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Keywords Studios
Written by
Keywords Studios |
Exceptional trading continues |
Trading update/estimates upgrade |
Software & comp services |
8 November 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 has announced that the strong trading in localisation and audio services has continued into H216. In particular, the Synthesis business acquired in April continues to benefit from exceptionally strong trading. Full-year results are now expected to be materially ahead of consensus and we upgrade our FY16e EPS by 13%. Erring on the side of caution, we have not changed our FY17 estimates significantly. Nevertheless, we believe the company does have a platform to sustain double-digit earnings growth, and hence medium-/long-term prospects for further share appreciation remain good.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
37.3 |
5.1 |
8.5 |
1.10 |
60.9 |
0.2 |
12/15 |
58.0 |
8.0 |
12.5 |
1.21 |
41.1 |
0.3 |
12/16e |
93.0 |
14.2 |
20.1 |
1.33 |
25.7 |
0.3 |
12/17e |
105.3 |
15.4 |
21.6 |
1.46 |
23.8 |
0.3 |
Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.
Robust trading, Synthesis driving FY16e upgrades
Trading has been robust across the group, but especially in the localisation and audio businesses, which both have strong seasonal peaks during the summer. Synthesis, which was acquired in September, has enjoyed exceptionally strong trading, boosted by full release schedules from key developer customers. We have upgraded our FY16 sales forecast by 7% to €93m with PBT and EPS both moving up by 18% to €14.2m and 20.1c respectively. Erring on the side of caution, our estimates for FY17 have not changed materially – assuming that Synthesis revenues drop back to historical levels following the exceptional FY16. The company is also increasing investment into this business.
Positive prospects, although flux reduces visibility
The market opportunity for Keywords looks very positive in the medium term, although there is a degree of flux within the company’s global games developer customer base, which clouds near-term visibility. Management is now seeing some developers and publishers look to consolidate their suppliers. This should be a positive trend for Keywords as the market leader with the most extensive portfolio of solutions, but the timing of wins and losses adds an element of uncertainty to forecasts. VR and AR are strong medium-term opportunities for Keywords but development activity may initially divert some budget away from Keywords services as the first generations of games are relatively small in terms of game play time.
Valuation: Supported by EPS growth prospects
While the shares are rated at a premium to peers, we believe the company’s growth prospects justify this and further acquisition activity or upgrades could quickly bring the rating back in line. In the longer term, we believe that Keywords has a platform to deliver sustained double-digit earnings growth and hence prospects for share price appreciation look very attractive.
Investment summary
Estimate changes
Our estimate changes are shown in Exhibit 1. The exceptional trading at Synthesis combined with generally robust trading across the group prompts a 7% upgrade to FY16 sales. This is accentuated in earnings due to operational gearing and exceptional utilisation rates at Synthesis, with PBT and EPS upgrades by 16% and 13% respectively.
We now expect annualised FY16 sales at Synthesis to reach c €19m versus €15m at the time of acquisition and, with capacity utilisation at exceptionally high levels, this strength will drop strongly through to profitability. Management also plans to increase investment in the business.
Our estimates for FY17 have not changed substantially. A minor increase in revenues is partly organic and partly due to the October acquisition of Player Research (for a purchase price up to £1.3m, of which the initial consideration was £700k plus 65k shares).
Exhibit 1: Estimate changes
€'000s |
2015 |
2016e |
2016e |
Change |
2017e |
2017e |
Change |
||
31-December |
Actual |
Old |
New |
Old |
New |
||||
PROFIT & LOSS |
|
|
|||||||
Revenue |
|
|
57,951 |
87,031 |
93,031 |
7% |
102,789 |
105,317 |
2% |
Cost of Sales |
(36,172) |
(54,661) |
(58,429) |
(62,701) |
(64,243) |
||||
Gross Profit |
21,779 |
32,370 |
34,602 |
7% |
40,088 |
41,074 |
2% |
||
EBITDA |
|
|
9,459 |
13,971 |
15,981 |
14% |
16,900 |
17,224 |
2% |
Operating Profit (before amort. and except.) |
8,162 |
12,471 |
14,481 |
16% |
15,140 |
15,464 |
2% |
||
Operating Profit |
5,824 |
8,022 |
10,032 |
25% |
13,391 |
13,715 |
2% |
||
Profit Before Tax (norm) |
|
|
8,007 |
12,211 |
14,221 |
16% |
14,990 |
15,364 |
2% |
Profit After Tax (norm) |
6,175 |
9,646 |
11,234 |
16% |
11,993 |
12,293 |
2% |
||
EPS - normalised fully diluted (c) |
|
|
12.5 |
17.8 |
20.1 |
13% |
21.8 |
21.6 |
-1% |
EPS - (IFRS) (c) |
|
|
7.1 |
9.7 |
12.2 |
26% |
18.7 |
18.6 |
0% |
Dividend per share (pence) |
1.2 |
1.3 |
1.3 |
0% |
1.5 |
1.5 |
0% |
||
Closing net debt/(cash) |
|
|
(17,284) |
(8,892) |
(9,927) |
12% |
(14,394) |
(15,921) |
11% |
Source: Edison Investment Research, company data
Valuation: Secular growth and upgrade potential justify premium
Keywords’ shares are valued at the top end of the peer group (Exhibit 5) although the premium for FY16 has reduced with our estimates upgrade. We believe this premium rating is justified by the company’s strong strategic position and growth prospects. Further accretive acquisition activity or organic upgrades could bring the rating back in-line. In the longer term, we believe the company has a platform for generating sustained double-digit earnings growth through a combination of healthy organic growth and earnings-enhancing acquisitions.
Exhibit 2: Peer valuation comparison
Company |
|
Share price (local) |
Market cap (local m) |
Current EV/sales (x) |
Next EV/sales (x) |
Current EV/ EBITDA |
Next EV/ EBITDA |
Current P/E |
Next P/E |
Keywords Studios |
|
460.0 |
250 |
2.4x |
2.6x |
13.8x |
16.0x |
25.7x |
23.8x |
Lionbridge Technologies Inc |
|
4.8 |
294 |
0.6x |
0.6x |
6.8x |
6.1x |
8.6x |
7.1x |
SDL |
|
432.0 |
352 |
1.4x |
1.4x |
11.2x |
9.5x |
18.3x |
15.9x |
RWS Holdings |
|
270.0 |
582 |
4.5x |
4.0x |
17.4x |
15.4x |
24.3x |
21.8x |
Capita |
|
565.0 |
3,769 |
1.2x |
1.2x |
8.4x |
8.0x |
8.4x |
8.1x |
Serco Group |
|
136.5 |
1,500 |
0.5x |
0.6x |
12.1x |
14.0x |
29.7x |
45.5x |
Wipro |
|
9.4 |
22,873 |
2.6x |
2.4x |
12.4x |
11.0x |
17.5x |
16.2x |
Capgemini |
|
74.0 |
12,743 |
1.2x |
1.1x |
8.8x |
8.2x |
13.9x |
12.8x |
Average |
1.7x |
1.6x |
11.0x |
10.3x |
17.3x |
18.2x |
Source: Edison Investment Research, Bloomberg. Note: Prices at 7 November 2016.
Exhibit 3: Financial summary
€'000s |
2013 |
2014 |
2015 |
2016e |
2017e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
16,185 |
37,293 |
57,951 |
93,031 |
105,317 |
Cost of Sales |
(10,570) |
(24,566) |
(36,172) |
(58,429) |
(64,243) |
||
Gross Profit |
5,615 |
12,727 |
21,779 |
34,602 |
41,074 |
||
EBITDA |
|
|
2,691 |
6,027 |
9,459 |
15,981 |
17,224 |
Operating Profit (before amort. and except.) |
2,419 |
5,159 |
8,162 |
14,481 |
15,464 |
||
Intangible Amortisation |
0 |
(468) |
(857) |
(1,357) |
(1,357) |
||
Exceptionals |
(1,124) |
(1,461) |
(1,089) |
(2,700) |
0 |
||
Other |
(71) |
(156) |
(392) |
(392) |
(392) |
||
Operating Profit |
1,224 |
3,074 |
5,824 |
10,032 |
13,715 |
||
Net Interest |
(66) |
(106) |
(264) |
(260) |
(100) |
||
FOREX |
0 |
467 |
(474) |
(1,200) |
0 |
||
Profit Before Tax (norm) |
|
|
2,352 |
5,053 |
8,007 |
14,221 |
15,364 |
Profit Before Tax (FRS 3) |
|
|
1,158 |
3,435 |
5,086 |
9,772 |
13,615 |
Tax |
(394) |
(1,215) |
(1,832) |
(2,986) |
(3,073) |
||
Profit After Tax (norm) |
1,959 |
3,838 |
6,175 |
11,234 |
12,293 |
||
Profit After Tax (FRS 3) |
764 |
2,220 |
3,254 |
6,785 |
10,543 |
||
Average Number of Shares Outstanding (m) |
36.1 |
45.1 |
49.0 |
55.7 |
56.6 |
||
EPS - normalised (c) |
|
|
5.4 |
8.5 |
12.8 |
20.2 |
21.7 |
EPS - normalised fully diluted (c) |
|
|
5.4 |
8.5 |
12.5 |
20.1 |
21.6 |
EPS - (IFRS) (c) |
|
|
2.1 |
4.9 |
7.1 |
12.2 |
18.6 |
Dividend per share (p) |
1.00 |
1.10 |
1.21 |
1.33 |
1.46 |
||
Gross Margin (%) |
34.7 |
34.1 |
37.6 |
37.2 |
39.0 |
||
EBITDA Margin (%) |
16.6 |
16.2 |
16.3 |
17.2 |
16.4 |
||
Operating Margin (before GW and except.) (%) |
14.9 |
13.8 |
14.1 |
15.6 |
14.7 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
600 |
20,874 |
32,132 |
54,174 |
54,545 |
Intangible Assets |
0 |
17,677 |
27,675 |
48,059 |
47,202 |
||
Tangible Assets |
600 |
2,761 |
3,486 |
5,144 |
6,372 |
||
Investments |
0 |
436 |
971 |
971 |
971 |
||
Current Assets |
|
|
18,218 |
23,120 |
34,884 |
35,351 |
38,458 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
1,303 |
6,203 |
7,519 |
12,979 |
13,984 |
||
Cash |
15,271 |
11,014 |
19,018 |
14,025 |
16,127 |
||
Other |
1,644 |
5,903 |
8,347 |
8,347 |
8,347 |
||
Current Liabilities |
|
|
(1,025) |
(9,746) |
(13,128) |
(21,216) |
(18,736) |
Creditors |
(1,025) |
(9,746) |
(11,965) |
(16,653) |
(17,573) |
||
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 |
57,813 |
67,475 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
2,705 |
2,412 |
4,768 |
15,827 |
17,373 |
Net Interest |
(59) |
11 |
(58) |
181 |
181 |
||
Tax |
(359) |
(522) |
(1,362) |
(2,986) |
(3,073) |
||
Capex |
(394) |
(1,252) |
(1,635) |
(3,977) |
(4,275) |
||
Acquisitions/disposals |
(13) |
(8,889) |
(7,409) |
(18,271) |
(3,500) |
||
Financing |
10,280 |
4,594 |
13,627 |
2,600 |
100 |
||
Dividends |
(781) |
(609) |
(737) |
(723) |
(813) |
||
Net Cash Flow |
11,378 |
(4,256) |
7,194 |
(7,349) |
5,994 |
||
Opening net debt/(cash) |
|
|
(3,892) |
(15,271) |
(11,014) |
(17,284) |
(9,927) |
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) |
(9,927) |
(15,921) |
Source: Company Data, Edison Investment Research
|
|