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Keyword’s acquisition of GameSim for $4.76m marks the company’s long planned entry into engineering. We expect follow-on acquisitions as it replicates its strategy of building a service line through consolidating the fragmented games outsourcer market. As with the company’s Art service line, GameSim’s teams work closely with the core engineering teams of its games developer customers, creating cross-selling opportunities and deeper relationships with customers. Incorporating GameSim, together with the earlier $0.9m acquisition of XLOC, we upgrade FY17e EPS by 3%.
Written by
Keywords Studios |
A new string to the bow |
Acquisition |
Software & comp services |
18 May 2017 |
Share price performance
Business description
Next events
Analyst
Keywords Studios is a research client of Edison Investment Research Limited |
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Keyword’s acquisition of GameSim for $4.76m marks the company’s long planned entry into engineering. We expect follow-on acquisitions as it replicates its strategy of building a service line through consolidating the fragmented games outsourcer market. As with the company’s Art service line, GameSim’s teams work closely with the core engineering teams of its games developer customers, creating cross-selling opportunities and deeper relationships with customers. Incorporating GameSim, together with the earlier $0.9m acquisition of XLOC, we upgrade FY17e EPS by 3%.
Year |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/15 |
58.0 |
8.0 |
12.6 |
1.2 |
73.5 |
0.1 |
12/16 |
96.6 |
14.9 |
20.3 |
1.3 |
45.6 |
0.1 |
12/17e |
119.6 |
18.0 |
25.2 |
1.5 |
36.8 |
0.2 |
12/18e |
130.6 |
19.8 |
27.5 |
1.6 |
33.7 |
0.2 |
Note: *PBT and EPS (fully diluted) are normalised, excluding intangible amortisation, exceptional items and share-based payments.
Landing point for building an engineering service line
GameSim is a Florida-based provider of engineering services for the games industry (c 70% of revenues), but also for the defence and geospatial industries. Its range of services for the games industry includes its proprietary technology for creating 3D simulated environments, which is core to its other service lines. The business has some similarities with Keywords’ Art service line in that teams of specialised staff work closely with the clients’ core games developer teams. Hence management sees good scope for cross-selling between engineering and art and for deeper customer relationships at this level. As a reminder, Keywords entered the art segment through the €3.2m acquisition of Lakshya Digital in 2014. Spending a total of €16.5m on Lakshya, Mindwalk and Liquid Development, the company has built this into an estimated €22m run rate service line. Management envisages a similar build-out profile for engineering.
Reasonable multiples, further earnings enhancement
GameSim’s FY16 revenues were $4.1m. As with the Art service line, gross margins are higher than the group average, but a higher relative fixed cost base (lower use of contract staff to deal with demand peaks and troughs) offsets this at the operating level. We understand that operating margins were slightly below Keywords’ group level during the year, but with synergies management expects to normalise margins within a year. The valuation equates to reasonable 1.16x historic sales and sub 10x EBIT multiples and the company has a good track record of accelerating growth under the group’s umbrella.
Valuation: Continued execution key to further upside
At 35x FY18e earnings, Keywords’ rating is a substantial premium to peers (average 19x for FY18) and, in our view, further strong progress is now priced in for this year. Nevertheless, the company has a compelling platform and strategy for growth in a games industry growing at a healthy 6.6% pa. Consequently, we believe continued execution should deliver share price value in the longer term.
Estimate changes
Our estimate changes are shown below and incorporate the acquisitions of both GameSim and XLOC, a provider of localisation services acquired for $0.9m (€0.63) on 10 April 2017.
Our FY17 revenue estimate implies a mere 3% like-for-like growth – although if we adjust for the c €4m of above run rate revenues from Synthesis this increases to 7% – still significantly below the 20% (Synthesis adjusted) level from FY16. We assume 8% like-for-like growth in FY18.
The company had €8.7m of cash at end FY16. It has a €35m revolving credit facility with Barclays and generates robust free cash flows, giving it plenty of firepower to make more earnings-enhancing acquisitions.
Exhibit 1: Estimate changes
€000s |
2015 |
2016 |
2017e |
2018e |
||||
Actual |
Actual |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
|
Revenue |
57,951 |
96,585 |
116,671 |
119,551 |
2 |
126,096 |
130,605 |
4 |
Cost of Sales |
(36,172) |
(59,907) |
(73,203) |
(74,833) |
2 |
(79,314) |
(81,843) |
3 |
Gross Profit |
21,779 |
36,678 |
43,468 |
44,718 |
3 |
46,782 |
48,761 |
4 |
EBITDA |
9,459 |
16,893 |
19,919 |
20,414 |
2 |
21,556 |
22,438 |
4 |
Operating Profit (before amort. and except.) |
8,162 |
15,090 |
17,845 |
18,339 |
3 |
19,274 |
20,156 |
5 |
Profit Before Tax (norm) |
8,007 |
14,864 |
17,558 |
18,029 |
3 |
18,987 |
19,846 |
5 |
Profit After Tax (norm) |
6,175 |
11,641 |
13,871 |
14,243 |
3 |
15,190 |
15,877 |
5 |
EPS - normalised fully diluted (c) |
12.6 |
20.3 |
24.5 |
25.2 |
3 |
26.3 |
27.5 |
5 |
EPS - (IFRS) (c) |
7.0 |
11.2 |
20.9 |
21.6 |
3 |
22.8 |
24.0 |
5 |
Dividend per share (pence) |
1.2 |
1.3 |
1.5 |
1.5 |
0 |
1.6 |
1.6 |
0 |
Closing net debt/(cash) |
(17,284) |
(8,650) |
(19,538) |
(15,720) |
(20) |
(29,858) |
(25,731) |
(14) |
Source: Company data, Edison Investment Research
Exhibit 2: Financial summary
€'000s |
2014 |
2015 |
2016 |
2017e |
2018e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
37,293 |
57,951 |
96,585 |
119,551 |
130,605 |
Cost of Sales |
(24,566) |
(36,172) |
(59,907) |
(74,833) |
(81,843) |
||
Gross Profit (inc multimedia tax credits) |
12,727 |
21,779 |
36,678 |
44,718 |
48,761 |
||
EBITDA |
|
|
6,027 |
9,459 |
16,893 |
20,414 |
22,438 |
Operating Profit (before amort. and except.) |
|
|
5,159 |
8,162 |
15,090 |
18,339 |
20,156 |
Intangible Amortisation |
(468) |
(857) |
(1,629) |
(1,629) |
(1,629) |
||
Exceptionals |
(1,461) |
(1,089) |
(1,316) |
0 |
0 |
||
Other |
(156) |
(392) |
(686) |
(686) |
(686) |
||
Operating Profit |
3,074 |
5,824 |
11,459 |
16,024 |
17,841 |
||
Net Interest |
(106) |
(264) |
(287) |
(310) |
(310) |
||
FOREX |
467 |
(474) |
(1,737) |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
5,053 |
8,007 |
14,864 |
18,029 |
19,846 |
Profit Before Tax (FRS 3) |
|
|
3,435 |
5,086 |
9,435 |
15,714 |
17,531 |
Tax |
(1,215) |
(1,832) |
(3,223) |
(3,786) |
(3,969) |
||
Profit After Tax (norm) |
3,838 |
6,175 |
11,641 |
14,243 |
15,877 |
||
Profit After Tax (FRS 3) |
2,220 |
3,254 |
6,212 |
11,928 |
13,562 |
||
Average Number of Shares Outstanding (m) |
45.0 |
48.2 |
55.9 |
55.3 |
56.5 |
||
EPS - normalised (c) |
|
|
8.5 |
12.8 |
20.9 |
25.8 |
28.1 |
EPS - normalised fully diluted (c) |
|
|
8.5 |
12.6 |
20.3 |
25.2 |
27.5 |
EPS - (IFRS) (c) |
|
|
4.9 |
7.0 |
11.2 |
21.6 |
24.0 |
Dividend per share (p) |
1.10 |
1.21 |
1.33 |
1.46 |
1.61 |
||
Gross Margin (%) |
34.1% |
37.6% |
38.0% |
37.4% |
37.3% |
||
EBITDA Margin (%) |
16.2% |
16.3% |
17.5% |
17.1% |
17.2% |
||
Operating Margin (before GW and except.) (%) |
13.8% |
14.1% |
15.6% |
15.3% |
15.4% |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
20,874 |
32,132 |
61,873 |
61,102 |
62,791 |
Intangible Assets |
17,677 |
27,675 |
55,495 |
54,191 |
52,562 |
||
Tangible Assets |
2,761 |
3,486 |
5,498 |
6,031 |
9,349 |
||
Investments |
436 |
971 |
880 |
880 |
880 |
||
Current Assets |
|
|
23,120 |
34,884 |
38,677 |
49,745 |
62,295 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
6,203 |
7,519 |
13,879 |
16,655 |
18,195 |
||
Cash |
11,014 |
19,018 |
17,020 |
24,090 |
34,101 |
||
Other |
5,903 |
8,347 |
7,778 |
9,000 |
10,000 |
||
Current Liabilities |
|
|
(9,746) |
(13,128) |
(27,830) |
(31,236) |
(32,449) |
Creditors |
(9,746) |
(11,965) |
(19,805) |
(23,211) |
(24,424) |
||
Short term borrowings |
0 |
(1,163) |
(8,025) |
(8,025) |
(8,025) |
||
Long Term Liabilities |
|
|
(2,607) |
(3,294) |
(6,016) |
(6,190) |
(6,190) |
Long term borrowings |
0 |
(571) |
(345) |
(345) |
(345) |
||
Other long term liabilities |
(2,607) |
(2,723) |
(5,671) |
(5,845) |
(5,845) |
||
Net Assets |
|
|
31,642 |
50,594 |
66,704 |
73,421 |
86,447 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
2,412 |
4,768 |
17,168 |
20,864 |
22,304 |
Net Interest |
11 |
(58) |
(58) |
(310) |
(310) |
||
Tax |
(522) |
(1,362) |
(2,129) |
(3,786) |
(3,969) |
||
Capex |
(1,252) |
(1,635) |
(2,306) |
(4,308) |
(5,600) |
||
Acquisitions/disposals |
(8,889) |
(7,409) |
(21,104) |
(4,565) |
(1,500) |
||
Financing |
7,342 |
14,199 |
643 |
0 |
0 |
||
Dividends |
(609) |
(737) |
(825) |
(814) |
(915) |
||
Net Cash Flow |
(4,256) |
7,194 |
(8,611) |
7,081 |
10,011 |
||
Opening net debt/(cash) |
|
|
(15,271) |
(11,014) |
(17,284) |
(8,650) |
(15,720) |
Forex gain on cash |
0 |
0 |
1 |
0 |
0 |
||
Other |
(1) |
(924) |
(24) |
(11) |
0 |
||
Closing net debt/(cash) |
|
|
(11,014) |
(17,284) |
(8,650) |
(15,720) |
(25,731) |
Source: Company data, Edison Investment Research
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