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Keywords Studios
Written by
Keywords Studios |
Synthesis acquisition ticks all the boxes |
Acquisition |
Software & comp services |
15 April 2016 |
Share price performance
Business description
Next events
Analysts
Keywords Studios is a research client of Edison Investment Research Limited |
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The acquisition of Synthesis for up to €18m is Keywords Studios’ largest to date and significantly strengthens the company’s leadership position in both localisation and audio. It also enhances earnings by an estimated 12% and 16% for FY16 and FY17 respectively. We see ample scope for continued upside as the company continues to strengthen its position in this fragmented market with earnings enhancing acquisitions.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS** |
P/E |
Yield |
12/14 |
37.3 |
5.1 |
8.5 |
1.0 |
36.2 |
0.4 |
12/15 |
58.0 |
8.0 |
12.5 |
1.2 |
24.4 |
0.5 |
12/16e |
84.8 |
11.6 |
17.0 |
1.3 |
18.0 |
0.5 |
12/17e |
98.9 |
13.9 |
20.2 |
1.5 |
15.1 |
0.6 |
Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items, exchange rate effects and share-based payments. ** DPS in distributable currency
A strong strategic fit
Keywords is acquiring Synthesis, a leading player in localisation, audio and localisation testing solutions. Synthesis is the number two player in these domains, and thus the deal strengthens Keywords’ number one position, taking market share from an estimated 10% to 15%. The business’s headquarters are in Switzerland but it has a particularly strong presence in Italy, Spain, Latin America and Asia. It also gives Keywords a presence in Germany (Hamburg) and Paris and strengthens the company’s relationship with some important developer names such as Rock Star, Take Two and Bethesda.
Also earnings enhancing
Our estimate changes are shown overleaf. We forecast annualised revenues for Synthesis of €15m with PBT of €2m for FY16 (valuing the business at an undemanding 9x PBT). We are not forecasting any significant cost synergies, with consolidation of offices in some cities offset by strengthening central functions. In the longer term however, we believe that prospects should benefit from the increased scale and strengthened market position. With the benefit of the lower Swiss tax rate broadly offsetting the share dilution, the acquisition enhances our FY16 and FY17 EPS estimates by 12% and 16% respectively.
Valuation: Upside from doing more of the same
Despite the strong recent share price performance, reflecting the enhancement from acquisitions supported by the translation benefit from sterling’s weakness versus the euro, Keyword’s shares have actually derated slightly of late. At a FY16 P/E of 18.0x dropping to 15.1x in FY17, Keywords is rated in line with its broader peer group. Consequently, we see ample scope for it to continue to deliver share price upside. The company’s strong track record of execution and strengthened market position support a premium rating, while it has a long runway to continue with its consolidation strategy, strengthening its competitive position and enhancing earnings as it does so.
Estimate changes
Our estimate changes are shown in Exhibit 1.
Keywords Studios is paying up to €18m for Synthesis, of which €1m is contingent on delivering at least €15m revenue and €2m PBT within 12 months of the acquisition. €10.2m was paid in cash on completion with the remainder to be satisfied by the right to 2,376,518 new Keywords shares to be issued in two equal tranches on the first and second anniversary of completion.
In 2015 Synthesis registered revenues of €16.9m with PBT of €2m, although these figures were boosted by a major project that will not repeat in FY15. Our estimates assume an annualised contribution of €15m revenues and €2m PBT in FY16, growing at 6% organically in FY17.
Our tax rate reduces from 24% to 21% reflecting the impact of the lower tax rate in Switzerland.
We estimate that the company will have net cash of €2-3m immediately after the deal, but that the company’s robust cash generation will bring this back up to c €10m by year end.
We understand that the company is negotiating debt facilities to support working capital and further acquisitions, giving the company headroom to continue with its consolidation strategy this year without issuing substantial amounts of new equity.
Exhibit 1: Estimate changes
€000s |
2015 |
2016e |
2016e |
Change |
2017e |
2017e |
Change |
Year end 31 December |
Actual |
Old |
New |
Old |
New |
||
Revenue |
57,951 |
74,161 |
84,761 |
14% |
82,874 |
98,904 |
19% |
Cost of Sales |
(36,172) |
(45,561) |
(53,315) |
(50,780) |
(62,111) |
||
Gross Profit |
21,779 |
28,600 |
31,446 |
10% |
32,094 |
36,792 |
15% |
EBITDA |
9,459 |
11,896 |
13,340 |
12% |
13,577 |
15,803 |
16% |
Operating Profit (before amort. and except.) |
8,162 |
10,413 |
11,840 |
14% |
11,946 |
14,043 |
18% |
Operating Profit |
5,824 |
9,056 |
8,983 |
-1% |
11,089 |
12,686 |
14% |
Profit Before Tax (norm) |
8,007 |
10,594 |
11,640 |
10% |
12,127 |
13,893 |
15% |
Profit After Tax (norm) |
6,175 |
8,210 |
9,196 |
12% |
9,460 |
11,115 |
17% |
EPS - normalised fully diluted (c) |
12.5 |
15.2 |
17.0 |
12% |
17.5 |
20.2 |
16% |
EPS - (IFRS) (c) |
7.1 |
12.7 |
11.8 |
-8% |
16.0 |
17.8 |
12% |
Dividend per share (c) |
1.5 |
1.7 |
1.7 |
0% |
1.8 |
1.8 |
0% |
Closing net debt/(cash) |
(17,284) |
(21,563) |
(9,852) |
-54% |
(29,184) |
(17,566) |
-40% |
Source: Keywords Studios data, Edison Investment Research
Exhibit 2: Financial summary
€'000s |
2013 |
2014 |
2015 |
2016e |
2017e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
16,185 |
37,293 |
57,951 |
84,761 |
98,904 |
Cost of Sales |
(10,570) |
(24,566) |
(36,172) |
(53,315) |
(62,111) |
||
Gross Profit |
5,615 |
12,727 |
21,779 |
31,446 |
36,792 |
||
EBITDA |
|
|
2,691 |
6,027 |
9,459 |
13,340 |
15,803 |
Operating Profit (before amort. and except.) |
2,419 |
5,159 |
8,162 |
11,840 |
14,043 |
||
Intangible Amortisation |
0 |
(468) |
(857) |
(1,357) |
(1,357) |
||
Exceptionals |
(1,124) |
(1,461) |
(1,089) |
(1,500) |
0 |
||
Other |
(71) |
(156) |
(392) |
0 |
0 |
||
Operating Profit |
1,224 |
3,074 |
5,824 |
8,983 |
12,686 |
||
Net Interest |
(66) |
(106) |
(264) |
(200) |
(150) |
||
FOREX |
0 |
467 |
(474) |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
2,352 |
5,053 |
8,007 |
11,640 |
13,893 |
Profit Before Tax (FRS 3) |
|
|
1,158 |
3,435 |
5,086 |
8,783 |
12,536 |
Tax |
(394) |
(1,215) |
(1,832) |
(2,444) |
(2,779) |
||
Profit After Tax (norm) |
1,959 |
3,838 |
6,175 |
9,196 |
11,115 |
||
Profit After Tax (FRS 3) |
764 |
2,220 |
3,254 |
6,339 |
9,757 |
||
Average Number of Shares Outstanding (m) |
36.1 |
45.1 |
49.0 |
53.8 |
54.7 |
||
EPS - normalised (c) |
|
|
5.4 |
8.5 |
12.8 |
17.1 |
20.3 |
EPS - normalised fully diluted (c) |
|
|
5.4 |
8.5 |
12.5 |
17.0 |
20.2 |
EPS - (IFRS) (c) |
|
|
2.1 |
4.9 |
7.1 |
11.8 |
17.8 |
Dividend per share (c) |
4,221.4 |
1.3 |
1.5 |
1.7 |
1.8 |
||
Gross Margin (%) |
34.7 |
34.1 |
37.6 |
37.1 |
37.2 |
||
EBITDA Margin (%) |
16.6 |
16.2 |
16.3 |
15.7 |
16.0 |
||
Operating Margin (before GW and except.) (%) |
14.9 |
13.8 |
14.1 |
14.0 |
14.2 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
600 |
20,874 |
32,132 |
50,505 |
50,767 |
Intangible Assets |
0 |
17,677 |
27,675 |
44,489 |
43,632 |
||
Tangible Assets |
600 |
2,761 |
3,486 |
5,045 |
6,164 |
||
Investments |
0 |
436 |
971 |
971 |
971 |
||
Current Assets |
|
|
18,218 |
23,120 |
34,884 |
31,382 |
40,840 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
1,303 |
6,203 |
7,519 |
11,450 |
13,194 |
||
Cash |
15,271 |
11,014 |
19,018 |
11,585 |
19,299 |
||
Other |
1,644 |
5,903 |
8,347 |
8,347 |
8,347 |
||
Current Liabilities |
|
|
(1,025) |
(9,746) |
(13,128) |
(17,353) |
(18,325) |
Creditors |
(1,025) |
(9,746) |
(11,965) |
(16,190) |
(17,162) |
||
Short term borrowings |
0 |
0 |
(1,163) |
(1,163) |
(1,163) |
||
Long Term Liabilities |
|
|
(300) |
(2,607) |
(3,294) |
(10,293) |
(6,793) |
Long term borrowings |
0 |
0 |
(571) |
(570) |
(570) |
||
Other long term liabilities |
(300) |
(2,607) |
(2,723) |
(9,723) |
(6,223) |
||
Net Assets |
|
|
17,494 |
31,642 |
50,594 |
54,241 |
66,488 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
2,705 |
2,412 |
4,768 |
14,140 |
15,101 |
Net Interest |
(59) |
11 |
(58) |
181 |
181 |
||
Tax |
(359) |
(522) |
(1,362) |
(2,444) |
(2,779) |
||
Capex |
(394) |
(1,252) |
(1,635) |
(3,712) |
(3,984) |
||
Acquisitions/disposals |
(13) |
(8,889) |
(7,409) |
(14,871) |
(3,500) |
||
Financing |
10,280 |
4,594 |
13,627 |
0 |
3,500 |
||
Dividends |
(781) |
(609) |
(737) |
(717) |
(806) |
||
Net Cash Flow |
11,378 |
(4,256) |
7,194 |
(7,424) |
7,714 |
||
Opening net debt/(cash) |
|
|
(3,892) |
(15,271) |
(11,014) |
(17,284) |
(9,852) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
(1) |
(924) |
(8) |
0 |
||
Closing net debt/(cash) |
|
|
(15,271) |
(11,014) |
(17,284) |
(9,852) |
(17,566) |
Source: : Keywords Studios data, Edison Investment Research. Note: Adjusted PBT and PAT exclude FOREX
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