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Keywords Studios
Written by
Keywords Studios |
Enzyme the catalyst for a 6% EPS upgrade |
Acquisition |
Software & comp services |
18 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’ acquisition of Enzyme strengthens the company’s position in French-speaking Canada, and in localisation and functional testing. Enzyme’s expertise in focus group testing should be a good complement to the recent Player Research acquisition and may support the company’s drive to develop more comprehensive, strategic outsourcing relationships with developers and publishers. The company is paying a mere 4.2x FY15 EBIT for the business and synergies should reduce this multiple in FY17. The deal adds a further 6% to our FY17 EPS.
Year |
Revenue (€m) |
PBT* |
EPS* |
DPS** |
P/E |
Yield |
12/14 |
37.3 |
5.1 |
8.5 |
1.1 |
65.7 |
0.2 |
12/15 |
58.0 |
8.0 |
12.6 |
1.2 |
44.3 |
0.3 |
12/16e |
93.5 |
14.3 |
20.2 |
1.3 |
27.7 |
0.3 |
12/17e |
112.7 |
16.2 |
23.0 |
1.5 |
24.3 |
0.3 |
Note: *PBT and EPS (fully diluted) are normalised, excluding intangible amortisation, exceptional items and share-based payments. **DPS in distributable currency.
Consolidating leadership position in Canada
Enzyme is an outsourced service provider to the games industry based in Montreal and St-Jerome (60km from Montreal). It specialises in functional testing and localisation, complementing Keywords’ established presence in these areas. It also provides focus group testing services for optimising game design and user experience. This is a new domain for Keywords, but one which should complement the activities of its Player Research operations, acquired in October, and support the company’s drive to build more comprehensive, retained, strategic relationships with clients. Keywords already has a presence in the area with Alchemic Dream (customer care) and Babel (functional test), facilitating cost and cross-selling synergies. Enzyme’s clients’ clients are not disclosed, but the Montreal area is a hub for games development/production, with the likes of Ubisoft, EA, Behaviour Interactive and Gameloft all present in the area.
6% FY16 EPS enhancement
Keywords is paying a total of C$5.4m (€3.7m) for Enzyme in cash. The business generated revenues of C$11.5m with EBIT of C$1.3m for FY15, equating to an acquisition multiple of 4.2x FY15 EBIT. We are forecasting sales of C$10.5m in FY17, which factors in some contingency for transaction disruption and customer overlap, but with synergies driving an increase in normalised PBT to C$1.6m. Our group FY17 sales and PBT estimates move up by 7%, with EPS upgraded by 6%.
Valuation: Premium justified
While the shares are rated at a premium to peers, one should expect further accretive acquisition to reduce this and we believe that further organic upgrades are very possible. We believe that a mid-single, low double-digit growth rate is sustainable, which is also higher than its peers. Hence we believe that Keywords has a platform to deliver sustained double-digit earnings growth, meaning that prospects for longer-term share price appreciation continue to look attractive.
Estimate changes
Acquisition drives 6% upgrade to FY17 EPS
Our estimate changes are shown in Exhibit 1 and factor in only the acquisition of Enzyme, which lifts FY17 sales and PBT estimates by 7% and EPS by 6%. Earlier this month we upgraded FY16 EPS by 16% to reflect the exceptionally strong trading at Synthesis, as well as the Player Research acquisition, but left FY17 essentially unchanged. (See update report 8 November Exceptional trading continues.)
We believe that these estimates remain cautious. The company’s strategy of consolidating a fragmented supply landscape means that further earnings-enhancing acquisitions should be expected.
Games market growing at 6.6% pa; Keywords has a platform to grow faster
We also believe that the company is starting to demonstrate a consistent ability to accelerate growth in acquired businesses through improved support, infrastructure and cross-selling. For example, since acquisition Layshka Digital (an Indian art studio) has grown revenues from US$4m in FY14 to an estimated U$6m in FY16, with Keywords’ support in enabling the set-up of a studio in Seattle a factor in this.
The company’s like-for-like growth is likely to be suppressed in FY17 by the normalisation of trading at Synthesis (where we forecast revenues will drop from c €19m in FY16 to c €15m in FY17). However, the global games industry is forecast to grow at c 6.6% from 2015-19 (source: Newzoo) and we believe that Keywords has the platform to continue to grow faster than this organically – at a high single-digit/low double-digit growth rate through cross-selling, market share gains and other scale benefits.
Exhibit 1: Estimate changes
€000s |
2015 |
2016e |
2017e |
||||
Actual |
Old |
New |
Change (%) |
Old |
New |
Change (%) |
|
Revenue |
57,951 |
93,031 |
93,531 |
1% |
105,317 |
112,705 |
7% |
Cost of Sales |
(36,172) |
(58,429) |
(58,743) |
1% |
(64,243) |
(68,750) |
7% |
Gross Profit |
21,779 |
34,602 |
34,788 |
1% |
41,074 |
43,955 |
7% |
EBITDA |
9,459 |
15,981 |
16,052 |
0% |
17,224 |
18,251 |
6% |
Operating Profit (before amort. and except.) |
8,162 |
14,481 |
14,552 |
0% |
15,464 |
16,491 |
7% |
Operating Profit |
5,824 |
10,032 |
11,303 |
13% |
13,715 |
14,742 |
7% |
Profit Before Tax (norm) |
8,007 |
14,221 |
14,292 |
0% |
15,364 |
16,241 |
6% |
Profit After Tax (norm) |
6,175 |
11,234 |
11,290 |
0% |
12,293 |
12,993 |
6% |
EPS - normalised fully diluted (c) |
12.6 |
20.1 |
20.2 |
0% |
21.6 |
23.0 |
6% |
EPS - (IFRS) (c) |
7.0 |
12.2 |
12.5 |
3% |
18.6 |
20.4 |
9% |
Dividend per share (pence) |
1.2 |
1.3 |
1.3 |
0% |
1.5 |
1.5 |
0% |
Closing net debt/(cash) |
(17,284) |
(9,927) |
(8,892) |
-10% |
(15,921) |
(14,394) |
-10% |
Source: Keywords Studios data, Edison Investment Research estimates