Keywords Studios — Update 4 August 2016

Keywords Studios (LN: KWS)

Last close As at 28/03/2024

2,920.00

50.00 (1.74%)

Market capitalisation

2,207m

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Research: TMT

Keywords Studios — Update 4 August 2016

Keywords Studios

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Written by

TMT

Keywords Studios

M&A strategy delivering value

Acquisition & trading update

Software & comp services

4 August 2016

Price

342p

Market cap

£184m

£/€1.19

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

23.91

34.91

103.57

Rel (local)

22.25

27.05

106.12

52-week high/low

342p

150p

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

Interim results

September 2016

Analysts

Eric Opara

+44 (0)20 3681 2524

Dan Ridsdale

+44 (0)20 3077 5729

Keywords Studios is a research client of Edison Investment Research Limited

Keywords’ trading update adds further evidence to support our view that it continues to create value from its ongoing buy-and-build strategy. The most recent of its acquisitions was Volta Creation at the end of July, a deal that takes Keywords into the concept art market. Previous acquisitions are reported to be performing well, with Synthesis (its largest to date) singled out as being particularly successful. We believe that the trading update supports our existing revenue and profit forecasts. However, we have slightly upgraded our estimates to reflect the impact of the Volta acquisition, which is expected to be accretive from year one.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS**
(p)

P/E
(x)

Yield
(%)

12/14

37.3

5.1

8.5

1.0

40.2

0.3

12/15

58.0

8.0

12.5

1.2

27.4

0.3

12/16e

85.8

11.8

17.2

1.3

19.9

0.4

12/17e

101.7

14.7

21.4

1.5

16.0

0.4

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

Extending the product offering

Keywords’ acquisition of concept art company Volta Creation is its fourth of 2016 and takes the company further upstream in the video games value chain into the distinct area of concept art production. This adds an important additional string to Keywords’ bow as it enables it to become involved in the very infancy of the video game production lifecycle, strengthening its ability to offer further services as games are developed.

Group trading ahead of H1 expectations

The trading update reveals that Keywords is trading ahead of expectations going into the seasonally stronger second half of the year. Recent audio and localisation service acquisition Synthesis, which was announced in April and is its largest to date, is reported to have hit the ground running with a number of significant early project wins. We have adjusted our forecasts to reflect the impact of the Volta acquisition. However, our forecasts for the underlying business are unchanged as we await an update on the important H2 trading in Keywords’ October interims.

Valuation: Further M&A key to upside

Keywords has demonstrated very strong share price performance over the last year. This reflects the level of growth, both organic and M&A driven, that the business has delivered during that time. Although the company has no direct listed peers, we believe that its FY16e P/E of 19.9x, falling to 16.0x in FY17e, constitutes fair value for the underlying business, which is growing organically and benefits from strong revenue visibility. However, we believe that the valuation under-appreciates the potential value to be realised through further M&A and management reports that the M&A pipeline remains strong in what continues to be a fragmented industry. We also believe that the successful integration of the acquisitions made to date serves to strengthen Keywords’ position in future deal discussions.

Estimate changes

We have updated our forecasts to reflect the Volta’s contribution. These changes are detailed in Exhibit 1.

Keywords Studios is paying a total consideration of approximately C$5.25m for Volta, $5.0m of which is to be settled in cash, with $0.3m deferred for between three and 18 months subject to certain conditions. The balance of C$0.25 will be settled by the issue of 45,192 new shares. The initial cash consideration is to be paid using Keywords’ existing revolving debt facility. Given the company’s growing cash generation ability we have assumed that this is repaid from FY17 cash flows.

Volta generated revenues of C$3.6m and profit before tax of C$0.7m. We have assumed a similar level of revenue and profit generation in 2016 on a pro rata basis for the remaining five months of 2016. For FY17 we have assumed a full year’s contribution and increasing margins for Volta as it benefits from the scale and central business functions of the wider Keywords group.

Exhibit 1: Estimate changes

€m

2015

2016e

2017e

Year end 31 December

Actual

Old

New

Change
(%)

Old

New

Change
(%)

Revenue

57.95

84.76

85.78

1.2

98.90

101.72

2.8

Cost of Sales

(36.17)

(53.32)

(53.88)

1.1

(62.11)

(62.05)

(0.1)

Gross Profit

21.78

31.45

31.91

1.5

36.79

39.67

7.8

EBITDA

9.46

13.34

13.57

1.7

15.80

16.64

5.3

Operating Profit (before amort. and except.)

8.16

11.84

12.07

1.9

14.04

14.88

6.0

Operating Profit

5.82

8.98

9.21

2.6

12.69

13.52

6.6

Profit Before Tax (norm)

8.01

11.64

11.81

1.5

13.89

14.73

6.0

Profit After Tax (norm)

6.18

9.20

9.33

1.5

11.12

11.79

5.9

EPS - normalised fully diluted (c)

12.54

16.99

17.23

1.4

20.22

21.42

5.9

EPS - (IFRS) (c)

7.09

11.77

12.02

2.1

17.84

19.05

6.8

Dividend per share (c)

1.50

1.70

1.70

0.0

1.80

1.80

0.0

Closing net debt/(cash)

(17.28)

(9.85)

(9.96)

1.1

(17.57)

(14.79)

(15.8)

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

85,781

101,719

Cost of Sales

(10,570)

(24,566)

(36,172)

(53,876)

(62,048)

Gross Profit

5,615

12,727

21,779

31,906

39,670

EBITDA

 

 

2,691

6,027

9,459

13,570

16,640

Operating Profit (before amort. and except.)

2,419

5,159

8,162

12,070

14,880

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

9,213

13,523

Net Interest

(66)

(106)

(264)

(260)

(150)

FOREX

0

467

(474)

0

0

Profit Before Tax (norm)

 

 

2,352

5,053

8,007

11,810

14,730

Profit Before Tax (FRS 3)

 

 

1,158

3,435

5,086

8,953

13,373

Tax

(394)

(1,215)

(1,832)

(2,480)

(2,946)

Profit After Tax (norm)

1,959

3,838

6,175

9,330

11,785

Profit After Tax (FRS 3)

764

2,220

3,254

6,473

10,427

Average Number of Shares Outstanding (m)

36.1

45.1

49.0

53.9

54.7

EPS - normalised (c)

 

 

5.4

8.5

12.8

17.3

21.5

EPS - normalised fully diluted (c)

 

 

5.4

8.5

12.5

17.2

21.4

EPS - (IFRS) (c)

 

 

2.1

4.9

7.1

12.0

19.1

Dividend per share (c)

4,221.4

1.3

1.5

1.7

1.8

Gross Margin (%)

34.7

34.1

37.6

37.2

39.0

EBITDA Margin (%)

16.6

16.2

16.3

15.8

16.4

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

14.9

13.8

14.1

14.1

14.6

BALANCE SHEET

Fixed Assets

 

 

600

20,874

32,132

54,087

54,363

Intangible Assets

0

17,677

27,675

48,059

47,202

Tangible Assets

600

2,761

3,486

5,057

6,190

Investments

0

436

971

971

971

Current Assets

 

 

18,218

23,120

34,884

35,013

38,408

Stocks

0

0

0

0

0

Debtors

1,303

6,203

7,519

11,576

13,541

Cash

15,271

11,014

19,018

15,090

16,520

Other

1,644

5,903

8,347

8,347

8,347

Current Liabilities

 

 

(1,025)

(9,746)

(13,128)

(20,818)

(18,488)

Creditors

(1,025)

(9,746)

(11,965)

(16,255)

(17,325)

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

57,785

67,490

CASH FLOW

Operating Cash Flow

 

 

2,705

2,412

4,768

14,313

15,821

Net Interest

(59)

11

(58)

181

181

Tax

(359)

(522)

(1,362)

(2,480)

(2,946)

Capex

(394)

(1,252)

(1,635)

(3,745)

(4,020)

Acquisitions/disposals

(13)

(8,889)

(7,409)

(18,271)

(3,500)

Financing

10,280

4,594

13,627

3,400

100

Dividends

(781)

(609)

(737)

(717)

(806)

Net Cash Flow

11,378

(4,256)

7,194

(7,319)

4,830

Opening net debt/(cash)

 

 

(3,892)

(15,271)

(11,014)

(17,284)

(9,957)

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)

(9,957)

(14,787)

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

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. 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 25, Aurora Place

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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

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. 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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