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Keywords Studios — Firing on all cylinders

Keywords Studios (LN: KWS)

Last close As at 05/08/2026

—

— 0.00 (0.00%)

Market capitalisation

—

More on this equity

Research: TMT

Keywords Studios — Firing on all cylinders

Strong trading nearly across the board reaffirms the strength of Keywords Studios’ model and prompts a further 8% upgrade to FY17 EPS. We believe there should be more to come, both organically and through acquisitions. Despite the premium rating, continued execution should drive further upside.

Analyst avatar placeholder

Written by

TMT

Keywords Studios

Firing on all cylinders

Trading update

Software & comp services

4 August 2017

Price

1,075p

Market cap

£600m

£/€1.12

Net cash (€m) as at 31 December 2016

8.7

Shares in issue

55.8m

Free float

69%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

45.8

31.9

241.3

Rel (local)

45.1

28.6

206.5

52-week high/low

1,075.0p

317.5p

Business description

Keywords Studios provides localisation, testing, artwork, community support and engineering services exclusively to the video games industry. It provides services to 20 of the top 25 games developers and is leading consolidation of this fragmented industry.

Next events

Interim results

September 2017

Analysts

Dan Ridsdale

+44 (0)20 3077 5729

Victoria Pease

+44 (0)20 3077 5700

Keywords Studios is a research client of Edison Investment Research Limited

Strong trading nearly across the board reaffirms the strength of Keywords Studios’ model and prompts a further 8% upgrade to FY17 EPS. We believe there should be more to come, both organically and through acquisitions. Despite the premium rating, continued execution should drive further upside.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS**
(p)

P/E
(x)

Yield
(%)

12/15

58.0

8.0

12.6

1.2

95.6

0.1

12/16

96.6

14.9

20.3

1.3

59.3

0.1

12/17e

132.1

20.2

28.1

1.5

42.8

0.1

12/18e

148.9

23.1

32.0

1.6

37.6

0.1

Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **DPS in distributable currency.

Excellent H1

H1 revenues are expected to have grown 50% y-o-y to €63.7m, with PBT up by 60% y-o-y to €9.6m. Like-for-like growth was a very healthy 17%, or 28% if adjusting for last year’s exceptionally strong trading at the Audio business Synthesis. The company reports that all service lines showed good organic growth other than Audio, due to the tough comparator last year.

Strength of model highlighted

The group’s like-for-like growth rate is well above the c 6.5% estimated growth for the games industry. We believe that this reflects the strength of Keywords’ position in the market, the trend to increased outsourcing and the company’s ability to generate revenue synergies from its acquired businesses. Keywords’ expansion into higher value-added service lines through Art Services and now Engineering with the acquisition of GameSim, could strengthen this position further. Delivery of these services occur earlier in a game’s creation than more ancillary service lines and require much closer relationships with the client, which should further support cross-selling through strengthening relationships and gaining better insights into the games development pipeline.

EPS upgraded by 8%, scope for more

We have upgraded our FY17 sales and EPS adjusted estimates by 7% and 8%, respectively which flows through to 9% and 10% respective upgrades for FY18. We believe that there is scope for more organic upgrades while earnings-enhancing acquisitions should be expected. We believe the company potentially has acquisition capital to nearly triple run-rate EPS from 20.3c in FY16 to 55-61c exiting FY18 if historical 7-9x current year EV/PBT multiples are maintained.

Valuation: Premium rating deserved

Keywords’ rating of 37.6x FY18 earnings (vs peer average of 19x) factors in further accretion from acquisitions or organic upgrades. If the company were to achieve our post-acquisitions EPS of 55-61c, the current share price would rate the company at 19-22x – a modest premium to the sector. The level of execution required to achieve this should not be underestimated, but if the company does, a wider premium rating would be merited.

Scope for organic and acquisition upside

8% FY17 EPS upgrade, scope for more

Our estimate changes are shown in Exhibit 1, with EPS for FY17 and FY18 upgraded by 8% and 10%, respectively. We believe that these estimates remain conservative. Our FY17 revenue forecast assumes that H2 revenues are broadly flat sequentially (excluding the c €6m we expect to be added from acquisitions), whereas historically H2 has been the stronger period, although with an evolving mix we do expect this seasonality to moderate. Our estimates assume only 12.5% organic growth for FY17 and 10% for FY18.

On an underlying basis, Keywords generates healthy cash flows although cash inflows are typically strongest in H2. Net cash at year-end was €8.7m and €6.9m has been spent on acquisitions in FY17 year to date. The company has a €35m revolving credit facility with Barclays, but we believe that the company’s diversity and cash flow generation profile could comfortably support 2x net debt/EBITDA or €45m in FY17 or €52m in FY18. Taking into account the cash Keywords will generate organically, we believe that the company has acquisition capital of at least €58m over the next 18 months.

Exhibit 1: Estimate changes

Year end 31 December, €000s

2016

2017e

2018e

Actual

Old

New

Change

Old

New

Change

Revenue

96,585

123,115

132,136

7%

136,485

148,894

9%

Cost of Sales

(59,907)

(76,793)

(85,815)

12%

(85,078)

(97,486)

15%

Gross Profit

36,678

46,322

46,322

0%

51,408

51,408

0%

EBITDA

16,893

21,152

22,688

7%

23,735

25,807

9%

Operating Profit (before amort. & except.)

15,090

19,077

20,613

8%

21,453

23,525

10%

Profit Before Tax (norm)

14,864

18,617

20,153

8%

20,993

23,065

10%

Profit After Tax (norm)

11,641

14,708

15,921

8%

16,795

18,452

10%

EPS - normalised fully diluted (c)

20.3

26.0

28.1

8%

29.1

32.0

10%

EPS - (IFRS) (c)

11.2

22.4

24.6

10%

25.7

28.6

11%

Dividend per share (pence)

1.3

1.5

1.5

0%

1.6

1.6

0%

Closing net debt/(cash)

(8,650)

(13,244)

(14,195)

7%

(23,943)

(26,333)

10%

Source: Edison Investment Research, Keywords Studios data

Acquisitions could nearly double EPS over the next 18 months

The figures above clearly only incorporate acquisitions made so far. While it is impossible to forecast future acquisitions with any accuracy, the earnings accretion driven by future acquisitions is clearly core to Keywords’ investment case. It is worth highlighting that, as a result of acquisitions and organic upgrades, our FY17e EPS of 28.1c is 60% higher than our 17.5c estimate for the same year from April 2016.

In Exhibit 2 we show a sensitivity analysis that calculates Keywords’ EPS run rate exiting FY18 based on various different organic growth rates and EV/PBT multiples paid for acquisitions (it has spent €6.9m year to date in FY17). We assume that the company deploys €58m of cash in acquisitions, matched with equity on a 70/30 ratio. This suggests that if Keywords can maintain a high single-digit/low double-digit organic growth rate and continue making acquisitions at the average 7.2x EV/PBT level of FY15 and FY16, the company’s EPS exiting FY18 could nearly triple to 55-61p from the 20.3c FY16 level.

Exhibit 2: Scenario analysis – EPS run rate (c/share) exiting FY18 based on varying organic growth and average acquisition multiples, assuming €56m acquisition investment

Average EV/PBT paid for acquisitions in H217 and FY18 (x)

6.0

7.0

8.0

9.0

10.0

Organic growth

7.5%

58.6

55.3

52.7

50.8

49.2

10.0%

60.0

56.6

54.1

52.2

50.6

12.5%

61.3

58.0

55.5

53.6

52.0

15.0%

62.8

59.4

56.9

55.0

53.4

17.5%

64.2

60.9

58.4

56.4

54.9

Source: Edison Investment Research

Other key assumptions and comments

■

The consideration for acquisitions is paid 70% cash, 30% in shares, in line with recent transactions, with the shares priced at a notional 1,054p.

■

If €56m is deployed progressively over the period, the company should remain comfortably within its €35m overdraft facility and a 2x net debt/EBITDA ratio.

Continued execution should continue to drive appreciation

At c 38x FY18 earnings, Keywords’ rating is a substantial premium to peers (average 19x for FY18) and clearly factors in some accretion from acquisitions or organic upgrades. The former should be expected, the latter very possible.

If we consider the scenarios portrayed in Exhibit 2, the company has the potential to nearly triple EPS from the FY16 level by 2019. On this basis, the shares would be at a mid-teens rating or potentially lower if stronger cross-selling synergies materialise.

A sector rating of 19x on this post-acquisitions EPS of c 55-61c would suggest a share price of 924-1,025p but if the company delivers this level of earnings growth and shows that it is well placed to continue on a similar trajectory, then a premium rating will almost certainly be retained.

Consequently, we believe that the shares do have good prospects for continued appreciation in the longer term, although we believe that there is plenty for the company to execute on to put itself in this position.

Exhibit 3: Peer multiples

Company

Quoted Currency

Current price

(ccy value)

Market
cap (m)

EV/sales
FY1 (x)

EV/sales FY2 (x)

EV/EBITDA
FY1 (x)

EV/EBITDA FY2 (x)

P/E
FY1 (x)

P/E
FY2 (x)

Outsourcing

Keywords Studios

£

1054.0

588

4.8

4.3

28.0

24.6

41.9

36.9

SDL

£

580.0

593

1.6

1.6

13.6

12.2

21.2

19.4

RWS Holdings

£

329.8

941

4.8

4.4

18.1

16.5

23.7

23.1

Capita

£

567.0

4,759

1.3

1.3

9.4

9.2

10.4

10.0

Serco Group

£

115.5

1,592

0.5

0.4

11.7

10.8

42.9

32.1

Wipro Ltd-ADR

US$

10.2

24,868

2.7

2.5

12.9

12.0

19.7

18.1

Poletowin Pitcrew Holdings

JPY

1221.0

209

0.8

0.8

na

na

13.2

11.8

Capgemini

€

86.5

15,600

1.2

1.2

9.1

8.5

14.5

13.3

Average

1.8

1.7

12.5

11.6

20.8

18.2

Games Developers

Microsoft Corp

US$

65.9

508,935

4.9

4.6

13.1

11.8

22.3

20.2

Sony Corp

JPY

3664.0

41,553

0.6

0.6

7.6

5.4

93.8

17.7

Square Enix Holdings Co

JPY

3180.0

3,493

1.1

1.1

7.2

5.7

18.8

14.4

Ubisoft Entertainment

€

39.6

4,826

2.9

2.6

6.8

5.3

30.1

23.4

Bandai Namco Holdings

JPY

3350.0

6,675

1.0

0.9

6.9

6.3

17.7

15.7

Konami Holdings Corp

JPY

4735.0

6,098

2.6

2.3

11.2

9.6

25.9

21.6

Electronic Arts

US$

89.5

27,596

4.9

4.7

14.1

13.6

23.2

21.5

Average

2.6

2.4

9.6

8.2

33.1

19.2

Source: Bloomberg consensus estimates, Edison Investment Research. Note: Priced on 26 July 2017.

Exhibit 4: Financial summary

€'000s

2014

2015

2016

2017e

2018e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

37,293

57,951

96,585

132,136

148,894

Cost of Sales

(24,566)

(36,172)

(59,907)

(85,815)

(97,486)

Gross Profit (inc multimedia tax credits)

12,727

21,779

36,678

46,322

51,408

EBITDA

 

 

6,027

9,459

16,893

22,688

25,807

Operating Profit (before amort. and except.)

 

 

5,159

8,162

15,090

20,613

23,525

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

18,298

21,210

Net Interest

(106)

(264)

(287)

(460)

(460)

FOREX

467

(474)

(1,737)

0

0

Profit Before Tax (norm)

 

 

5,053

8,007

14,864

20,153

23,065

Profit Before Tax (FRS 3)

 

 

3,435

5,086

9,435

17,838

20,750

Tax

(1,215)

(1,832)

(3,223)

(4,232)

(4,613)

Profit After Tax (norm)

3,838

6,175

11,641

15,921

18,452

Profit After Tax (FRS 3)

2,220

3,254

6,212

13,606

16,137

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

28.8

32.7

EPS - normalised fully diluted (c)

 

 

8.5

12.6

20.3

28.1

32.0

EPS - (IFRS) (c)

 

 

4.9

7.0

11.2

24.6

28.6

Dividend per share (p)

1.10

1.21

1.33

1.46

1.61

Gross Margin (%)

34.1%

37.6%

38.0%

35.1%

34.5%

EBITDA Margin (%)

16.2%

16.3%

17.5%

17.2%

17.3%

Operating Margin (before GW and except.) (%)

13.8%

14.1%

15.6%

15.6%

15.8%

BALANCE SHEET

Fixed Assets

 

 

20,874

32,132

61,873

54,577

57,571

Intangible Assets

17,677

27,675

55,495

48,971

47,342

Tangible Assets

2,761

3,486

5,498

4,726

9,349

Investments

436

971

880

880

880

Current Assets

 

 

23,120

34,884

38,677

48,379

63,199

Stocks

0

0

0

0

0

Debtors

6,203

7,519

13,879

16,815

18,496

Cash

11,014

19,018

17,020

22,565

34,703

Other

5,903

8,347

7,778

9,000

10,000

Current Liabilities

 

 

(9,746)

(13,128)

(27,830)

(31,357)

(32,281)

Creditors

(9,746)

(11,965)

(19,805)

(23,332)

(24,256)

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

65,409

82,299

CASH FLOW

Operating Cash Flow

 

 

2,412

4,768

17,168

22,950

25,226

Net Interest

11

(58)

(58)

(460)

(460)

Tax

(522)

(1,362)

(2,129)

(4,232)

(4,613)

Capex

(1,252)

(1,635)

(2,306)

(4,308)

(5,600)

Acquisitions/disposals

(8,889)

(7,409)

(21,104)

(7,580)

(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)

5,556

12,138

Opening net debt/(cash)

 

 

(15,271)

(11,014)

(17,284)

(8,650)

(14,195)

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)

(14,195)

(26,333)

Source: Keywords Studios accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Keywords Studios and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Keywords Studios and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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. 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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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