Making hay while the sun shines

Keywords Studios 5 August 2021 Update
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Keywords Studios

Making hay while the sun shines

Trading update

Software & comp services

5 August 2021

Price

2,816p

Market cap

£2.13bn

€1.18/£

Net cash (€m) at 30 June 2021 (excluding lease liabilities)

84.0

Shares in issue

75.57m

Free float

90%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.9

10.5

41.2

Rel (local)

7.4

7.0

16.0

52-week high/low

2,996p

2,056p

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

H121 results

15 September 2021

FY21 trading update

January 2022

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

Keywords has delivered exceptional growth in H121, reflecting continued strong demand from video games developers driven by gamers desperate for new content. Expected revenues of €238m are up c 37% y-o-y, with organic growth of 23% as all service lines performed well against a weak H120 comparator (initial impact of COVID-19). Margins were also elevated, with adjusted PBT of €40m, an 80% y-o-y increase and a margin of 16.8%, continuing the uplift in margins seen in H220. With costs expected to start to normalise towards the end of the year, we have raised our FY21 adjusted PBT margin to 16%, but have left our FY22 and FY23 margins at 15%. Keywords trades on a P/E of 39.4x our updated FY21 estimates, falling to 37.1x in FY22. However, we expect that further M&A will lower Keywords’ rating.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(p)

P/E
(x)

Yield
(%)

12/19

326.5

40.9

48.8

0.58

68.1

0.02

12/20

373.5

55.0

60.9

0.00

54.5

0.00

12/21e

491.5

78.8

84.3

1.91

39.4

0.07

12/22e

563.9

84.8

89.6

2.11

37.1

0.07

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

H121: Strong organic growth, elevated margins

Keywords’ trading update shows a strong H121, with revenues of €238m (H120: €173.5m), up c 37% y-o-y, and organic growth of 23% (H220: 15.0%, FY20: 11.7%) with all service lines performing well against a weak H120 (initial impact of COVID-19). Adjusted PBT is expected to be c €40m, a more than 80% increase year-on-year (H120: €21.7m), a margin of 16.8% (H120: 12.5%, H220: 16.6%) and a continuation of the strong margins seen in H220. The group ended H121 with net cash of €84m (FY20: €102.9m), having spent €45m on M&A in the period (Tantalus, Climax and €5m of deferred consideration). With strong positive cash flow, Keywords will restart its progressive dividend policy in 2021.

FY21 estimates revised upwards

Given the combination of strong organic growth (H121: 23%) and elevated adjusted PBT margins (H121: 16.8%) versus long-term guidance of 15%, we feel it appropriate to raise our FY21 estimates. Conservatively, we are leaving revenues unchanged, but increasing our adjusted PBT margins to 16% to reflect the super-normal margins in H121. However, with the assumption that costs will start to normalise towards the end of the year, we have increased our margin assumptions for FY22 and FY23 only incrementally to 15%, in line with long-term guidance.

Valuation: Keywords justifies a premium valuation

In our opinion, Keywords’ shares warrant a premium valuation, trading on a P/E of 39.4x our updated FY21 estimates, falling to 37.1x in FY22. With high growth driven by substantial underlying demand for its services, the group remains capacity constrained. However, with net cash of €84m, as well as €100m of undrawn facilities, the group retains substantial financial firepower and we expect to see further M&A in the coming periods, which should lower Keywords’ rating.

FY21 revised upwards, FY22/23 largely unchanged

We had expected Keywords’ business to bounce back in FY21, supported by pent-up demand from its core client base and underpinned by strong consumer demand for games across all platforms and geographies. This bounce-back in demand is now visible in Keywords’ H121 trading update, constrained only by resource capacity and the company’s ability to meet increased demand.

Revenues: despite 23% organic growth in H121, well above the company’s guidance of 10–15% long-term organic growth, we have conservatively decided not to increase our FY21 revenue estimate. We also leave our assumptions for 12% organic growth in FY22 and 10% in FY23 unchanged. However, we see no reason why growth should slow materially in H221, save that the company appears to be resource constrained, with more demand than it can meet at present. This points to the likelihood of further acquisitions in the coming periods, which we do not factor into our estimates.

Margins: the adjusted PBT margin in H121 was 16.8% (H120: 12.5%, H220: 16.6%), a continuation of the elevated margins seen in H220. Despite a trend of strengthening margins, we see this level of margin as unlikely to be sustained as costs start to normalise towards the end of the year. In particular, we anticipate more normal levels of capex, marketing spend and travel in FY22. Accordingly, we have raised our adjusted PBT margin for FY21e to 16%, implying PBT of €78.8m, but have only nudged our margin estimates for FY22 and FY23 up to 15%, the group’s long-term margin guidance.

Other assumptions remain unchanged.

Exhibit 1: Revised estimates

€'000s

2020

2021e

2022e

2023e

Year end 31 December

Actual

Old

New

Change

Old

New

Change

Old

New

Change

Revenue

373,538

491,544

491,544

-

563,935

563,935

-

620,328

620,328

-

Gross profit (incl. multimedia tax credits)

141,772

186,735

192,634

3.2%

213,425

215,117

0.8%

234,768

236,008

0.5%

Gross margin (%)

38.0%

38.0%

39.2%

37.8%

38.1%

37.8%

38.0%

EBITDA (adjusted)

74,177

94,659

100,557

6.2%

106,078

107,770

1.6%

115,893

117,134

1.1%

Operating profit (pre amort. and except.)

57,259

74,909

80,807

7.9%

85,130

86,822

2.0%

93,643

94,884

1.3%

Operating margin

15.3%

15.2%

16.4%

15.1%

15.4%

15.1%

15.3%

Profit before tax (norm)

54,954

72,909

78,807

8.1%

83,130

84,822

2.0%

91,643

92,884

1.4%

PBT (norm) margin

14.7%

14.8%

16.0%

14.7%

15.0%

14.8%

15.0%

Profit after tax (norm)

43,927

58,327

63,046

8.1%

66,504

67,857

2.0%

73,314

74,307

1.4%

EPS – normalised (c)

60.9

78.1

84.3

7.9%

88.1

89.6

1.7%

96.8

97.8

1.0%

Dividend per share (p)

0.00

1.91

1.91

-

2.11

2.11

-

2.32

2.32

-

Source: Keywords Studios accounts, Edison Investment Research

Exhibit 2: Financial summary

€'000s

2019

2020

2021e

2022e

2023e

Year end 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)

(298,911)

(348,818)

(384,320)

Gross Profit (incl. multimedia tax credits)

120,229

141,772

192,634

215,117

236,008

Investment income

-

1,437

-

-

-

EBITDA (adjusted)

 

 

57,611

74,177

100,557

107,770

117,134

EBITDA (reported)

 

 

43,375

66,760

100,557

107,770

117,134

Operating Profit (before amort. and except.)

 

 

42,983

57,259

80,807

86,822

94,884

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

69,490

72,771

79,428

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

78,807

84,822

92,884

Profit Before Tax (FRS 3)

 

 

17,371

32,494

67,490

70,771

77,428

Tax

(7,462)

(11,027)

(15,761)

(16,964)

(18,577)

Profit After Tax (norm)

33,451

43,927

63,046

67,857

74,307

Profit After Tax (FRS 3)

9,909

21,467

51,729

53,807

58,851

Average Number of Shares Outstanding (m)

65.1

70.8

74.8

75.7

76.0

EPS - normalised (c)

 

 

48.8

60.9

84.3

89.6

97.8

EPS - normalised fully diluted (c)

 

 

47.2

57.7

81.6

87.1

95.4

EPS - (IFRS) (c)

 

 

15.2

30.3

69.1

71.1

77.4

Dividend per share (p)

0.58

0.00

1.91

2.11

2.32

Gross Margin (%)

36.8%

38.0%

39.2%

38.1%

38.0%

EBITDA Margin (%)

13.3%

17.9%

20.5%

19.1%

18.9%

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

13.2%

15.3%

16.4%

15.4%

15.3%

PBT Margin (%)

12.5%

14.7%

16.0%

15.0%

15.0%

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

195,070

244,729

306,069

Stocks

-

-

-

-

-

Debtors

43,243

47,832

57,457

64,352

70,787

Cash

41,827

103,070

91,167

128,357

178,060

Other

35,413

38,665

46,446

52,019

57,221

Current Liabilities

 

 

(57,292)

(91,130)

(97,153)

(99,356)

(101,969)

Creditors

(49,471)

(83,696)

(89,719)

(91,922)

(94,535)

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

416,493

487,509

564,930

CASH FLOW

Operating Cash Flow

 

 

46,069

80,879

91,508

104,364

112,658

Net Interest

(9,411)

(9,816)

(9,047)

(9,047)

(9,047)

Tax

(13,288)

(4,459)

(15,761)

(16,964)

(18,577)

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)

-

(1,707)

(1,889)

(2,084)

Net Cash Flow

(18,734)

124,458

(11,903)

37,190

49,703

Opening net debt/(cash)

 

 

430

17,924

(102,875)

(90,972)

(128,162)

Forex gain on cash

1,293

(3,426)

-

-

-

Other

(53)

(233)

-

-

-

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

 

 

17,924

(102,875)

(90,972)

(128,162)

(177,865)

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

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

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