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Keywords has rounded off the year with three small acquisitions, very much in line with its stated M&A strategy: Kantan, a Dublin-based machine translation technology company (€7m); Ichi, a London-based video games creative and marketing services agency (£3.2m); and Syllabes, a Montreal-based audio recording studio (C$0.5m). Together, they have reported revenues of c €4.8m and have been acquired on a trailing multiple of c 2.3x revenues. As we approach year-end, we retain our view that Keywords remains strongly positioned as the only public games service provider at a global scale. The company’s P/E rating (25.7x FY20e) reflects its leading market position, track record and potential, and should fall further as Keywords continues its buy-and-build strategy successfully.
Written by
Keywords Studios |
A trinity of acquisitions to round off the year |
M&A update |
Software & comp services |
19 December 2019 |
Share price performance
Business description
Next events
Analysts
Keywords Studios is a research client of Edison Investment Research Limited |
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Keywords has rounded off the year with three small acquisitions, very much in line with its stated M&A strategy: Kantan, a Dublin-based machine translation technology company (€7m); Ichi, a London-based video games creative and marketing services agency (£3.2m); and Syllabes, a Montreal-based audio recording studio (C$0.5m). Together, they have reported revenues of c €4.8m and have been acquired on a trailing multiple of c 2.3x revenues. As we approach year-end, we retain our view that Keywords remains strongly positioned as the only public games service provider at a global scale. The company’s P/E rating (25.5x FY20e) reflects its leading market position, track record and potential, and should fall further as Keywords continues its buy-and-build strategy successfully.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
||||||
12/17 |
151.4 |
23.1 |
30.0 |
1.46 |
55.1 |
0.10 |
||||||
12/18 |
250.8 |
37.9 |
40.1 |
1.61 |
41.2 |
0.11 |
||||||
12/19e |
319.7 |
40.2 |
45.0 |
1.77 |
36.7 |
0.13 |
||||||
12/20e |
360.2 |
52.5 |
64.8 |
1.95 |
25.5 |
0.14 |
||||||
Notes: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
€11.2m of acquisitions: Kantan, Ichi and Syllabes
Keywords has announced three acquisitions for a total consideration of €11.2m, approximately 2.3x aggregate historic revenues of €4.8m. Kantan develops a machine translation technology that will allow Keywords to provide an automated, machine learning localisation service. The acquisition of Ichi expands Keywords’ marketing services capabilities, providing video game branding expertise from its base in London. Syllabes provides audio recording and casting services in French and English, and offers a games and film/TV audio recording studio, completing the full suite of services provided from Keywords' Montreal services hub.
Valuation: Strong growth, margins normalising
As we approach year-end, it is worth reiterating that we anticipate a strong second-half performance from Keywords. Although management has stated it will invest in growth if the opportunity allows, H219 margins are expected to start to recover from the accelerated investment in H119, with operating margins normalising towards 15% over the course of FY20 (H119: 12.6%, FY19: 13.2%). The coming console transition (Thanksgiving 2020) should be a net benefit to Keywords, with increasing spend on next-generation console development in the run-up to launch. Management continues to see a healthy acquisition pipeline for FY20, with an emphasis on game development and marketing services.
Keywords has delivered an adjusted EPS CAGR of 51% from 2013 to 2018, and we believe it looks set to maintain double-digit revenue growth for the foreseeable future, driven by the growth of the games industry and increasing outsourcing, supported by M&A. We have updated our forecasts for the acquisitions, which otherwise remain unchanged. Organic growth has remained solid through a period of industry flux and in this context, we believe the 25.5x FY20e P/E is not overly undemanding.
Keywords’ latest acquisitions
Kantan – machine translation technology
Acquisition price €7m; based in Ireland; nine employees; revenues to 31 March 2019 of €0.8m
Kantan, based in Dublin, is a leading developer of automated translation technology, with its own suite of neural network machine translation engines. It has also been developing a global translation platform, KantanSkynet, which combines machine translation with crowd-sourced post-editing to offer high-quality localised output. Prior to the acquisition, Keywords had been working as a commercial partner with Kantan, applying its technologies to video games, allowing Keywords to provide a fully integrated, machine-assisted localisation service to leading video game publishers and developers. Kantan has also worked with organisations such as eBay, VistaPrint and the European Commission, as well as with language service providers.
Ichi – marketing services
Acquisition price £3.2m; based in the UK; 13 employees; revenues to 30 June 2019 of £2.9m
Ichi, based in London, provides a full suite of creative and marketing services to game publishers such as Square Enix, NaturalMotion, Deep Silver and Sports Interactive, as well as sports brands such as Puma and entertainment content companies including Netflix. It creates brand marketing campaign strategies, as well as marketing assets such as game trailers, live action, social content, key marketing art and materials.
Syllabes – audio services
Acquisition price C$0.475m; based in Canada; five employees; revenues (annual run ate) of C$0.7m
Syllabes, based in Montreal, provides audio recording and casting services in French and English for the video games industry, as well as for a wide range of media and entertainment customers. It also provides sound design services, audiobook recording services, as well as teaching dubbing and voice acting. Keywords has been working with Syllabes for many years and the acquisition means that Keywords can provide the full range of services from its Montreal hub.
Exhibit 1: Keywords has completed eight acquisitions in FY19
Year |
Art services |
Game development |
Audio services |
Functional testing |
Localisation |
Localisation testing |
Player support |
Total cost* |
2014 |
Lakshya Digital |
Liquid Violet |
Babel Media |
Babel Media |
Babel Media |
19.0 |
||
2015 |
Liquid Dev |
Reverb |
Alchemic Dream |
10.9 |
||||
2016 |
Mindwalk |
Synthesis |
Enzyme |
Synthesis |
Synthesis |
Ankama |
32.6 |
|
2017 |
SPOV |
GameSim |
La Marque Rose |
VMC |
VMC |
VMC |
VMC |
101.4 |
2018 |
Fire Without Smoke |
Snowed In |
Maximal |
60.4 |
||||
2019 |
Sunny Side Up Ichi |
GetSocial |
Descriptive Video Works Syllabes |
TV+Synchron Kantan |
21.8 |
|||
|
Source: Keywords Studios. Note: *Includes all cash, deferred and equity consideration. |
||||||||
Valuation: Model updated, small rise in revenue for FY20
We have amended our model to allow for the acquisitions. Given the year-end timing, there are minimal changes to FY19, but we have reflected a full contribution for FY20, with revenue rising c 1.5% from €354.9m to €360.2m. Our forecasts, otherwise, remain unchanged.
Exhibit 2: Financial summary
€'000s |
2016 |
2017 |
2018 |
2019e |
2020e |
|
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|
PROFIT & LOSS |
||||||
Revenue |
|
96,525 |
151,430 |
250,805 |
319,720 |
360,157 |
Cost of Sales |
(59,907) |
(96,345) |
(154,997) |
(200,771) |
(224,903) |
|
Gross Profit (inc multimedia tax credits) |
36,618 |
55,085 |
95,808 |
118,949 |
135,253 |
|
EBITDA |
|
16,833 |
26,645 |
44,232 |
48,845 |
60,965 |
Operating Profit (before amort. and except.) |
|
15,030 |
23,915 |
38,916 |
42,216 |
53,498 |
Intangible Amortisation |
(1,629) |
(3,038) |
(6,872) |
(7,559) |
(8,315) |
|
Exceptionals |
(1,316) |
(3,016) |
(5,607) |
(2,981) |
0 |
|
Other |
(686) |
(1,426) |
(4,129) |
(6,000) |
(6,600) |
|
Operating Profit |
11,399 |
16,435 |
22,308 |
25,676 |
38,583 |
|
Net Interest |
(287) |
(818) |
(1,005) |
(2,000) |
(1,000) |
|
FOREX |
(1,737) |
(3,623) |
791 |
(1,159) |
0 |
|
Profit Before Tax (norm) |
|
14,804 |
23,097 |
37,911 |
40,216 |
52,498 |
Profit Before Tax (FRS 3) |
|
9,375 |
11,994 |
22,094 |
22,517 |
37,583 |
Tax |
(3,223) |
(4,731) |
(7,191) |
(7,440) |
(9,450) |
|
Profit After Tax (norm) |
11,581 |
18,366 |
30,720 |
32,776 |
43,048 |
|
Profit After Tax (FRS 3) |
6,152 |
7,263 |
14,903 |
15,077 |
28,133 |
|
Average Number of Shares Outstanding (m) |
55.9 |
58.7 |
64.3 |
65.1 |
65.2 |
|
EPS |
|
20.8 |
31.3 |
41.8 |
46.0 |
66.1 |
EPS - normalised (c) |
|
20.2 |
30.0 |
40.1 |
45.0 |
64.8 |
EPS - (IFRS) (c) |
|
11.0 |
12.4 |
23.2 |
23.2 |
43.2 |
Dividend per share (p) |
1.33 |
1.46 |
1.61 |
1.77 |
1.95 |
|
Gross Margin (%) |
37.9% |
36.4% |
38.2% |
37.2% |
37.6% |
|
EBITDA Margin (%) |
17.4% |
17.6% |
17.6% |
15.3% |
16.9% |
|
Operating Margin (before GW and except.) (%) |
15.6% |
15.8% |
15.5% |
13.2% |
14.9% |
|
BALANCE SHEET |
||||||
Fixed Assets |
|
61,873 |
142,927 |
198,215 |
222,847 |
217,349 |
Intangible Assets |
55,495 |
131,610 |
180,086 |
202,347 |
194,316 |
|
Tangible Assets |
5,498 |
10,111 |
15,002 |
17,534 |
20,066 |
|
Investments |
880 |
1,206 |
3,127 |
2,967 |
2,967 |
|
Current Assets |
|
38,677 |
80,182 |
100,349 |
107,589 |
149,291 |
Stocks |
0 |
0 |
0 |
0 |
0 |
|
Debtors |
13,879 |
27,473 |
37,019 |
43,140 |
47,282 |
|
Cash |
17,020 |
30,374 |
39,871 |
37,111 |
72,048 |
|
Other |
7,778 |
22,335 |
23,459 |
27,338 |
29,962 |
|
Current Liabilities |
|
(27,830) |
(51,677) |
(95,031) |
(81,527) |
(82,211) |
Creditors |
(19,805) |
(32,734) |
(54,960) |
(34,455) |
(35,139) |
|
Short term borrowings |
(8,025) |
(18,943) |
(40,071) |
(47,072) |
(47,072) |
|
Long Term Liabilities |
|
(6,016) |
(10,420) |
(11,158) |
(11,703) |
(10,718) |
Long term borrowings |
(345) |
(337) |
(230) |
(230) |
(230) |
|
Other long term liabilities |
(5,671) |
(10,083) |
(10,928) |
(11,473) |
(10,488) |
|
Net Assets |
|
66,704 |
161,012 |
192,375 |
237,206 |
273,712 |
CASH FLOW |
||||||
Operating Cash Flow |
|
17,108 |
21,389 |
38,481 |
48,506 |
62,869 |
Net Interest |
(58) |
(253) |
(502) |
(7,542) |
(6,394) |
|
Tax |
(2,129) |
(4,731) |
(6,304) |
(7,440) |
(9,450) |
|
Capex |
(2,306) |
(3,803) |
(9,440) |
(9,000) |
(10,500) |
|
Acquisitions/disposals |
(21,104) |
(90,090) |
(30,296) |
(33,133) |
(316) |
|
Financing |
643 |
82,936 |
174 |
0 |
0 |
|
Dividends |
(825) |
(867) |
(1,080) |
(1,152) |
(1,272) |
|
Net Cash Flow |
(8,671) |
4,581 |
(9,919) |
(9,761) |
34,937 |
|
Opening net debt/(cash) |
|
(17,284) |
(8,650) |
(11,094) |
423 |
10,184 |
Forex gain on cash |
1 |
(891) |
(3) |
0 |
0 |
|
Other |
36 |
(1,246) |
(1,596) |
0 |
0 |
|
Closing net debt/(cash) |
|
(8,650) |
(11,094) |
423 |
10,184 |
(24,752) |
Source: Keywords Studios data, Edison Investment Research
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