.2

12.4

33.1

44.9

Dividend per share (p)

1.33

1.46

1.61

1.77

Gross Margin (%)

38.0%

36.4%

35.8%

35.7%

EBITDA Margin (%)

17.5%

17.6%

17.2%

17.9%

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

15.6%

15.8%

15.2%

16.0%

BALANCE SHEET

Fixed Assets

 

 

61,873

143,872

165,226

174,962

Intangible Assets

55,495

132,555

152,307

161,445

Tangible Assets

5,498

10,111

11,713

12,311

Investments

880

1,206

1,206

1,206

Current Assets

 

 

38,677

80,182

84,533

98,322

Stocks

0

0

0

0

Debtors

13,879

27,473

38,077

41,885

Cash

17,020

30,374

24,120

34,103

Other

7,778

22,335

22,335

22,335

Current Liabilities

 

 

(27,830)

(52,503)

(48,005)

(44,222)

Creditors

(19,805)

(33,560)

(29,062)

(25,279)

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

191,389

218,697

CASH FLOW

Operating Cash Flow

 

 

17,168

18,373

38,095

44,675

Net Interest

(58)

(253)

(1,397)

(2,271)

Tax

(2,129)

(4,731)

(7,494)

(8,647)

Capex

(2,306)

(3,803)

(6,121)

(6,363)

Acquisitions/disposals

(21,104)

(87,074)

(27,502)

(16,264)

Financing

643

82,936

0

0

Dividends

(825)

(867)

(1,034)

(1,148)

Net Cash Flow

(8,611)

4,581

(5,453)

9,982

Opening net debt/(cash)

 

 

(17,284)

(8,650)

(11,094)

(4,840)

Forex gain on cash

1

(891)

(500)

0

Other

(24)

(1,246)

(301)

0

Closing net debt/(cash)

 

 

(8,650)

(11,094)

(4,840)

(14,823)

Source: Company data, Edison Investment Research

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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US

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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