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Keywords Studios
Written by
Keywords Studios |
M&A strategy delivering value |
Acquisition & trading update |
Software & comp services |
4 August 2016 |
Share price performance
Business description
Next events
Analysts
Keywords Studios is a research client of Edison Investment Research Limited |
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Keywords’ trading update adds further evidence to support our view that it continues to create value from its ongoing buy-and-build strategy. The most recent of its acquisitions was Volta Creation at the end of July, a deal that takes Keywords into the concept art market. Previous acquisitions are reported to be performing well, with Synthesis (its largest to date) singled out as being particularly successful. We believe that the trading update supports our existing revenue and profit forecasts. However, we have slightly upgraded our estimates to reflect the impact of the Volta acquisition, which is expected to be accretive from year one.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS** |
P/E |
Yield |
12/14 |
37.3 |
5.1 |
8.5 |
1.0 |
40.2 |
0.3 |
12/15 |
58.0 |
8.0 |
12.5 |
1.2 |
27.4 |
0.3 |
12/16e |
85.8 |
11.8 |
17.2 |
1.3 |
19.9 |
0.4 |
12/17e |
101.7 |
14.7 |
21.4 |
1.5 |
16.0 |
0.4 |
Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items, exchange rate effects and share-based payments. **DPS in distributable currency.
Extending the product offering
Keywords’ acquisition of concept art company Volta Creation is its fourth of 2016 and takes the company further upstream in the video games value chain into the distinct area of concept art production. This adds an important additional string to Keywords’ bow as it enables it to become involved in the very infancy of the video game production lifecycle, strengthening its ability to offer further services as games are developed.
Group trading ahead of H1 expectations
The trading update reveals that Keywords is trading ahead of expectations going into the seasonally stronger second half of the year. Recent audio and localisation service acquisition Synthesis, which was announced in April and is its largest to date, is reported to have hit the ground running with a number of significant early project wins. We have adjusted our forecasts to reflect the impact of the Volta acquisition. However, our forecasts for the underlying business are unchanged as we await an update on the important H2 trading in Keywords’ October interims.
Valuation: Further M&A key to upside
Keywords has demonstrated very strong share price performance over the last year. This reflects the level of growth, both organic and M&A driven, that the business has delivered during that time. Although the company has no direct listed peers, we believe that its FY16e P/E of 19.9x, falling to 16.0x in FY17e, constitutes fair value for the underlying business, which is growing organically and benefits from strong revenue visibility. However, we believe that the valuation under-appreciates the potential value to be realised through further M&A and management reports that the M&A pipeline remains strong in what continues to be a fragmented industry. We also believe that the successful integration of the acquisitions made to date serves to strengthen Keywords’ position in future deal discussions.
Estimate changes
We have updated our forecasts to reflect the Volta’s contribution. These changes are detailed in Exhibit 1.
Keywords Studios is paying a total consideration of approximately C$5.25m for Volta, $5.0m of which is to be settled in cash, with $0.3m deferred for between three and 18 months subject to certain conditions. The balance of C$0.25 will be settled by the issue of 45,192 new shares. The initial cash consideration is to be paid using Keywords’ existing revolving debt facility. Given the company’s growing cash generation ability we have assumed that this is repaid from FY17 cash flows.
Volta generated revenues of C$3.6m and profit before tax of C$0.7m. We have assumed a similar level of revenue and profit generation in 2016 on a pro rata basis for the remaining five months of 2016. For FY17 we have assumed a full year’s contribution and increasing margins for Volta as it benefits from the scale and central business functions of the wider Keywords group.
Exhibit 1: Estimate changes
€m |
2015 |
2016e |
2017e |
||||
Year end 31 December |
Actual |
Old |
New |
Change |
Old |
New |
Change |
Revenue |
57.95 |
84.76 |
85.78 |
1.2 |
98.90 |
101.72 |
2.8 |
Cost of Sales |
(36.17) |
(53.32) |
(53.88) |
1.1 |
(62.11) |
(62.05) |
(0.1) |
Gross Profit |
21.78 |
31.45 |
31.91 |
1.5 |
36.79 |
39.67 |
7.8 |
EBITDA |
9.46 |
13.34 |
13.57 |
1.7 |
15.80 |
16.64 |
5.3 |
Operating Profit (before amort. and except.) |
8.16 |
11.84 |
12.07 |
1.9 |
14.04 |
14.88 |
6.0 |
Operating Profit |
5.82 |
8.98 |
9.21 |
2.6 |
12.69 |
13.52 |
6.6 |
Profit Before Tax (norm) |
8.01 |
11.64 |
11.81 |
1.5 |
13.89 |
14.73 |
6.0 |
Profit After Tax (norm) |
6.18 |
9.20 |
9.33 |
1.5 |
11.12 |
11.79 |
5.9 |
EPS - normalised fully diluted (c) |
12.54 |
16.99 |
17.23 |
1.4 |
20.22 |
21.42 |
5.9 |
EPS - (IFRS) (c) |
7.09 |
11.77 |
12.02 |
2.1 |
17.84 |
19.05 |
6.8 |
Dividend per share (c) |
1.50 |
1.70 |
1.70 |
0.0 |
1.80 |
1.80 |
0.0 |
Closing net debt/(cash) |
(17.28) |
(9.85) |
(9.96) |
1.1 |
(17.57) |
(14.79) |
(15.8) |
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 |
85,781 |
101,719 |
Cost of Sales |
(10,570) |
(24,566) |
(36,172) |
(53,876) |
(62,048) |
||
Gross Profit |
5,615 |
12,727 |
21,779 |
31,906 |
39,670 |
||
EBITDA |
|
|
2,691 |
6,027 |
9,459 |
13,570 |
16,640 |
Operating Profit (before amort. and except.) |
2,419 |
5,159 |
8,162 |
12,070 |
14,880 |
||
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 |
9,213 |
13,523 |
||
Net Interest |
(66) |
(106) |
(264) |
(260) |
(150) |
||
FOREX |
0 |
467 |
(474) |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
2,352 |
5,053 |
8,007 |
11,810 |
14,730 |
Profit Before Tax (FRS 3) |
|
|
1,158 |
3,435 |
5,086 |
8,953 |
13,373 |
Tax |
(394) |
(1,215) |
(1,832) |
(2,480) |
(2,946) |
||
Profit After Tax (norm) |
1,959 |
3,838 |
6,175 |
9,330 |
11,785 |
||
Profit After Tax (FRS 3) |
764 |
2,220 |
3,254 |
6,473 |
10,427 |
||
Average Number of Shares Outstanding (m) |
36.1 |
45.1 |
49.0 |
53.9 |
54.7 |
||
EPS - normalised (c) |
|
|
5.4 |
8.5 |
12.8 |
17.3 |
21.5 |
EPS - normalised fully diluted (c) |
|
|
5.4 |
8.5 |
12.5 |
17.2 |
21.4 |
EPS - (IFRS) (c) |
|
|
2.1 |
4.9 |
7.1 |
12.0 |
19.1 |
Dividend per share (c) |
4,221.4 |
1.3 |
1.5 |
1.7 |
1.8 |
||
Gross Margin (%) |
34.7 |
34.1 |
37.6 |
37.2 |
39.0 |
||
EBITDA Margin (%) |
16.6 |
16.2 |
16.3 |
15.8 |
16.4 |
||
Operating Margin (before GW and except.) (%) |
14.9 |
13.8 |
14.1 |
14.1 |
14.6 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
600 |
20,874 |
32,132 |
54,087 |
54,363 |
Intangible Assets |
0 |
17,677 |
27,675 |
48,059 |
47,202 |
||
Tangible Assets |
600 |
2,761 |
3,486 |
5,057 |
6,190 |
||
Investments |
0 |
436 |
971 |
971 |
971 |
||
Current Assets |
|
|
18,218 |
23,120 |
34,884 |
35,013 |
38,408 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
1,303 |
6,203 |
7,519 |
11,576 |
13,541 |
||
Cash |
15,271 |
11,014 |
19,018 |
15,090 |
16,520 |
||
Other |
1,644 |
5,903 |
8,347 |
8,347 |
8,347 |
||
Current Liabilities |
|
|
(1,025) |
(9,746) |
(13,128) |
(20,818) |
(18,488) |
Creditors |
(1,025) |
(9,746) |
(11,965) |
(16,255) |
(17,325) |
||
Short term borrowings |
0 |
0 |
(1,163) |
(4,563) |
(1,163) |
||
Long Term Liabilities |
|
|
(300) |
(2,607) |
(3,294) |
(10,497) |
(6,793) |
Long term borrowings |
0 |
0 |
(571) |
(570) |
(570) |
||
Other long term liabilities |
(300) |
(2,607) |
(2,723) |
(9,927) |
(6,223) |
||
Net Assets |
|
|
17,494 |
31,642 |
50,594 |
57,785 |
67,490 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
2,705 |
2,412 |
4,768 |
14,313 |
15,821 |
Net Interest |
(59) |
11 |
(58) |
181 |
181 |
||
Tax |
(359) |
(522) |
(1,362) |
(2,480) |
(2,946) |
||
Capex |
(394) |
(1,252) |
(1,635) |
(3,745) |
(4,020) |
||
Acquisitions/disposals |
(13) |
(8,889) |
(7,409) |
(18,271) |
(3,500) |
||
Financing |
10,280 |
4,594 |
13,627 |
3,400 |
100 |
||
Dividends |
(781) |
(609) |
(737) |
(717) |
(806) |
||
Net Cash Flow |
11,378 |
(4,256) |
7,194 |
(7,319) |
4,830 |
||
Opening net debt/(cash) |
|
|
(3,892) |
(15,271) |
(11,014) |
(17,284) |
(9,957) |
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) |
(9,957) |
(14,787) |
Source: Keywords Studios data, Edison Investment Research. Note: Adjusted PBT and PAT exclude FX.
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