Keywords Studios — 12% organic revenue growth despite COVID-19

Keywords Studios (LN: KWS)

Last close As at 28/03/2024

2,920.00

50.00 (1.74%)

Market capitalisation

2,207m

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Research: TMT

Keywords Studios — 12% organic revenue growth despite COVID-19

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.

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TMT

Keywords Studios

12% organic revenue growth despite COVID-19

FY20 trading update

Software & comp services

28 January 2021

Price

2,704p

Market cap

£2.01bn

€1.13/£

Approx. net cash (€m) at 31 December 2020 (excluding lease liabilities)

100.0

Shares in issue

74.4m

Free float

90%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.9)

22.5

94.8

Rel (local)

(6.5)

6.6

115.9

52-week high/low

2,942p

1,232p

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

FY20 results

24 March 2021

AGM

May 2021

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

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
(€m)

PBT*
(€m)

EPS*
(c)

DPS
(p)

P/E
(x)

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

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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