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Research: TMT
Management has confirmed that FY20 revenues and adjusted PBT will be marginally ahead of guidance, with revenues of €373m (guidance c €367m) and adjusted PBT of €55m (guidance c €52m). This outperformance has been driven by a strong close to the year, together with an additional revenue contribution from December’s M&A. Given the headwinds from COVID-19 in FY20, underlying organic revenue growth of 12% (H120: 8.0%, FY19: 15.5%) is a hugely resilient performance. The group is set well for FY21 and, with a growing next-gen console base in FY22/23, the medium-term outlook appears bright. With net cash of c €100m, Keywords remains well placed to execute further M&A deals in FY21.
Written by
Keywords Studios |
12% organic revenue growth despite COVID-19 |
FY20 trading update |
Software & comp services |
28 January 2021 |
Share price performance
Business description
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Keywords Studios is a research client of Edison Investment Research Limited |
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Management has confirmed that FY20 revenues and adjusted PBT will be marginally ahead of guidance, with revenues of €373m (guidance c €367m) and adjusted PBT of €55m (guidance c €52m). This outperformance has been driven by a strong close to the year, together with an additional revenue contribution from December’s M&A. Given the headwinds from COVID-19 in FY20, underlying organic revenue growth of 12% (H120: 8.0%, FY19: 15.5%) is a hugely resilient performance. The group is set well for FY21 and, with a growing next-gen console base in FY22/23, the medium-term outlook appears bright. With net cash of c €100m, Keywords remains well placed to execute further M&A deals in FY21.
Year end |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/18 |
250.8 |
37.9 |
45.5 |
1.61 |
67.1 |
0.06 |
12/19 |
326.5 |
40.9 |
48.8 |
0.58 |
62.6 |
0.02 |
12/20e |
373.0 |
55.0 |
61.2 |
0.00 |
50.0 |
N/A |
12/21e |
464.5 |
67.8 |
71.5 |
1.91 |
42.7 |
0.07 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Margin recovery in H220 set to persist in H121
FY20 revenues of €373m and adjusted PBT of €55m indicate a significant recovery in FY20 adjusted PBT margin to 14.7% (H120: 12.5%, FY19: 12.5%), implying an H220 margin of 16.7%. This bodes well for margins in FY21, with a similar environment expected in H121 to H220, although costs are likely to start to normalise again in H221. Management attributed the underlying margin improvement to operational leverage, effective cost control and a reduction in the normal cost base due to COVID-19 (eg travel, marketing).
Management noted a strong finish to the year, despite continuing delivery challenges in audio and localisation. Keywords remains well capitalised with net cash at 31 December 2020 of c €100m (H120: €101m, FY19: net debt of €17.9m), together with €100m of undrawn facilities, having spent cash of €38m (net of cash acquired) on its seven acquisitions in FY20 (of which, six were in H220).
Model updated, estimates unchanged
We have updated our FY20 estimates to bring them into line with management guidance and also reflected contributions from the last acquisitions of the year (High Voltage Software, Indigo Pearl and Jinglebell) in December. However, apart from the consequential increase in the starting revenue run-rate, we have otherwise left our assumptions for FY21 and FY22 unchanged at this stage.
Valuation: Earnings to rise with continuing M&A
Keywords’ shares trade on an FY21e P/E of 42.7x, falling to 37.6x in FY22e, in line with its UK and European games industry peers. Although this is a demanding valuation, we expect the recent next-gen console launches to lead to a period of heightened game releases, benefiting underlying growth in the period from FY21–23. Supplemented by its proven buy-and-build strategy, we expect earnings to rise, lowering valuation multiples as deals are completed in FY21 and beyond.
Exhibit 1: Financial summary
€'000s |
2018 |
2019 |
2020e |
2021e |
2022e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
250,805 |
326,463 |
373,018 |
464,520 |
520,263 |
Cost of Sales |
(154,997) |
(206,234) |
(230,576) |
(288,307) |
(322,322) |
||
Gross Profit (inc multimedia tax credits) |
95,808 |
120,229 |
142,442 |
176,214 |
197,941 |
||
EBITDA (adjusted) |
|
|
43,729 |
57,611 |
72,902 |
89,703 |
100,821 |
EBITDA (reported) |
|
|
34,304 |
43,375 |
63,190 |
77,875 |
87,811 |
Operating Profit (before amort. and except.) |
|
|
38,916 |
42,983 |
58,513 |
70,303 |
79,321 |
Amortisation of acquired intangibles |
(6,872) |
(7,318) |
(11,324) |
(14,269) |
(15,981) |
||
Exceptionals |
(5,296) |
(4,348) |
(2,370) |
0 |
0 |
||
Other (incl share based payments) |
(4,129) |
(9,775) |
(10,753) |
(11,828) |
(13,011) |
||
Operating Profit |
22,619 |
21,542 |
34,066 |
44,207 |
50,330 |
||
Net Interest |
(1,316) |
(2,513) |
(3,500) |
(2,500) |
(2,500) |
||
Forex |
791 |
(1,658) |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
37,911 |
40,913 |
55,013 |
67,803 |
76,821 |
Profit Before Tax (FRS 3) |
|
|
22,094 |
17,371 |
30,566 |
41,707 |
47,830 |
Tax |
(7,191) |
(7,462) |
(10,034) |
(12,366) |
(14,011) |
||
Profit After Tax (norm) |
30,720 |
33,451 |
44,979 |
55,437 |
62,810 |
||
Profit After Tax (FRS 3) |
14,903 |
9,909 |
20,533 |
29,340 |
33,819 |
||
Average Number of Shares Outstanding (m) |
64.3 |
65.1 |
69.8 |
74.6 |
74.9 |
||
EPS - normalised (c) |
|
|
45.5 |
48.8 |
61.2 |
71.5 |
81.3 |
EPS - normalised fully diluted (c) |
|
|
43.7 |
47.2 |
58.8 |
69.3 |
79.0 |
EPS - (IFRS) (c) |
|
|
23.2 |
15.2 |
29.4 |
39.3 |
45.1 |
Dividend per share (p) |
1.61 |
0.58 |
0.00 |
1.91 |
2.11 |
||
Gross Margin (%) |
38.2% |
36.8% |
38.2% |
37.9% |
38.0% |
||
EBITDA Margin (%) |
13.7% |
13.3% |
16.9% |
16.8% |
16.9% |
||
Operating Margin (before GW and except.) (%) |
15.5% |
13.2% |
15.7% |
15.1% |
15.2% |
||
PBT Margin (%) |
15.1% |
12.5% |
14.7% |
14.6% |
14.8% |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
198,215 |
223,992 |
250,322 |
260,730 |
262,758 |
Intangible Assets |
180,086 |
196,769 |
221,445 |
223,049 |
214,529 |
||
Tangible Assets |
15,002 |
22,163 |
23,817 |
32,621 |
43,169 |
||
Investments |
3,127 |
5,060 |
5,060 |
5,060 |
5,060 |
||
Current Assets |
|
|
100,348 |
120,483 |
238,536 |
276,058 |
332,056 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
37,019 |
43,243 |
47,433 |
53,125 |
59,500 |
||
Cash |
39,870 |
41,827 |
152,258 |
179,427 |
223,830 |
||
Other |
23,459 |
35,413 |
38,845 |
43,506 |
48,727 |
||
Current Liabilities |
|
|
(95,031) |
(49,551) |
(49,948) |
(33,311) |
(26,102) |
Creditors |
(54,960) |
(49,471) |
(49,868) |
(33,231) |
(26,022) |
||
Short term borrowings |
(40,071) |
(80) |
(80) |
(80) |
(80) |
||
Long Term Liabilities |
|
|
(11,158) |
(71,528) |
(71,194) |
(73,194) |
(75,194) |
Long term borrowings |
(230) |
(59,671) |
(59,671) |
(59,671) |
(59,671) |
||
Other long-term liabilities |
(10,928) |
(11,857) |
(11,523) |
(13,523) |
(15,523) |
||
Net Assets |
|
|
192,374 |
223,396 |
367,716 |
430,283 |
493,518 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
33,954 |
46,069 |
67,993 |
80,734 |
89,510 |
Net Interest |
(502) |
(9,411) |
(6,263) |
(3,425) |
(2,276) |
||
Tax |
(6,304) |
(13,288) |
(10,034) |
(12,366) |
(14,011) |
||
Capex |
(9,440) |
(13,145) |
(11,265) |
(18,704) |
(20,948) |
||
Acquisitions/disposals |
(25,766) |
(27,762) |
(40,000) |
(17,637) |
(8,289) |
||
Financing |
0 |
0 |
110,000 |
0 |
0 |
||
Dividends |
(1,080) |
(1,197) |
0 |
(1,432) |
(1,582) |
||
Net Cash Flow |
(10,090) |
(18,734) |
110,432 |
27,169 |
43,403 |
||
Opening net debt/(cash) |
|
|
(11,094) |
431 |
17,924 |
(92,508) |
(119,677) |
Forex gain on cash |
(3) |
1,293 |
0 |
0 |
0 |
||
Other |
(1,432) |
(52) |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
431 |
17,924 |
(92,508) |
(119,677) |
(163,079) |
Source: Company accounts, Edison Investment Research
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Research: TMT
After a difficult FY20, DATAGROUP’s earnings are set to recover significantly in FY21, mostly driven by a recovery of earnings in its Financial IT services (FIS) unit, which took a hit in FY20. We believe the M&A-driven business model is intact and an EBIT margin of 9% should be within reach in the medium term. Trading at 27.5x FY21e P/E on consensus estimates, DATAGROUP is valued at a 12% premium to peers.