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Research: TMT
Although we expected strong growth in H219, FY19 revenue of €326m, reflecting 30% overall growth and 15% organic growth, represents a sparkling performance. EBITDA and PBT were ahead of forecast at €49.5m and €41.0m, respectively. Given the higher revenue base, we are revising our FY20 revenue estimate up by 4%, but prudently holding operating profit and PBT at previous levels as margins normalise through FY20. We retain our view that Keywords remains strongly positioned as the only games service provider at a global scale. The company’s P/E rating (25.0x FY20e) reflects its leading market position, track record and potential, and should fall further as Keywords continues its buy-and-build strategy.
Written by
Keywords Studios |
Sparkling growth, improving margins |
FY19 trading update |
Software & comp services |
30 January 2020 |
Share price performance
Business description
Next events
Analysts
Keywords Studios is a research client of Edison Investment Research Limited |
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Although we expected strong growth in H219, FY19 revenue of €326m, reflecting 30% overall growth and 15% organic growth, represents a sparkling performance. EBITDA and PBT were ahead of forecast at €49.5m and €41.0m, respectively. Given the higher revenue base, we are revising our FY20 revenue estimate up by 4%, but prudently holding operating profit and PBT at previous levels as margins normalise through FY20. We retain our view that Keywords remains strongly positioned as the only games service provider at a global scale. The company’s P/E rating (25.0x FY20e) reflects its leading market position, track record and potential, and should fall further as Keywords continues its buy-and-build strategy.
Year end |
Revenue |
PBT* |
EPS* |
DPS* |
P/E |
Yield |
12/17 |
151.4 |
23.1 |
30.0 |
1.46 |
53.9 |
0.11 |
12/18 |
250.8 |
37.9 |
40.1 |
1.61 |
40.3 |
0.12 |
12/19e |
326.0 |
41.0 |
46.0 |
1.77 |
35.2 |
0.13 |
12/20e |
374.9 |
52.4 |
64.8 |
1.95 |
25.0 |
0.14 |
Notes: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Market leader in a growth industry
As management emphasised at the Montreal capital markets day (CMD), as well as strong industry growth (Newzoo forecasts 8.4% growth 2019–22), Keywords benefits from the growth of outsourcing and increasing market share as a market leader in a fragmented global industry. Growth is further boosted by M&A through Keywords’ successful buy-and-build strategy. With the next console transition in Q420, the medium-term growth outlook remains robust and next week’s London CMD will provide further insight into the opportunities for each of Keywords’ business lines.
Robust performance leading to forecast revisions
Although we expected strong growth, FY19 revenues of €326m (FY18: €250.8m), reflecting 30% overall growth and 15% organic growth, represents a sparkling performance. EBITDA and PBT were accordingly ahead of forecast at €49.5m and €41.0m, respectively (Edison: €48.8m, €40.2m), while management expects FY19 net debt of €18m (H119: €9m). Given the higher revenue base, we are revising our FY20 estimates (revenues +4%) but prudently holding operating profit and PBT at previous levels, reflecting caution on the normalisation of margins in FY20 (operating margins of 14.2% vs 14.9% previously), together with a more conservative stance on cash conversion (see below).
Valuation: Rating undemanding, likely to fall further
Keywords remains well placed with strong industry growth and a healthy acquisition pipeline focused around game development and marketing services. Keywords has delivered an adjusted EPS CAGR of 40% from 2014–19, and we believe looks set to maintain double-digit revenue growth for the foreseeable future. In this context, we believe that a 25.0x FY20e P/E is not overly demanding and fairly reflects Keywords’ leading market position, track record and potential. This rating should fall further as Keywords successfully continues to execute its buy-and-build strategy.
Revised estimates
Our estimate revisions are shown in Exhibit 1.
In summary, we have revised FY20 revenue growth (+4% to €375m) given Keywords’ robust performance in FY19, as well as management’s reassuring comments from the trading update on the medium-term outlook. However, we have taken the opportunity to be slightly more cautious on margin expectations, largely holding our FY20 operating profit (€53.4m) and PBT (€52.4m) forecasts at previous levels. This reflects a more prudent assumption on margin progression through FY20, although management restated its expectations that operating profit margins will normalise (which we take as 15%) incrementally in FY20 as Keywords’ leverages its investment (in facilities, recruitment, training, IT, security and HR) over its growing revenue base.
Management has estimated FY19 year-end net debt to be higher than anticipated at €18m (Edison: €10.2m), leading to a reduction in our expectations for net cash in FY20 to €7.6m. However, with the expectation of further M&A to be financed by the company’s new €100m three-year banking facility (extendable to €140m over five years), the net cash/debt position is likely to continue to change significantly.
Exhibit 1: Estimate changes
€000s Year end 31 December |
2018 |
2019e |
2019e |
2020e |
2020e |
||||||
Actual |
Old |
New |
Change |
Old |
New |
Change |
|||||
Revenue |
|
|
250,805 |
319,720 |
326,004 |
2.0% |
360,157 |
374,913 |
4.1% |
||
Cost of sales |
(154,997) |
(200,771) |
(205,021) |
2.1% |
(224,903) |
(234,889) |
4.4% |
||||
Gross profit (inc multimedia tax credits) |
95,808 |
118,949 |
120,982 |
1.7% |
135,253 |
140,024 |
3.5% |
||||
Gross margin (%) |
38.2% |
37.2% |
37.1% |
|
37.6% |
37.3% |
|
||||
EBITDA |
|
|
44,232 |
48,845 |
49,500 |
1.3% |
60,965 |
61,192 |
0.4% |
||
Operating profit (before amort. and except.) |
38,916 |
42,216 |
42,741 |
1.2% |
53,498 |
53,419 |
-0.1% |
||||
Operating margin |
15.5% |
13.2% |
13.1% |
14.9% |
14.2% |
||||||
Profit before tax (norm) |
|
|
37,911 |
40,216 |
41,001 |
2.0% |
52,498 |
52,419 |
-0.2% |
||
Profit after tax (norm) |
30,720 |
32,776 |
33,416 |
2.0% |
43,048 |
42,983 |
-0.2% |
||||
EPS - normalised (c) |
|
|
40.1 |
45.0 |
46.0 |
2.1% |
64.8 |
64.8 |
-0.2% |
||
Dividend per share (p) |
1.61 |
1.77 |
1.77 |
|
1.95 |
1.95 |
|
||||
Closing net debt/(cash) |
|
|
423 |
10,188 |
18,000 |
76.7% |
(24,745) |
(7,647) |
-69.1% |
||
Source: Keywords Studios accounts, Edison Investment Research
Exhibit 2: Financial summary
€000s |
2016 |
2017 |
2018 |
2019e |
2020e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
96,525 |
151,430 |
250,805 |
326,004 |
374,913 |
Cost of Sales |
(59,907) |
(96,345) |
(154,997) |
(205,021) |
(234,889) |
||
Gross Profit (inc multimedia tax credits) |
36,618 |
55,085 |
95,808 |
120,982 |
140,024 |
||
EBITDA |
|
|
16,833 |
26,645 |
44,232 |
49,500 |
61,192 |
Operating Profit (before amort. and except.) |
|
|
15,030 |
23,915 |
38,916 |
42,741 |
53,419 |
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 |
26,201 |
38,504 |
||
Net Interest |
(287) |
(818) |
(1,005) |
(1,740) |
(1,000) |
||
FOREX |
(1,737) |
(3,623) |
791 |
(1,159) |
0 |
||
Profit Before Tax (norm) |
|
|
14,804 |
23,097 |
37,911 |
41,001 |
52,419 |
Profit Before Tax (FRS 3) |
|
|
9,375 |
11,994 |
22,094 |
23,302 |
37,504 |
Tax |
(3,223) |
(4,731) |
(7,191) |
(7,585) |
(9,435) |
||
Profit After Tax (norm) |
11,581 |
18,366 |
30,720 |
33,416 |
42,983 |
||
Profit After Tax (FRS 3) |
6,152 |
7,263 |
14,903 |
15,717 |
28,068 |
||
Average Number of Shares Outstanding (m) |
55.9 |
58.7 |
64.3 |
65.3 |
65.4 |
||
EPS (c) |
|
|
20.8 |
31.3 |
41.8 |
46.8 |
65.8 |
EPS - normalised (c) |
|
|
20.2 |
30.0 |
40.1 |
46.0 |
64.8 |
EPS - (IFRS) (c) |
|
|
11.0 |
12.4 |
23.2 |
24.1 |
42.9 |
Dividend per share (p) |
1.33 |
1.46 |
1.61 |
1.77 |
1.95 |
||
Gross Margin (%) |
37.9% |
36.4% |
38.2% |
37.1% |
37.3% |
||
EBITDA Margin (%) |
17.4% |
17.6% |
17.6% |
15.2% |
16.3% |
||
Operating Margin (before GW and except.) (%) |
15.6% |
15.8% |
15.5% |
13.1% |
14.2% |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
61,873 |
142,927 |
198,215 |
223,669 |
222,865 |
Intangible Assets |
55,495 |
131,610 |
180,086 |
197,727 |
189,696 |
||
Tangible Assets |
5,498 |
10,111 |
15,002 |
22,975 |
30,202 |
||
Investments |
880 |
1,206 |
3,127 |
2,967 |
2,967 |
||
Current Assets |
|
|
38,677 |
80,182 |
100,349 |
107,916 |
145,357 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
13,879 |
27,473 |
37,019 |
48,125 |
55,343 |
||
Cash |
17,020 |
30,374 |
39,871 |
29,295 |
54,942 |
||
Other |
7,778 |
22,335 |
23,459 |
30,497 |
35,071 |
||
Current Liabilities |
|
|
(27,830) |
(51,677) |
(95,031) |
(83,595) |
(84,279) |
Creditors |
(19,805) |
(32,734) |
(54,960) |
(36,523) |
(37,207) |
||
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 |
236,288 |
273,225 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
17,108 |
21,389 |
38,481 |
41,278 |
58,069 |
Net Interest |
(58) |
(253) |
(502) |
(7,542) |
(6,394) |
||
Tax |
(2,129) |
(4,731) |
(6,304) |
(7,585) |
(9,435) |
||
Capex |
(2,306) |
(3,803) |
(9,440) |
(14,572) |
(15,000) |
||
Acquisitions/disposals |
(21,104) |
(90,090) |
(30,296) |
(28,000) |
(316) |
||
Financing |
643 |
82,936 |
174 |
0 |
0 |
||
Dividends |
(825) |
(867) |
(1,080) |
(1,155) |
(1,276) |
||
Net Cash Flow |
(8,671) |
4,581 |
(9,919) |
(17,577) |
25,647 |
||
Opening net debt/(cash) |
|
|
(17,284) |
(8,650) |
(11,094) |
423 |
18,000 |
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 |
18,000 |
(7,647) |
Source: Keywords Studios data, Edison Investment Research
|
|
Research: Energy & Resources
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