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Having stepped back temporarily in March 2021 for health reasons, Andrew Day has now confirmed that he will take early retirement after 12 years as CEO of Keywords. Accordingly, the board has initiated the search for a full-time replacement. Jon Hauck (CFO, M&A) and Sonia Sedler (COO and operations) will continue to operate as interim CEOs until the search is complete. In parallel, Keywords provided a trading update, with the group reporting 25% l-f-l organic revenue growth and overall revenue growth of 36% y-o-y for the first four months of the year, and ‘good margin delivery’. We note that the comparator period was relatively weak given the onset of COVID-19 (H120: 8% l-f-l organic revenue growth), but with trading momentum continuing as games companies try to make up for the content deficit last year, together with a strong M&A pipeline, the board is confident in meeting FY21 market expectations.
Written by
Keywords Studios |
CEO retires for health reasons, positive trading |
Board change, |
Software & comp services |
15 June 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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Having stepped back temporarily in March 2021 for health reasons, Andrew Day has now confirmed that he will take early retirement after 12 years as CEO of Keywords. Accordingly, the board has initiated the search for a full-time replacement. Jon Hauck (CFO, M&A) and Sonia Sedler (COO and operations) will continue to operate as interim CEOs until the search is complete. In parallel, Keywords provided a trading update, with the group reporting 25% l-f-l organic revenue growth and overall revenue growth of 36% y-o-y for the first four months of the year, and ‘good margin delivery’. We note that the comparator period was relatively weak given the onset of COVID-19 (H120: 8% l-f-l organic revenue growth), but with trading momentum continuing as games companies try to make up for the content deficit last year, together with a strong M&A pipeline, the board is confident in meeting FY21 market expectations.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/19 |
326.5 |
40.9 |
48.8 |
0.58 |
59.5 |
0.02 |
12/20 |
373.5 |
55.0 |
60.9 |
0.00 |
47.7 |
0.00 |
12/21e |
491.5 |
72.9 |
78.1 |
1.91 |
37.2 |
0.08 |
12/22e |
563.9 |
83.1 |
88.1 |
2.11 |
33.0 |
0.08 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Strong trading momentum to continue in H221
Operationally, management stated that trading momentum is expected to continue through FY21, although noting that the H220 comparatives are stronger than the H120 comparatives. In terms of M&A, Keywords has already completed three acquisitions in FY21, all so far in game development: Heavy Iron (January 2021), Tantalus Media (March 2021) and most recently Climax Studios (April 2021). Management continues to see a healthy acquisition pipeline.
Estimates updated to reflect Climax acquisition
We have updated our estimates to reflect the acquisition of Climax Studios, the UK games developer acquired in April for a maximum total consideration of £43.0m (10x FY20 EBITDA), with an upfront consideration of £27.0m (75% cash, 25% equity). Climax reported FY20 adjusted EBITDA of £4.3m. Incorporating Climax, our estimates for FY21 revenues rise 3% to €491.5m, with adjusted EBITDA rising 2% to €94.7m and normalised operating profit rising to €74.9m, a 15.2% margin.
Valuation: Investment case remains intact
From our perspective, Keywords’ key growth drivers and the investment story remain intact, with continued games development spending, an increasing trend towards outsourcing and a strong pipeline of games launches for next-generation consoles in FY21–23, underpinned by strong long-term secular and technology trends. With Keywords trading on an FY21e EV/adjusted EBITDA of 22x and a P/E of 37x, we see business as usual, together with a well-oiled M&A machine.
Exhibit 1: Financial summary
€'000s |
2019 |
2020 |
2021e |
2022e |
2023e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
326,463 |
373,538 |
491,544 |
563,935 |
620,328 |
Cost of Sales |
(206,234) |
(231,766) |
(304,809) |
(350,510) |
(385,561) |
||
Gross Profit (including multimedia tax credits) |
120,229 |
141,772 |
186,735 |
213,425 |
234,768 |
||
Investment income |
- |
1,437 |
- |
- |
- |
||
EBITDA (adjusted) |
|
|
57,611 |
74,177 |
94,659 |
106,078 |
115,893 |
EBITDA (reported) |
|
|
43,375 |
66,760 |
94,659 |
106,078 |
115,893 |
Operating Profit (before amort. and except.) |
|
|
42,983 |
57,259 |
74,909 |
85,130 |
93,643 |
Amortisation of acquired intangibles |
(7,318) |
(8,808) |
(11,317) |
(14,051) |
(15,456) |
||
Exceptionals |
(4,348) |
(2,650) |
- |
- |
- |
||
Other (incl share based payments) |
(9,775) |
(15,350) |
- |
- |
- |
||
Operating Profit |
21,542 |
41,119 |
63,592 |
71,079 |
78,187 |
||
Net Interest |
(2,513) |
(2,522) |
(2,000) |
(2,000) |
(2,000) |
||
FOREX |
(1,658) |
(6,103) |
- |
- |
- |
||
Profit Before Tax (norm) |
|
|
40,913 |
54,954 |
72,909 |
83,130 |
91,643 |
Profit Before Tax (FRS 3) |
|
|
17,371 |
32,494 |
61,592 |
69,079 |
76,187 |
Tax |
(7,462) |
(11,027) |
(14,582) |
(16,626) |
(18,329) |
||
Profit After Tax (norm) |
33,451 |
43,927 |
58,327 |
66,504 |
73,314 |
||
Profit After Tax (FRS 3) |
9,909 |
21,467 |
47,010 |
52,453 |
57,858 |
||
Average Number of Shares Outstanding (m) |
65.1 |
70.8 |
74.7 |
75.5 |
75.8 |
||
EPS - normalised (c) |
|
|
48.8 |
60.9 |
78.1 |
88.1 |
96.8 |
EPS - normalised fully diluted (c) |
|
|
47.2 |
57.7 |
75.3 |
85.4 |
94.1 |
EPS - (IFRS) (c) |
|
|
15.2 |
30.3 |
62.9 |
69.5 |
76.4 |
Dividend per share (p) |
0.58 |
0.00 |
1.91 |
2.11 |
2.32 |
||
Gross Margin (%) |
36.8% |
38.0% |
38.0% |
37.8% |
37.8% |
||
EBITDA Margin (%) |
13.3% |
17.9% |
19.3% |
18.8% |
18.7% |
||
Operating Margin (before GW and except.) (%) |
13.2% |
15.3% |
15.2% |
15.1% |
15.1% |
||
PBT Margin (%) |
12.5% |
14.7% |
14.8% |
14.7% |
14.8% |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
245,461 |
309,685 |
355,464 |
379,024 |
397,717 |
Intangible Assets |
196,769 |
240,810 |
280,783 |
294,036 |
300,652 |
||
Tangible Assets |
22,163 |
26,419 |
32,225 |
42,532 |
54,609 |
||
Right of use assets |
21,469 |
27,807 |
27,807 |
27,807 |
27,807 |
||
Investments |
5,060 |
14,649 |
14,649 |
14,649 |
14,649 |
||
Current Assets |
|
|
120,483 |
189,567 |
190,385 |
238,729 |
299,118 |
Stocks |
- |
- |
- |
- |
- |
||
Debtors |
43,243 |
47,832 |
57,457 |
64,352 |
70,787 |
||
Cash |
41,827 |
103,070 |
86,482 |
122,357 |
171,110 |
||
Other |
35,413 |
38,665 |
46,446 |
52,019 |
57,221 |
||
Current Liabilities |
|
|
(57,292) |
(91,130) |
(95,974) |
(99,018) |
(101,721) |
Creditors |
(49,471) |
(83,696) |
(88,540) |
(91,584) |
(94,287) |
||
Short term borrowings |
(80) |
(73) |
(73) |
(73) |
(73) |
||
Lease liabilities |
(7,741) |
(7,361) |
(7,361) |
(7,361) |
(7,361) |
||
Long Term Liabilities |
|
|
(85,694) |
(36,887) |
(36,887) |
(36,887) |
(36,887) |
Long term borrowings |
(59,671) |
(122) |
(122) |
(122) |
(122) |
||
Lease liabilities |
(14,166) |
(21,503) |
(21,503) |
(21,503) |
(21,503) |
||
Other long-term liabilities |
(11,857) |
(15,262) |
(15,262) |
(15,262) |
(15,262) |
||
Net Assets |
|
|
222,958 |
371,235 |
412,988 |
481,847 |
558,227 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
46,069 |
80,879 |
85,609 |
102,673 |
111,417 |
Net Interest |
(9,411) |
(9,816) |
(9,047) |
(9,047) |
(9,047) |
||
Tax |
(13,288) |
(4,459) |
(14,582) |
(16,626) |
(18,329) |
||
Capex |
(13,145) |
(13,908) |
(19,792) |
(22,707) |
(24,977) |
||
Acquisitions/disposals |
(27,762) |
(39,936) |
(57,104) |
(16,567) |
(8,269) |
||
Financing |
- |
111,698 |
- |
- |
- |
||
Dividends |
(1,197) |
- |
(1,672) |
(1,851) |
(2,042) |
||
Net Cash Flow |
(18,734) |
124,458 |
(16,588) |
35,875 |
48,752 |
||
Opening net debt/(cash) |
|
|
430 |
17,924 |
(102,875) |
(86,287) |
(122,162) |
Forex gain on cash |
1,293 |
(3,426) |
- |
- |
- |
||
Other |
(53) |
(233) |
- |
- |
- |
||
Closing net debt/(cash) (excluding lease liabilities) |
|
|
17,924 |
(102,875) |
(86,287) |
(122,162) |
(170,915) |
Source: Company accounts, Edison Investment Research
|
|
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