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Trading in H2 was affected in some areas by flux in the games industry, so although the overall picture remains relatively healthy (we est 8% l-f-l revenue growth, 49% EPS growth for FY18) FY18 revenues and PBT are expected to be 2% and 6% below our respective forecasts. Looking through this disruption, we still believe Keywords remains attractively positioned in a games industry that should continue to deliver robust growth. There remains plenty of scope for Keywords to continue accretive M&A, as demonstrated by the acquisition of games marketing services specialist, Sunny Side Up for C$5.9m (c €3.8m) for c 4.9x trailing EBITDA.
Written by
Keywords Studios |
Affected by industry flux but still performing well |
Acquisition/trading update |
Software & comp services |
21 December 2018 |
Share price performance
Business description
Next events
Analysts
Keywords Studios is a research client of Edison Investment Research Limited |
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Trading in H2 was affected in some areas by flux in the games industry, so although the overall picture remains relatively healthy (we est 8% l-f-l revenue growth, 49% EPS growth for FY18) FY18 revenues and PBT are expected to be 2% and 6% below our respective forecasts. Looking through this disruption, we still believe Keywords remains attractively positioned in a games industry that should continue to deliver robust growth. There remains plenty of scope for Keywords to continue accretive M&A, as demonstrated by the acquisition of games marketing services specialist, Sunny Side Up for C$5.9m (c €3.8m) for c 4.9x trailing EBITDA.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/16 |
96.6 |
14.9 |
20.3 |
1.3 |
56.6 |
0.13 |
12/17 |
151.4 |
23.0 |
29.9 |
1.5 |
38.3 |
0.14 |
12/18e |
250.0 |
37.0 |
44.6 |
1.6 |
25.7 |
0.16 |
12/19e |
292.1 |
44.4 |
55.1 |
1.8 |
20.8 |
0.17 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Healthy performance despite industry disruption
In a brief trading statement made together with the announcement of the acquisition of Canadian marketing services specialist, Sunny Side Up, Keywords flags that FY18 revenues and PBT are expected to be €250m (€258m in constant currency) vs our estimates of €254.6m and €37m (Edison old: €39.2m). This represents respective FY18 growth figures of 61% and 65% and we estimate l-f-l revenue growth was c 8%. Management does not point to one factor, but we highlight that a relatively muted H1 left some catching up to do and the industry has seen some turbulence, with the dramatic success of Fortnite counterbalanced by some studio closures and mixed title performance elsewhere.
Remains attractively positioned
We still believe Keywords is attractively positioned within a growth end market. We expect the games industry will continue growing at a high single-digit rate and Keywords should benefit from increased outsourcing. The acquisition of Sunny Side Up, for C$5.9m (c €3.8m, c 4.9x trailing EBITDA) highlights the company’s ongoing ability to enhance its portfolio and earnings with acquisitions. There is an argument that the de-rating of the sector will ease vendor price expectations. The business will complement the company’s other marketing studios – Fire-Without Smoke (acquired in May) and Trailerfarm (acquired in September).
Valuation: Undemanding given growth prospects
We reduce our FY18 and FY19 adj EPS estimates by 6% and 5% respectively, which assumes a 9% revenue growth rate from the lower base offset by the Sunny Side Up acquisition (detailed overleaf). With the recent sell off, the shares have de-rated substantially to a FY19 P/E of 21x (vs 40x at the interims). While still a growth rating, it looks undemanding given the company’s track record of generating EPS growth (52% EPS CAGR 2013–2018e) and acquisition activity should bring this down further. Gaining better visibility on trading into FY19 will likely be the key catalyst for a re-rating upwards.
Estimate changes
While FY18 revenues and PBT are expected to be somewhat below our expectations, it is worth highlighting that estimated l-f-l growth was still a relatively healthy 8% in FY18 and, factoring in acquisitions, we estimate EPS growth at 49%.
We also believe the overall outlook for the games industry remains robust, even if it is recovering from a bout of optimism and investment witnessed in H217 and H118. The dramatic success of Fortnite has likely accelerated the growth of the overall industry, but this success has also cannibalised revenues elsewhere. Whether related to Fortnite or not, H2 has seen the closure or significant scaling back of a number of studios (Telltale Games, Capcom Vancouver, Carbine). Trading at the major studios has been mixed, while a reshuffling of the games launch timetable can also disrupt near-term trading.
We highlight that none of the above factors are particularly unusual within this highly dynamic industry, but the degree of flux witnesses in H2 is above historical norms and likely reflect a bout of over optimism and investment in the preceding period.
We also highlight that while now a substantially larger and more diversified business that it was before, the company has shown its ability to recover rapidly from disruptions in the past (in FY13 related to the console replacement cycle).
On an l-f-l basis, our adj EPS estimate is brought back by 6% for FY18 and 7% for FY19. This assumes a 9% l-f-l revenue growth in FY19 from the reduced base. To calibrate, NewZoo forecasts a 8.2% CAGR for the industry through 2020 and Keywords should also continue to benefit from the trend towards outsourcing.
The acquisition of Sunny Side Up enhances FY19 EPS by 1% from the revised base. Further acquisition activity should enhance earnings, and we reiterate our view that the derating of the sector could ease vendor price expectations, providing support to the acquisition strategy. With a revolving credit facility of €105m (at 1.5% above Euribor), Keywords retains plenty of firepower for future acquisitions.
Exhibit 1: Estimate changes
€000s |
2017 |
2018e |
2018e |
2019 |
2019e |
2019e |
|||||
31-December |
Actual |
Old |
New |
Change, % |
Old |
New pre Sunny Side Up* |
% change pre Sunny Side Up |
New with Sunny Side Up |
Total change, % |
||
PROFIT & LOSS |
|||||||||||
Revenue |
|
|
151,430 |
254,570 |
249,967 |
(2) |
300,212 |
289,024 |
(4) |
292,111 |
(3) |
Cost of Sales |
(96,345) |
(160,361) |
(157,579) |
(2) |
(190,439) |
(100) |
(185,394) |
(3) |
|||
Gross Profit |
55,085 |
94,208 |
92,389 |
(2) |
109,772 |
(100) |
106,718 |
(3) |
|||
EBITDA |
|
|
26,645 |
44,539 |
42,357 |
(5) |
53,911 |
50,593 |
(6) |
51,451 |
(5) |
Operating Profit (before amort. and except.) |
|
|
23,915 |
39,339 |
37,157 |
(6) |
47,778 |
44,461 |
(7) |
45,374 |
(5) |
Profit Before Tax (norm) |
|
|
23,043 |
39,196 |
37,014 |
(6) |
46,843 |
43,737 |
(7) |
44,439 |
(5) |
Profit After Tax (norm) |
18,312 |
31,435 |
29,685 |
(6) |
37,943 |
35,427 |
(7) |
35,996 |
(5) |
||
EPS - normalised fully diluted (c) |
|
|
30 |
47 |
45 |
(6) |
58 |
54 |
(7) |
55 |
(5) |
EPS - (IFRS) (c) |
|
|
12 |
33 |
30 |
(8) |
47 |
44 |
(7) |
44 |
(6) |
Dividend per share (pence) |
1 |
2 |
2 |
0 |
2 |
2 |
0 |
2 |
0 |
||
Closing net debt/(cash) |
|
|
(11,094) |
(3,749) |
(2,783) |
(9,788) |
(6,196) |
(3,108) |
(68) |
Source: Keywords, Edison Investment Research. Note: *Not in financial summary.
Exhibit 2: Financial summary
€'000s |
2016 |
2017 |
2018e |
2019e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
96,585 |
151,430 |
249,967 |
292,111 |
Cost of Sales |
(59,907) |
(96,345) |
(157,579) |
(185,394) |
||
Gross Profit (inc multimedia tax credits) |
36,678 |
55,085 |
92,389 |
106,718 |
||
EBITDA |
|
|
16,893 |
26,645 |
42,357 |
51,451 |
Operating Profit (before amort. and except.) |
|
|
15,090 |
23,915 |
37,157 |
45,374 |
Intangible Amortisation |
(1,629) |
(3,038) |
(5,000) |
(5,500) |
||
Exceptionals |
(1,316) |
(3,016) |
(3,400) |
0 |
||
Other |
(686) |
(1,426) |
(1,854) |
(2,410) |
||
Operating Profit |
11,459 |
16,435 |
26,903 |
37,465 |
||
Net Interest |
(287) |
(872) |
(143) |
(935) |
||
FOREX |
(1,737) |
(3,569) |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
14,864 |
23,043 |
37,014 |
44,439 |
Profit Before Tax (FRS 3) |
|
|
9,435 |
11,994 |
26,760 |
36,529 |
Tax |
(3,223) |
(4,731) |
(7,329) |
(8,443) |
||
Profit After Tax (norm) |
11,641 |
18,312 |
29,685 |
35,996 |
||
Profit After Tax (FRS 3) |
6,212 |
7,263 |
19,431 |
28,086 |
||
Average Number of Shares Outstanding (m) |
55.9 |
58.7 |
63.9 |
64.1 |
||
EPS |
|
|
20.9 |
31.2 |
46.5 |
56.2 |
EPS - normalised (c) |
|
|
20.3 |
29.9 |
44.6 |
55.1 |
EPS - (IFRS) (c) |
|
|
11.2 |
12.4 |
30.4 |
43.8 |
Dividend per share (p) |
1.33 |
1.46 |
1.61 |
1.77 |
||
Gross Margin (%) |
38.0% |
36.4% |
37.0% |
36.5% |
||
EBITDA Margin (%) |
17.5% |
17.6% |
16.9% |
17.6% |
||
Operating Margin (before GW and except.) (%) |
15.6% |
15.8% |
14.9% |
15.5% |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
61,873 |
143,872 |
165,787 |
180,005 |
Intangible Assets |
55,495 |
132,555 |
153,103 |
167,036 |
||
Tangible Assets |
5,498 |
10,111 |
11,477 |
11,764 |
||
Investments |
880 |
1,206 |
1,206 |
1,206 |
||
Current Assets |
|
|
38,677 |
80,182 |
74,516 |
81,205 |
Stocks |
0 |
0 |
0 |
0 |
||
Debtors |
13,879 |
27,473 |
37,118 |
40,896 |
||
Cash |
17,020 |
30,374 |
22,063 |
22,388 |
||
Other |
7,778 |
22,335 |
15,335 |
17,920 |
||
Current Liabilities |
|
|
(27,830) |
(52,503) |
(47,729) |
(44,017) |
Creditors |
(19,805) |
(33,560) |
(28,786) |
(25,074) |
||
Short term borrowings |
(8,025) |
(18,943) |
(18,943) |
(18,943) |
||
Long Term Liabilities |
|
|
(6,016) |
(10,420) |
(10,365) |
(10,365) |
Long term borrowings |
(345) |
(337) |
(337) |
(337) |
||
Other long term liabilities |
(5,671) |
(10,083) |
(10,028) |
(10,028) |
||
Net Assets |
|
|
66,704 |
161,131 |
182,209 |
206,828 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
17,168 |
18,373 |
35,498 |
38,799 |
Net Interest |
(58) |
(253) |
(143) |
(935) |
||
Tax |
(2,129) |
(4,731) |
(7,329) |
(8,443) |
||
Capex |
(2,306) |
(3,803) |
(6,121) |
(6,363) |
||
Acquisitions/disposals |
(21,104) |
(87,074) |
(28,387) |
(21,592) |
||
Financing |
643 |
82,936 |
0 |
0 |
||
Dividends |
(825) |
(867) |
(1,027) |
(1,140) |
||
Net Cash Flow |
(8,611) |
4,581 |
(7,510) |
325 |
||
Opening net debt/(cash) |
|
|
(17,284) |
(8,650) |
(11,094) |
(2,783) |
Forex gain on cash |
1 |
(891) |
(500) |
0 |
||
Other |
(24) |
(1,246) |
(301) |
0 |
||
Closing net debt/(cash) |
|
|
(8,650) |
(11,094) |
(2,783) |
(3,108) |
Source: Company data, Edison Investment Research
|
|
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