Firing on all cylinders

Keywords Studios 31 July 2019 Update
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Keywords Studios

Firing on all cylinders

Trading update

Software & comp services

31 July 2019

Price

1716p

Market cap

£1,110m

€1.09/£

Net debt (€m) at end H119

9.0

Shares in issue

64.7m

Free float

94%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.0)

10.2

(6.7)

Rel (local)

(8.4)

7.7

(5.2)

52-week high/low

2065p

900p

Business description

Keywords Studios is the leading 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 games industry.

Next events

Half year results

18 September 2019

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’ trading update highlighted a stronger than anticipated first half, with expected H1 revenue growth of c 39% to €153.1m and adjusted PBT growth of c 15% to €18.4m, and growth seen across all seven service lines. Investment accelerated in H1 to manage the high level of demand, which means margins should benefit from this extra investment in H2. The group also agreed terms for a new RCF to replace the existing €105m facility. With strong underlying demand, the potential for margin leverage and an increased M&A capacity, Keywords looks set for a strong H2. Our forecasts are essentially unchanged for now, but we will review them later in the year.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(p)

P/E
(x)

Yield
(%)

12/17

151.4

23.1

30.0

1.46

62.3

0.1

12/18

250.8

37.9

45.8

1.61

40.8

0.1

12/19e

299.6

44.2

54.4

1.77

34.4

0.1

12/20e

335.5

49.5

61.0

1.95

30.7

0.1

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

Strong underlying growth

Keywords’ trading statement highlighted a stronger than anticipated first half, with expected H1 revenue growth of c 39% to €153.1m (H118: €110m) and adjusted PBT growth of c 15% to €18.4m (H118: €16.0m). Organic growth was particularly strong, with revenues on a constant currency, l-f-l basis rising 17% to €146.4m (H118: €124.8m). Growth was broadly spread, with all seven service lines, led by Functional Testing and Game Development, demonstrating l-f-l growth of 5–33%.

The group incurred additional costs in H1 to manage the level of demand growth, which means margins should benefit from leveraging this extra investment in H2.

Our forecasts for FY19 have changed marginally to reflect the four acquisitions in H119, but otherwise remain unchanged. Our FY19 estimates were based on a conservative 11% organic growth rate (although we noted that demand from streaming services, reduced drag from VMC and H218 projects slipping into H119 might boost this). In light of the strength of the H1 performance, we may need to review our forecasts for FY19 later in the year.

New financing facility underpins M&A agenda

Keywords announced a new revolving credit facility (RCF), subject to final contract, for €100m over a three-year term, with the option to increase the facility to €140m and extend it to five years. The RCF replaces the existing €105m facility, on the same terms. As expected, net debt increased to €9.0m in H119 (FY18: €0.4m) as Keywords invested €5.2m in four acquisitions in H119 (Sunny Side Up, GetSocial, Wizcorp and Descriptive Video Works) and paid deferred consideration of €1.8m on previous deals. Keywords continues to see a healthy pipeline of acquisition candidates. The new RCF will allow management to continue to deliver growth, both organically and through acquisition.

Exhibit 1: Financial summary

€'000s

2017

2018

2019e

2020e

31-December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

151,430

250,805

299,559

335,506

Cost of Sales

(96,345)

(154,997)

(188,485)

(212,569)

Gross Profit (inc multimedia tax credits)

55,085

95,808

111,075

122,937

EBITDA

 

 

26,645

44,232

51,382

57,424

Operating Profit (before amort. and except.)

 

 

23,915

38,916

45,172

50,468

Intangible Amortisation

(3,038)

(6,872)

(5,500)

(5,500)

Exceptionals

(3,016)

(5,296)

0

0

Other

(1,426)

(4,129)

(4,542)

(4,996)

Operating Profit

16,435

22,619

35,130

39,972

Net Interest

(818)

(1,005)

(1,005)

(1,005)

FOREX

(3,623)

791

0

0

Profit Before Tax (norm)

 

 

23,097

37,911

44,167

49,463

Profit Before Tax (FRS 3)

 

 

11,994

22,405

34,125

38,967

Tax

(4,731)

(7,191)

(8,171)

(8,903)

Profit After Tax (norm)

18,366

30,720

35,996

40,559

Profit After Tax (FRS 3)

7,263

15,214

25,954

30,063

Average Number of Shares Outstanding (m)

58.7

64.3

64.1

64.4

EPS

 

 

31.3

47.8

56.2

63.0

EPS - normalised (c)

 

 

30.0

45.8

54.4

61.0

EPS - (IFRS) (c)

 

 

12.4

23.6

40.5

46.7

Dividend per share (p)

1.46

1.61

1.77

1.95

Gross Margin (%)

36.4%

38.2%

37.1%

36.6%

EBITDA Margin (%)

17.6%

17.6%

17.2%

17.1%

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

15.8%

15.5%

15.1%

15.0%

BALANCE SHEET

Fixed Assets

 

 

142,927

198,055

214,434

211,978

Intangible Assets

131,610

180,086

194,824

189,324

Tangible Assets

10,111

15,002

16,643

19,687

Investments

1,206

2,967

2,967

2,967

Current Assets

 

 

80,182

100,348

98,475

120,737

Stocks

0

0

0

0

Debtors

27,473

37,019

41,091

46,022

Cash

30,374

39,870

31,344

45,551

Other

22,335

23,459

26,039

29,164

Current Liabilities

 

 

(51,677)

(95,031)

(74,168)

(74,168)

Creditors

(32,734)

(54,960)

(34,097)

(34,097)

Short term borrowings

(18,943)

(40,071)

(40,071)

(40,071)

Long Term Liabilities

 

 

(10,420)

(11,158)

(10,718)

(10,718)

Long term borrowings

(337)

(230)

(230)

(230)

Other long term liabilities

(10,083)

(10,928)

(10,488)

(10,488)

Net Assets

 

 

161,012

192,214

228,022

247,828

CASH FLOW

Operating Cash Flow

 

 

21,389

38,484

33,276

35,869

Net Interest

(253)

(502)

(1,005)

(1,005)

Tax

(4,731)

(6,304)

(8,171)

(8,903)

Capex

(3,803)

(9,440)

(9,000)

(10,500)

Acquisitions/disposals

(90,090)

(30,296)

(22,486)

0

Financing

82,936

174

0

0

Dividends

(867)

(1,080)

(1,141)

(1,255)

Net Cash Flow

4,581

(9,916)

(8,526)

14,206

Opening net debt/(cash)

 

 

(8,650)

(11,094)

424

8,950

Forex gain on cash

(891)

(3)

0

0

Other

(1,246)

(1,599)

0

0

Closing net debt/(cash)

 

 

(11,094)

424

8,950

(5,256)

Source: Keywords Studios 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 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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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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