CEO retires for health reasons, positive trading

Keywords Studios 15 June 2021 Update
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Keywords Studios

CEO retires for health reasons, positive trading

Board change,
trading update

Software & comp services

15 June 2021

Price

2,504p

Market cap

£1.89bn

€1.16/£

Net cash (€m) at 31 December 2020 (excluding lease liabilities)

102.9

Shares in issue

75.3m

Free float

90%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.5

3.7

51.1

Rel (local)

(1.1)

(2.0)

25.4

52-week high/low

2,996p

1,666p

Business description

Keywords Studios is the largest and most diverse supplier of outsourced technical and creative services to the games industry. Through regular acquisitions, the company is building its scale, geographic footprint and delivery capability to become the ‘go-to’ supplier across the industry.

Next event

Trading update

August 2021

Interim results

September 2021

Analysts

Richard Williamson

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5700

Keywords Studios is a research client of Edison Investment Research Limited

Having stepped back temporarily in March 2021 for health reasons, Andrew Day has now confirmed that he will take early retirement after 12 years as CEO of Keywords. Accordingly, the board has initiated the search for a full-time replacement. Jon Hauck (CFO, M&A) and Sonia Sedler (COO and operations) will continue to operate as interim CEOs until the search is complete. In parallel, Keywords provided a trading update, with the group reporting 25% l-f-l organic revenue growth and overall revenue growth of 36% y-o-y for the first four months of the year, and ‘good margin delivery’. We note that the comparator period was relatively weak given the onset of COVID-19 (H120: 8% l-f-l organic revenue growth), but with trading momentum continuing as games companies try to make up for the content deficit last year, together with a strong M&A pipeline, the board is confident in meeting FY21 market expectations.

Year end

Revenue

(€m)

PBT*
(€m)

EPS*
(c)

DPS
(p)

P/E
(x)

Yield
(%)

12/19

326.5

40.9

48.8

0.58

59.5

0.02

12/20

373.5

55.0

60.9

0.00

47.7

0.00

12/21e

491.5

72.9

78.1

1.91

37.2

0.08

12/22e

563.9

83.1

88.1

2.11

33.0

0.08

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

Strong trading momentum to continue in H221

Operationally, management stated that trading momentum is expected to continue through FY21, although noting that the H220 comparatives are stronger than the H120 comparatives. In terms of M&A, Keywords has already completed three acquisitions in FY21, all so far in game development: Heavy Iron (January 2021), Tantalus Media (March 2021) and most recently Climax Studios (April 2021). Management continues to see a healthy acquisition pipeline.

Estimates updated to reflect Climax acquisition

We have updated our estimates to reflect the acquisition of Climax Studios, the UK games developer acquired in April for a maximum total consideration of £43.0m (10x FY20 EBITDA), with an upfront consideration of £27.0m (75% cash, 25% equity). Climax reported FY20 adjusted EBITDA of £4.3m. Incorporating Climax, our estimates for FY21 revenues rise 3% to €491.5m, with adjusted EBITDA rising 2% to €94.7m and normalised operating profit rising to €74.9m, a 15.2% margin.

Valuation: Investment case remains intact

From our perspective, Keywords’ key growth drivers and the investment story remain intact, with continued games development spending, an increasing trend towards outsourcing and a strong pipeline of games launches for next-generation consoles in FY21–23, underpinned by strong long-term secular and technology trends. With Keywords trading on an FY21e EV/adjusted EBITDA of 22x and a P/E of 37x, we see business as usual, together with a well-oiled M&A machine.

Exhibit 1: Financial summary

€'000s

2019

2020

2021e

2022e

2023e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

326,463

373,538

491,544

563,935

620,328

Cost of Sales

(206,234)

(231,766)

(304,809)

(350,510)

(385,561)

Gross Profit (including multimedia tax credits)

120,229

141,772

186,735

213,425

234,768

Investment income

-

1,437

-

-

-

EBITDA (adjusted)

 

 

57,611

74,177

94,659

106,078

115,893

EBITDA (reported)

 

 

43,375

66,760

94,659

106,078

115,893

Operating Profit (before amort. and except.)

 

 

42,983

57,259

74,909

85,130

93,643

Amortisation of acquired intangibles

(7,318)

(8,808)

(11,317)

(14,051)

(15,456)

Exceptionals

(4,348)

(2,650)

-

-

-

Other (incl share based payments)

(9,775)

(15,350)

-

-

-

Operating Profit

21,542

41,119

63,592

71,079

78,187

Net Interest

(2,513)

(2,522)

(2,000)

(2,000)

(2,000)

FOREX

(1,658)

(6,103)

-

-

-

Profit Before Tax (norm)

 

 

40,913

54,954

72,909

83,130

91,643

Profit Before Tax (FRS 3)

 

 

17,371

32,494

61,592

69,079

76,187

Tax

(7,462)

(11,027)

(14,582)

(16,626)

(18,329)

Profit After Tax (norm)

33,451

43,927

58,327

66,504

73,314

Profit After Tax (FRS 3)

9,909

21,467

47,010

52,453

57,858

Average Number of Shares Outstanding (m)

65.1

70.8

74.7

75.5

75.8

EPS - normalised (c)

 

 

48.8

60.9

78.1

88.1

96.8

EPS - normalised fully diluted (c)

 

 

47.2

57.7

75.3

85.4

94.1

EPS - (IFRS) (c)

 

 

15.2

30.3

62.9

69.5

76.4

Dividend per share (p)

0.58

0.00

1.91

2.11

2.32

Gross Margin (%)

36.8%

38.0%

38.0%

37.8%

37.8%

EBITDA Margin (%)

13.3%

17.9%

19.3%

18.8%

18.7%

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

13.2%

15.3%

15.2%

15.1%

15.1%

PBT Margin (%)

12.5%

14.7%

14.8%

14.7%

14.8%

BALANCE SHEET

Fixed Assets

 

 

245,461

309,685

355,464

379,024

397,717

Intangible Assets

196,769

240,810

280,783

294,036

300,652

Tangible Assets

22,163

26,419

32,225

42,532

54,609

Right of use assets

21,469

27,807

27,807

27,807

27,807

Investments

5,060

14,649

14,649

14,649

14,649

Current Assets

 

 

120,483

189,567

190,385

238,729

299,118

Stocks

-

-

-

-

-

Debtors

43,243

47,832

57,457

64,352

70,787

Cash

41,827

103,070

86,482

122,357

171,110

Other

35,413

38,665

46,446

52,019

57,221

Current Liabilities

 

 

(57,292)

(91,130)

(95,974)

(99,018)

(101,721)

Creditors

(49,471)

(83,696)

(88,540)

(91,584)

(94,287)

Short term borrowings

(80)

(73)

(73)

(73)

(73)

Lease liabilities

(7,741)

(7,361)

(7,361)

(7,361)

(7,361)

Long Term Liabilities

 

 

(85,694)

(36,887)

(36,887)

(36,887)

(36,887)

Long term borrowings

(59,671)

(122)

(122)

(122)

(122)

Lease liabilities

(14,166)

(21,503)

(21,503)

(21,503)

(21,503)

Other long-term liabilities

(11,857)

(15,262)

(15,262)

(15,262)

(15,262)

Net Assets

 

 

222,958

371,235

412,988

481,847

558,227

CASH FLOW

Operating Cash Flow

 

 

46,069

80,879

85,609

102,673

111,417

Net Interest

(9,411)

(9,816)

(9,047)

(9,047)

(9,047)

Tax

(13,288)

(4,459)

(14,582)

(16,626)

(18,329)

Capex

(13,145)

(13,908)

(19,792)

(22,707)

(24,977)

Acquisitions/disposals

(27,762)

(39,936)

(57,104)

(16,567)

(8,269)

Financing

-

111,698

-

-

-

Dividends

(1,197)

-

(1,672)

(1,851)

(2,042)

Net Cash Flow

(18,734)

124,458

(16,588)

35,875

48,752

Opening net debt/(cash)

 

 

430

17,924

(102,875)

(86,287)

(122,162)

Forex gain on cash

1,293

(3,426)

-

-

-

Other

(53)

(233)

-

-

-

Closing net debt/(cash) (excluding lease liabilities)

 

 

17,924

(102,875)

(86,287)

(122,162)

(170,915)

Source: Company accounts, 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.

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 2021 Edison Investment Research Limited (Edison).

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

1185 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

1185 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 2021 Edison Investment Research Limited (Edison).

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

1185 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

1185 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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