Keywords Studios — Update 18 November 2016

Keywords Studios (LN: KWS)

Last close As at 24/04/2024

2,920.00

50.00 (1.74%)

Market capitalisation

2,207m

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Research: TMT

Keywords Studios — Update 18 November 2016

Keywords Studios

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TMT

Keywords Studios

Enzyme the catalyst for a 6% EPS upgrade

Acquisition

Software & comp services

18 November 2016

Price

477.50p

Market cap

£260m

£/€1.17; C$/€1.44

Net cash ($m) at 30 June 2016

3.5

Shares in issue

54.4m

Free float

68%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.2

41.5

134.1

Rel (local)

5.4

42.8

117.8

52-week high/low

477.5p

197.0p

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

Deutsches Eigenkapitalforum

21-22 November 2016

Analysts

Dan Ridsdale

+44 (0)20 3077 5729

Jane Anscombe

+44 (0)20 3077 5740

Keywords Studios is a research client of Edison Investment Research Limited

Keywords’ acquisition of Enzyme strengthens the company’s position in French-speaking Canada, and in localisation and functional testing. Enzyme’s expertise in focus group testing should be a good complement to the recent Player Research acquisition and may support the company’s drive to develop more comprehensive, strategic outsourcing relationships with developers and publishers. The company is paying a mere 4.2x FY15 EBIT for the business and synergies should reduce this multiple in FY17. The deal adds a further 6% to our FY17 EPS.

Year
end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS**
(p)

P/E
(x)

Yield
(%)

12/14

37.3

5.1

8.5

1.1

65.7

0.2

12/15

58.0

8.0

12.6

1.2

44.3

0.3

12/16e

93.5

14.3

20.2

1.3

27.7

0.3

12/17e

112.7

16.2

23.0

1.5

24.3

0.3

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

Consolidating leadership position in Canada

Enzyme is an outsourced service provider to the games industry based in Montreal and St-Jerome (60km from Montreal). It specialises in functional testing and localisation, complementing Keywords’ established presence in these areas. It also provides focus group testing services for optimising game design and user experience. This is a new domain for Keywords, but one which should complement the activities of its Player Research operations, acquired in October, and support the company’s drive to build more comprehensive, retained, strategic relationships with clients. Keywords already has a presence in the area with Alchemic Dream (customer care) and Babel (functional test), facilitating cost and cross-selling synergies. Enzyme’s clients’ clients are not disclosed, but the Montreal area is a hub for games development/production, with the likes of Ubisoft, EA, Behaviour Interactive and Gameloft all present in the area.

6% FY16 EPS enhancement

Keywords is paying a total of C$5.4m (€3.7m) for Enzyme in cash. The business generated revenues of C$11.5m with EBIT of C$1.3m for FY15, equating to an acquisition multiple of 4.2x FY15 EBIT. We are forecasting sales of C$10.5m in FY17, which factors in some contingency for transaction disruption and customer overlap, but with synergies driving an increase in normalised PBT to C$1.6m. Our group FY17 sales and PBT estimates move up by 7%, with EPS upgraded by 6%.

Valuation: Premium justified

While the shares are rated at a premium to peers, one should expect further accretive acquisition to reduce this and we believe that further organic upgrades are very possible. We believe that a mid-single, low double-digit growth rate is sustainable, which is also higher than its peers. Hence we believe that Keywords has a platform to deliver sustained double-digit earnings growth, meaning that prospects for longer-term share price appreciation continue to look attractive.

Estimate changes

Acquisition drives 6% upgrade to FY17 EPS

Our estimate changes are shown in Exhibit 1 and factor in only the acquisition of Enzyme, which lifts FY17 sales and PBT estimates by 7% and EPS by 6%. Earlier this month we upgraded FY16 EPS by 16% to reflect the exceptionally strong trading at Synthesis, as well as the Player Research acquisition, but left FY17 essentially unchanged. (See update report 8 November Exceptional trading continues.)

We believe that these estimates remain cautious. The company’s strategy of consolidating a fragmented supply landscape means that further earnings-enhancing acquisitions should be expected.

Games market growing at 6.6% pa; Keywords has a platform to grow faster

We also believe that the company is starting to demonstrate a consistent ability to accelerate growth in acquired businesses through improved support, infrastructure and cross-selling. For example, since acquisition Layshka Digital (an Indian art studio) has grown revenues from US$4m in FY14 to an estimated U$6m in FY16, with Keywords’ support in enabling the set-up of a studio in Seattle a factor in this.

The company’s like-for-like growth is likely to be suppressed in FY17 by the normalisation of trading at Synthesis (where we forecast revenues will drop from c €19m in FY16 to c €15m in FY17). However, the global games industry is forecast to grow at c 6.6% from 2015-19 (source: Newzoo) and we believe that Keywords has the platform to continue to grow faster than this organically – at a high single-digit/low double-digit growth rate through cross-selling, market share gains and other scale benefits.

Exhibit 1: Estimate changes

€000s

2015

2016e

2017e

Actual

Old

New

Change (%)

Old

New

Change (%)

Revenue

57,951

93,031

93,531

1%

105,317

112,705

7%

Cost of Sales

(36,172)

(58,429)

(58,743)

1%

(64,243)

(68,750)

7%

Gross Profit

21,779

34,602

34,788

1%

41,074

43,955

7%

EBITDA

9,459

15,981

16,052

0%

17,224

18,251

6%

Operating Profit (before amort. and except.)

8,162

14,481

14,552

0%

15,464

16,491

7%

Operating Profit

5,824

10,032

11,303

13%

13,715

14,742

7%

Profit Before Tax (norm)

8,007

14,221

14,292

0%

15,364

16,241

6%

Profit After Tax (norm)

6,175

11,234

11,290

0%

12,293

12,993

6%

EPS - normalised fully diluted (c)

12.6

20.1

20.2

0%

21.6

23.0

6%

EPS - (IFRS) (c)

7.0

12.2

12.5

3%

18.6

20.4

9%

Dividend per share (pence)

1.2

1.3

1.3

0%

1.5

1.5

0%

Closing net debt/(cash)

(17,284)

(9,927)

(8,892)

-10%

(15,921)

(14,394)

-10%

Source: Keywords Studios data, Edison Investment Research estimates


Valuation: Secular growth & upgrade potential justify premium

Keywords’ shares are valued at the top end of the peer group (see Exhibit 2), although the premium for FY17 has reduced with our estimates upgrade. We consider this premium rating to be justified by the company’s strong strategic position and growth prospects. We believe that the market is now pricing in the likelihood of one or two similar acquisitions, which is justified given that the company’s strategy is based around doing this; it has a strong track record of making acquisitions and there appears to be plenty of scope to further consolidate this fragmented market. We believe that Keywords is likely to be able to sustain a high single-digit/low double-digit organic growth rate, which is also faster than these peers.

In the longer term, we believe the company has a platform for generating sustained double-digit earnings growth through a combination of healthy organic growth and earnings-enhancing acquisitions, meaning that prospects for longer-term share appreciation remain attractive.

Exhibit 2: Peer valuation comparison

Company

Share price (local cur.)

Market cap (local cur. m)

Current EV/sales (x)

Next EV/sales (x)

Current EV/ EBITDA (x)

Next EV/ EBITDA (x)

Current P/E (x)

Next
P/E (x)

Keywords Studios

477.5

260

3.2x

2.6x

18.5x

16.3x

27.7x

24.3x

Lionbridge Technologies

4.8

294

0.6x

0.6x

6.8x

6.1x

8.6x

7.1x

SDL

432.0

352

1.4x

1.4x

11.2x

9.5x

18.3x

15.9x

RWS Holdings

270.0

582

4.5x

4.0x

17.4x

15.4x

24.3x

21.8x

Capita

565.0

3,769

1.2x

1.2x

8.4x

8.0x

8.4x

8.1x

Serco Group

136.5

1,500

0.5x

0.6x

12.1x

14.0x

29.7x

45.5x

Wipro

9.4

22,873

2.6x

2.4x

12.4x

11.0x

17.5x

16.2x

Capgemini

74.0

12,743

1.2x

1.1x

8.8x

8.2x

13.9x

12.8x

Average

1.7x

1.6x

11.0x

10.3x

17.3x

18.2x

Source: Edison Investment Research, Bloomberg. Note: Prices at 16 November 2016.

Exhibit 3: Financial summary

€000s

2013

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

16,185

37,293

57,951

93,531

112,705

Cost of Sales

(10,570)

(24,566)

(36,172)

(58,743)

(68,750)

Gross Profit

5,615

12,727

21,779

34,788

43,955

EBITDA

 

 

2,691

6,027

9,459

16,052

18,251

Operating Profit (before amort. and except.)

2,419

5,159

2,419

5,159

8,162

Intangible Amortisation

0

(468)

(857)

(1,357)

(1,357)

Exceptionals

(1,124)

(1,461)

(1,089)

(1,500)

0

Other

(71)

(156)

(392)

(392)

(392)

Operating Profit

1,224

3,074

5,824

11,303

14,742

Net Interest

(66)

(106)

(264)

(260)

(250)

FOREX

0

467

(474)

(1,200)

0

Profit Before Tax (norm)

 

 

2,352

5,053

8,007

14,292

16,241

Profit Before Tax (FRS 3)

 

 

1,158

3,435

5,086

9,843

14,492

Tax

(394)

(1,215)

(1,832)

(3,001)

(3,248)

Profit After Tax (norm)

1,959

3,838

6,175

11,290

12,993

Profit After Tax (FRS 3)

764

2,220

3,254

6,841

11,243

Average Number of Shares Outstanding (m)

36.1

35.8

45.0

48.2

54.7

EPS - normalised (c)

 

 

5.5

8.5

12.8

20.6

23.5

EPS - normalised fully diluted (c)

 

 

5.4

8.5

12.6

20.2

23.0

EPS - (IFRS) (c)

 

 

2.1

4.9

7.0

12.5

20.4

Dividend per share (p)

1.00

1.10

1.21

1.33

1.46

Gross Margin (%)

34.7%

34.1%

37.6%

37.2%

39.0%

EBITDA Margin (%)

16.6%

16.2%

16.3%

17.2%

16.2%

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

14.9

14.9%

13.8%

14.1%

15.6%

BALANCE SHEET

Fixed Assets

 

 

600

20,874

32,132

74,983

71,934

Intangible Assets

0

17,677

27,675

67,253

64,578

Tangible Assets

600

2,761

3,486

6,759

6,385

Investments

0

436

971

971

971

Current Assets

 

 

18,218

23,120

34,884

35,415

39,369

Stocks

0

0

0

0

0

Debtors

1,303

6,203

7,519

13,044

14,895

Cash

15,271

11,014

19,018

14,025

16,127

Other

1,644

5,903

8,347

8,347

8,347

Current Liabilities

 

 

(1,025)

(9,746)

(13,128)

(21,251)

(19,259)

Creditors

(1,025)

(9,746)

(11,965)

(16,688)

(18,096)

Short term borrowings

0

0

(1,163)

(4,563)

(1,163)

Long Term Liabilities

 

 

(300)

(2,607)

(3,294)

(10,497)

(6,793)

Long term borrowings

0

0

(571)

(570)

(570)

Other long term liabilities

(300)

(2,607)

(2,723)

(9,927)

(6,223)

Net Assets

 

 

17,494

31,642

50,594

78,651

85,251

CASH FLOW

Operating Cash Flow

 

 

2,705

2,412

4,768

15,878

17,827

Net Interest

(59)

11

(58)

181

181

Tax

(359)

(522)

(1,362)

(3,001)

(3,248)

Capex

(394)

(1,252)

(1,635)

(3,993)

(4,292)

Acquisitions/disposals

(13)

(8,889)

(7,409)

(22,047)

(3,500)

Financing

10,221

7,342

14,199

(800)

3,500

Dividends

(781)

(609)

(737)

(724)

(814)

Net Cash Flow

11,378

(4,256)

7,194

(11,107)

6,254

Opening net debt/(cash)

 

 

(3,892)

(15,271)

(11,014)

(17,284)

(6,170)

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)

(6,170)

(12,424)

Source: Keywords Studios data, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). 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 2016 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 2016. “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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Level 15, 171 Featherston St

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New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). 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 2016 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 2016. “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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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