A trinity of acquisitions to round off the year

Keywords Studios 19 December 2019 Update
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Keywords Studios

A trinity of acquisitions to round off the year

M&A update

Software & comp services

19 December 2019

Price

1,424p

Market cap

£920m

€1.17/£

Net debt (€m) at 30 June 2019

9.0

Shares in issue

65.08m

Free float

94%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.6

16.5

28.5

Rel (local)

5.7

12.0

12.4

52-week high/low

1838p

900p

Business description

Keywords Studios is 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

Year-end trading statement

January 2020

London CMD

5 February 2020

Final results

April 2020

Analysts

Richard Williamson

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

Keywords Studios is a research client of Edison Investment Research Limited

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*
(€m)

EPS*
(c)

DPS
(p)

P/E
(x)

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*
(€m)

2014

Lakshya Digital

Liquid Violet
Binari Sonori

Babel Media

Babel Media
Binari Sonori

Babel Media

19.0

2015

Liquid Dev

Reverb
Kite Team

Alchemic Dream

10.9

2016

Mindwalk
Volta

Synthesis
Sonox

Enzyme
Player Research

Synthesis
Sonox

Synthesis
Enzyme

Ankama

32.6

2017

SPOV
RedHot

GameSim
d3t
Sperasoft

La Marque Rose
Dune Sound
AsRec

VMC

VMC
XLOC
La Marque Rose
Around the Word
Dune Sound
AsRec
LOLA

VMC

VMC

101.4

2018

Fire Without Smoke
Trailer Farm

Snowed In
Studio Gobo
Electric Square
Yokozuna

Maximal
Cord
Laced
Blindlight

60.4

2019

Sunny Side Up

Ichi

GetSocial
Wizcorp

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

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 research department of Edison 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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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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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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New Zealand

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This document is prepared and provided by Edison 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.

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.

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Frankfurt +49 (0)69 78 8076 960

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New York +1 646 653 7026

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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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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 research department of Edison 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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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 Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

This document is prepared and provided by Edison 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.

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.

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

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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