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The acquisition of four French companies gives Keywords Studios strong capabilities across all major European languages for localisation and voice-over recording. The transactions boost our FY18 EPS by 5%, although some investment in integrating the entities will be required. The expanded offering should also support organic growth, through helping secure more centrally procured, multi-language contacts.
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Keywords Studios |
French audio and localisation consolidation |
Acquisition |
Software & comp services |
9 August 2017 |
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Keywords Studios is a research client of Edison Investment Research Limited |
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The acquisition of four French companies gives Keywords Studios strong capabilities across all major European languages for localisation and voice-over recording. The transactions boost our FY18 EPS by 5%, although some investment in integrating the entities will be required. The expanded offering should also support organic growth, through helping secure more centrally procured, multi-language contacts.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS** |
P/E |
Yield |
12/15 |
58.0 |
8.0 |
12.6 |
1.2 |
103.9 |
0.1 |
12/16 |
96.6 |
14.9 |
20.3 |
1.3 |
64.5 |
0.1 |
12/17e |
135.1 |
20.5 |
28.6 |
1.5 |
45.8 |
0.1 |
12/18e |
158.8 |
24.3 |
33.5 |
1.6 |
39.1 |
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.
Consolidating French audio and localisation
Keywords Studios has further consolidated its leadership position in the European localisation and audio service lines through the acquisition of four Paris-based businesses – La Marque Rose (audio), Around the Word (game localisation), Dune Sound and Asrec (both audio recording) – for a total consideration of up to €7.6m (details overleaf). The transaction strengthens the company’s French language capability, which had been a relative weakness, and gives the company strong capabilities across all major European languages, which should enable Keywords to win larger and more comprehensive contracts as clients increasingly look to source all voice-over recording work from a single provider. The plan is to integrate the acquired businesses into the company’s existing recording studio in Paris, with c €1m expected to be invested in equipment and offices for the combined facilities.
5% EPS upgrade, likely more to come
In aggregate, the businesses had revenues of €9.0m and PBT of €0.9m. Aggregate margins (10% at the PBT level) are currently below Keywords’ group level (15.4% in FY16), but management expects to bring margins in line with the rest of the group within a couple of years. The acquisitions represent a trailing PBT multiple of 8x, in line with the company’s historical norms. This should drop to close to 5x as margins are brought to group level. We upgrade our FY17 and FY18 EPS by 2% and 5%, respectively, with our forecast FY17 year-end net cash dropping back by €7.8m to €6.4m. We believe that there is scope for more organic upgrades, while more earnings-enhancing acquisitions should be expected, with remaining acquisition capital giving the potential to generate EPS of 58-63c exiting FY18 if historical 7-9x current year EV/PBT multiples are maintained.
Valuation: Premium rating deserved
Keywords’ rating of 39x FY18e earnings (vs peer average of 19x) factors in further accretion from acquisitions or organic upgrades. If Keywords were to achieve our notional post-acquisitions EPS of 58-63c, the rating would drop to 20-22x – a modest premium to the sector. We believe a wider premium would almost certainly be maintained.
Changes in estimates
The transactions involve the acquisitions of La Marque Rose SARL, Asrec SAS, Dune Sound and Around the Word; the latter two were subsidiaries of Dune Media SAS. All are Paris based.
The maximum aggregate consideration is €7.6m, with €6.6m paid on completion and a further €1m over the two years to 31 December 2019 contingent on meeting performance targets. Of the initial €6.6m, €5.7m is being paid in cash with the remainder in shares, 9,534 of which are to be issued on 10 August.
Our estimate changes are shown below. Our FY18 estimates assume that the PBT margin for the acquired businesses expands to 12.3% and therefore FY19 estimates (not yet published) should benefit from further earnings accretion as margins are expanded towards the 15% group level.
Exhibit 1: Estimates changes
€000s |
2016 |
2017e |
2017e |
Change |
2018e |
2018e |
Change |
Actual |
Old |
New |
Old |
New |
|||
Revenue |
96,585 |
132,136 |
135,136 |
2% |
148,894 |
158,794 |
7% |
Cost of sales |
(59,907) |
(85,815) |
(87,825) |
2% |
(97,486) |
(104,347) |
7% |
Gross profit |
36,678 |
46,322 |
47,312 |
2% |
51,408 |
54,447 |
6% |
EBITDA |
16,893 |
22,688 |
23,006 |
1% |
25,807 |
27,021 |
5% |
Operating profit (before amort. and except.) |
15,090 |
20,613 |
20,931 |
2% |
23,525 |
24,739 |
5% |
Profit before tax (norm) |
14,864 |
20,153 |
20,471 |
2% |
23,065 |
24,279 |
5% |
Profit after tax (norm) |
11,641 |
15,921 |
16,172 |
2% |
18,452 |
19,424 |
5% |
EPS - normalised fully diluted (c) |
20.3 |
28.1 |
28.6 |
2% |
32.0 |
33.5 |
5% |
EPS - (IFRS) (c) |
11.2 |
24.6 |
25.1 |
2% |
28.6 |
30.2 |
6% |
Dividend per share (pence)* |
1.3 |
1.5 |
1.5 |
0% |
1.6 |
1.6 |
0% |
Closing net debt/(cash) |
(8,650) |
(14,195) |
(6,371) |
-55% |
(26,333) |
(19,171) |
-27% |
Source: Keywords Studios data, Edison Investment Research. Note: *DPS in distributable currency.
Exhibit 2: Financial summary
€000s |
2014 |
2015 |
2016 |
2017e |
2018e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
37,293 |
57,951 |
96,585 |
135,136 |
158,794 |
Cost of Sales |
(24,566) |
(36,172) |
(59,907) |
(87,825) |
(104,347) |
||
Gross Profit (inc multimedia tax credits) |
12,727 |
21,779 |
36,678 |
47,312 |
54,447 |
||
EBITDA |
|
|
6,027 |
9,459 |
16,893 |
23,006 |
27,021 |
Operating Profit (before amort. and except.) |
|
|
5,159 |
8,162 |
15,090 |
20,931 |
24,739 |
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 |
18,616 |
22,424 |
||
Net Interest |
(106) |
(264) |
(287) |
(460) |
(460) |
||
FOREX |
467 |
(474) |
(1,737) |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
5,053 |
8,007 |
14,864 |
20,471 |
24,279 |
Profit Before Tax (FRS 3) |
|
|
3,435 |
5,086 |
9,435 |
18,156 |
21,964 |
Tax |
(1,215) |
(1,832) |
(3,223) |
(4,299) |
(4,856) |
||
Profit After Tax (norm) |
3,838 |
6,175 |
11,641 |
16,172 |
19,424 |
||
Profit After Tax (FRS 3) |
2,220 |
3,254 |
6,212 |
13,857 |
17,109 |
||
Average Number of Shares Outstanding (m) |
45.0 |
48.2 |
55.9 |
55.3 |
56.7 |
||
EPS - normalised (c) |
|
|
8.5 |
12.8 |
20.9 |
29.3 |
34.3 |
EPS - normalised fully diluted (c) |
|
|
8.5 |
12.6 |
20.3 |
28.6 |
33.5 |
EPS - (IFRS) (c) |
|
|
4.9 |
7.0 |
11.2 |
25.1 |
30.2 |
Dividend per share (p) |
1.10 |
1.21 |
1.33 |
1.46 |
1.61 |
||
Gross Margin (%) |
34.1% |
37.6% |
38.0% |
35.0% |
34.3% |
||
EBITDA Margin (%) |
16.2% |
16.3% |
17.5% |
17.0% |
17.0% |
||
Operating Margin (before GW and except.) (%) |
13.8% |
14.1% |
15.6% |
15.5% |
15.6% |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
20,874 |
32,132 |
61,873 |
75,184 |
78,756 |
Intangible Assets |
17,677 |
27,675 |
55,495 |
66,628 |
66,349 |
||
Tangible Assets |
2,761 |
3,486 |
5,498 |
7,676 |
11,527 |
||
Investments |
436 |
971 |
880 |
880 |
880 |
||
Current Assets |
|
|
23,120 |
34,884 |
38,677 |
41,674 |
57,267 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
6,203 |
7,519 |
13,879 |
17,933 |
19,726 |
||
Cash |
11,014 |
19,018 |
17,020 |
14,741 |
27,541 |
||
Other |
5,903 |
8,347 |
7,778 |
9,000 |
10,000 |
||
Current Liabilities |
|
|
(9,746) |
(13,128) |
(27,830) |
(31,534) |
(32,862) |
Creditors |
(9,746) |
(11,965) |
(19,805) |
(23,509) |
(24,837) |
||
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 |
79,133 |
96,971 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
2,412 |
4,768 |
17,168 |
22,326 |
26,677 |
Net Interest |
11 |
(58) |
(58) |
(460) |
(460) |
||
Tax |
(522) |
(1,362) |
(2,129) |
(4,299) |
(4,856) |
||
Capex |
(1,252) |
(1,635) |
(2,306) |
(4,839) |
(6,133) |
||
Acquisitions/disposals |
(8,889) |
(7,409) |
(21,104) |
(14,180) |
(1,500) |
||
Financing |
7,342 |
14,199 |
643 |
0 |
0 |
||
Dividends |
(609) |
(737) |
(825) |
(817) |
(927) |
||
Net Cash Flow |
(4,256) |
7,194 |
(8,611) |
(2,268) |
12,800 |
||
Opening net debt/(cash) |
|
|
(15,271) |
(11,014) |
(17,284) |
(8,650) |
(6,371) |
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) |
(6,371) |
(19,171) |
Source: Keywords Studios accounts, Edison Investment Research. Note: DPS in distributable currency
|
|
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