Strong 2015 trading; expect further acquisitions

Keywords Studios 2 February 2016 Update

Keywords Studios

Strong 2015 trading; expect further acquisitions

Trading update

Software & comp services

2 February 2016

Price

220p

Market cap

£118m

€1.32/£

Net cash (€m) at end June 2015

6.1

Shares in issue

53.8m

Free float

67.8%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.8

3.0

50.7

Rel (local)

11.7

8.1

64.9

52-week high/low

220.0p

146.0p

Business description

Keywords Studios provides localisation, testing, artwork and community support services exclusively to the video games industry. It provides services to 21 of the top 25 games developers and is looking to consolidate the currently fragmented industry.

Next event

Full-year results

April 2016

Analysts

Eric Opara

+44 (0)20 3681 2524

Dan Ridsdale

+44 (0)20 3077 5729

Keywords Studios is a research client of Edison Investment Research Limited

Keywords has stated that it expects its full-year revenue and adjusted PBT numbers to come in “comfortably ahead” of consensus estimates. Having raised funds in November, the company also re-iterated its commitment to a buy-and-build strategy to complement its already solid organic growth. It is in advanced discussions to complete one or more deals and we expect an announcement could be made before the company delivers its full-year financials in April.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/13

16.2

2.4

5.4

4,221**

53.7

N/A

12/14

37.3

5.5

9.5

1.5

30.5

0.5

12/15e

55.4

8.0

12.7

1.6

22.8

0.5

12/16e

72.8

10.1

15.0

1.8

19.3

0.6

Note: *PBT and EPS are normalised, excluding acquired intangible amortisation, exceptional items and share-based payments but after exchange rate gains of €0.6m reported for H115. **Before IPO €0.6m total distribution.

Strong H2 trading – underpins existing forecasts

Keywords’ update indicates strong trading in H215, continuing the momentum that the company has built up over the last couple of years. The expected top line and PBT beat suggests it is successfully integrating the numerous acquisitions carried out in 2014/15 from both a cost-efficiency and a cross-sell driven revenue synergy perspective. We have updated our EPS and year-end net cash estimates to reflect November’s placing. We have left our revenue forecasts unchanged, but note the prevailing upside risks. We are planning to revisit our estimates when the company completes its next acquisition or on release of the company’s full year numbers in April, whichever is sooner.

Firepower to fund further M&A

Keywords’ issued 5.5 million new shares at 190p via a placing to new and existing shareholders in November 2015, raising £10.45m (gross). The funds were raised with the explicit intention of providing firepower for its stated buy-and-build strategy. While the company has yet to deploy the cash raised, it has stated that the M&A pipeline is strong with advanced discussions being held with more than one target company. Historically the company has funded its acquisitions with a mixture of cash and equity. We estimate that including November’s placing proceeds, Keywords ended 2015 with a net cash position of c €19m.

Valuation: Further M&A success is key

Keywords’ shares have performed strongly since its November placing, rising 17%, including yesterday’s positive reaction. The stock is trading on a 2016e P/E of 19.3x, broadly in line with localisation peers. However, given the company’s track record of attractively valued M&A and its changing business mix, we believe the valuation fails to recognise Keywords’ much stronger outlook. The stock should respond positively to the completion of further M&A deals at valuations comparable to historic deals.

Exhibit 1: Financial summary

€'000s

2012

2013

2014

2015e

2016e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

14,343

16,185

37,293

55,443

72,759

Cost of Sales

(8,817)

(10,722)

(24,568)

(35,600)

(48,471)

Gross Profit

5,526

5,463

12,725

19,843

24,288

EBITDA

 

 

3,013

2,691

6,027

8,477

11,482

Operating Profit (before amort. and except.)

2,815

2,419

5,159

7,368

10,027

Intangible Amortisation

0

0

(468)

(700)

(700)

Exceptionals

0

(1,124)

(994)

(1,200)

0

Other

0

(71)

(156)

0

0

Operating Profit

2,815

1,224

3,541

5,468

9,327

Net Interest

(76)

(66)

361

645

184

Profit Before Tax (norm)

 

 

2,739

2,352

5,520

8,013

10,211

Profit Before Tax (FRS 3)

 

 

2,739

1,158

3,902

6,113

9,511

Tax

(411)

(394)

(1,215)

(1,843)

(2,042)

Profit After Tax (norm)

2,328

1,959

4,305

6,170

8,169

Profit After Tax (FRS 3)

2,328

764

2,687

4,270

7,469

Average Number of Shares Outstanding (m)

31.9

36.1

45.1

48.2

53.8

EPS - normalised (c)

 

 

7.3

5.4

9.6

12.8

15.2

EPS - normalised and fully diluted (c)

 

7.3

5.4

9.5

12.7

15.1

EPS - (IFRS) (c)

 

 

7.3

2.1

6.0

8.9

13.9

Dividend per share (c)

2,538.0

4,221.4

1.5

1.6

1.8

Gross Margin (%)

38.5

33.8

34.1

35.8

33.4

EBITDA Margin (%)

21.0

16.6

16.2

15.3

15.8

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

19.6

14.9

13.8

13.3

13.8

BALANCE SHEET

Fixed Assets

 

 

490

600

21,251

47,537

45,708

Intangible Assets

0

0

17,677

40,577

39,877

Tangible Assets

490

600

2,761

4,147

5,020

Investments

0

0

813

2,813

810

Current Assets

 

 

6,702

18,218

23,120

31,865

42,184

Stocks

0

0

0

0

0

Debtors

1,397

1,303

6,203

6,835

8,970

Cash

3,892

15,271

11,014

19,127

27,311

Other

1,413

1,644

5,903

5,903

5,903

Current Liabilities

 

 

(1,182)

(1,025)

(9,746)

(10,240)

(11,280)

Creditors

(1,182)

(1,025)

(9,746)

(10,240)

(11,280)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

0

(300)

(2,607)

(2,607)

(2,607)

Long term borrowings

0

0

0

0

0

Other long term liabilities

0

(300)

(2,607)

(2,607)

(2,607)

Net Assets

 

 

6,011

17,494

32,019

66,556

74,005

CASH FLOW

Operating Cash Flow

 

 

2,650

2,705

2,411

6,538

13,088

Net Interest

(50)

(59)

11

645

184

Tax

(749)

(359)

(522)

(1,843)

(2,042)

Capex

(391)

(394)

(1,252)

(2,495)

(2,328)

Acquisitions/disposals

(506)

(13)

(8,889)

(7,278)

0

Financing

50

10,280

4,594

13,196

0

Dividends

(375)

(781)

(609)

(651)

(717)

Net Cash Flow

629

11,378

(4,257)

8,113

8,184

Opening net debt/(cash)

 

 

(3,263)

(3,892)

(15,271)

(11,014)

(19,127)

HP finance leases initiated

0

0

0

0

0

Other

(0)

0

(0)

(0)

(0)

Closing net debt/(cash)

 

 

(3,892)

(15,271)

(11,014)

(19,127)

(27,311)

Source: Keywords Studios, Edison Investment Research

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