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Keywords Studios
Written by
Keywords Studios |
Another beat and raise |
Trading update |
Software & comp services |
8 February 2017 |
Share price performance
Business description
Next events
Analysts
Keywords Studios is a research client of Edison Investment Research Limited |
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Full-year revenues and PBT are both expected to come in 3% above our forecasts, which were upgraded in November, suggesting like-for-like growth in the region of 20%. We upgrade our FY17 revenue and EPS estimates by 2% and 4% respectively, but with the company attractively positioned within a generally buoyant gaming technical services sector, we see clear scope for the organic upgrade trajectory to continue through both organic performance and acquisitions.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS** |
P/E |
Yield |
12/14 |
37.3 |
5.1 |
8.5 |
1.1 |
80.8 |
0.4 |
12/15 |
58.0 |
8.0 |
12.6 |
1.2 |
54.6 |
0.4 |
12/16e |
96.6 |
14.8 |
20.9 |
1.3 |
33.0 |
0.5 |
12/17e |
115.2 |
17.0 |
24.0 |
1.5 |
28.7 |
0.5 |
Note:*PBT and EPS (fully diluted) are normalised, excluding intangible amortisation, exceptional items and share-based payments. **DPS in distributable currency.
Broad-based strength
Full-year revenues and PBT are expected to be €96.6m and €14.8m vs our old estimates of €93.5m and €14.3m respectively. The upgrade is nearly entirely underlying, with the December acquisition of Sonox for €650k the only M&A activity since we last upgraded our estimates in November and suggests like-for-like growth at close to 20%. The strength is broad based, with Localisation, Art and Community Management (the latter off a low base) all performing particularly well. Net cash stands at €9m (€17m cash, €8m debt) down from €17.3m last year, with solid cash generation offset by eight acquisitions for a net cash spend of €20.7m.
Set for another good year
We upgrade our FY17 sales and EPS by 2% and 4% respectively (detailed overleaf), which we believe leaves scope for further upgrades. The games industry as a whole appears to be in good health and well set to continue growing at a mid-to high single-digit rate. As the largest supplier of outsourcing services in a fragmented competitive landscape, Keywords is well placed to take market share organically and through acquisition as well as being a net beneficiary of customer consolidation. M&A will continue and may also accelerate. Given the fragmentation of the market and lack of alternative exits for independent studios, we believe that the company should continue to be able to acquire at attractive multiples.
Valuation: EPS growth prospects justify premium
In our view, one of the key attractions of Keyword’s investment case is that it has scope to continue growing earnings at a double-digit rate without substantially deviating from the existing strategy, which has generated 57% CAGR EPS growth since 2013. At 29x FY17 earnings, Keyword’s rating is a premium to peers (average 19x), with a wide range, but we believe the company’s growth prospects justify this; further accretive acquisition activity or upgrades could quickly bring the rating more in line. Hence, prospects for further share price appreciation continue to look good.
Investment summary
Games industry dynamics remain supportive
The global games industry is estimated to be worth US$90-100bn with the market broadly equally split between PC, console and mobile. Newzoo estimates the industry grew 8.5% in 2016 and will expand at an annual rate of 6.6% through 2019. Growth is being driven by the mobile market, which is increasing at c 20% pa, with growth of PC and Console in the low single digits. Nevertheless, recent results from major PC and console brands such as Electronic Arts and Take-Two indicate sales over the peak holiday season were robust.
Keywords looks well placed to continue outgrowing the market
Strategically, we believe Keywords is uniquely placed. No other service provider has as many touch points in the global games industry, both in terms of developer penetration and stages of the games development cycle covered. An increased trend towards outsourcing by the games developers should support faster growth than the games market, and cross-selling opportunities are expanding. Ongoing consolidation in the games market (combined spend in FY16 was estimated at US$21bn) may cause some unpredictability, but as the largest, most diverse outsourced supplier, Keywords should be well placed to gain market share in this trend.
Pace of M&A to continue
We expect the pace of M&A to continue, and perhaps accelerate. With €17m of cash on the balance sheet and a €15m facility (of which €8m is currently drawn), the company has €15-20m of cash to deploy from current resources; we believe this facility has scope to be expanded (in our view, net debt/EBITDA of c 2x would be a comfortable threshold). Given the fragmentation of the outsourced supplier market and lack of alternative exits for independent studios, we feel the company should continue to be able to acquire at attractive multiples, despite the expansion of Keywords’ own rating.
Expect to add a new service line in engineering, dipping toe in new markets
We expect Keywords will initiate its entry into engineering (coding) over the year, adding a seventh service line to the overall offering. The company is also seeing opportunities for localisation, audio and art in the video production industry, where the rise of streaming services (such as Netflix, Amazon etc) are creating dynamics more akin to the games industry with faster production cycles and global distribution. The online gambling industry (where, for now, Keywords is minimally involved) also provides opportunities for growth.
Investing to scale
Management is taking steps to ensure the model continues to scale, through investment in core platforms in some areas and increased decentralisation in others. The company is investing in a new accounting platform, which will be rolled out across the group over the next 12-18 months, and new resource management and project management platforms for the Arts business. At the same time, the development of key leaders and processes will enable M&A activity to become less centralised. The company has also expanded its sales and support team to 14 over the last year, up from nine.
Estimate changes
Our estimate changes are shown in Exhibit 1. We believe our new estimates are still cautious. We estimate that 2016 revenues were boosted by c €4m of exceptional revenue from very strong trading at Synthesis over the year. Stripping this out, our estimates assume c 8% like-for-like* growth in FY17 (calculated on the basis of revenues included for 2016 acquisitions from the date of acquisition and for the equivalent period in the prior year) versus c 20% in FY16 (albeit with Synthesis’s exceptional strength). Further acquisitions will almost certainly be accretive to earnings.
Exhibit 1: Estimate changes
€000s |
2015 |
2016e |
2016e |
Change |
2017e |
2017e |
Change |
||
31-December |
Actual |
Old |
New |
Old |
New |
||||
PROFIT & LOSS |
|
|
|||||||
Revenue |
|
|
57,951 |
93,531 |
96,600 |
3% |
112,705 |
115,248 |
2% |
Cost of Sales |
(36,172) |
(58,743) |
(60,671) |
3% |
(68,750) |
(70,301) |
2% |
||
Gross Profit |
21,779 |
34,788 |
35,929 |
3% |
43,955 |
44,947 |
2% |
||
EBITDA |
|
|
9,459 |
16,052 |
16,544 |
3% |
18,251 |
18,984 |
4% |
Operating Profit (before amort. and except.) |
|
|
8,162 |
14,552 |
15,044 |
3% |
16,491 |
17,224 |
4% |
Operating Profit |
5,824 |
11,303 |
11,795 |
4% |
14,742 |
15,475 |
5% |
||
Profit Before Tax (norm) |
|
|
8,007 |
14,292 |
14,784 |
3% |
16,241 |
16,974 |
5% |
Profit After Tax (norm) |
6,175 |
11,290 |
11,679 |
3% |
12,993 |
13,581 |
5% |
||
EPS - normalised fully diluted (c) |
|
|
12.6 |
20.2 |
20.9 |
3% |
23.5 |
24.0 |
4% |
EPS - (IFRS) (c) |
|
|
7.0 |
12.5 |
13.2 |
6% |
20.4 |
21.4 |
5% |
Dividend per share (pence) |
1.2 |
1.3 |
1.3 |
0% |
1.5 |
1.5 |
0% |
||
Closing net debt/(cash) |
|
|
(17,284) |
(8,892) |
(9,032) |
2% |
(14,394) |
(17,939) |
25% |
Source: Keywords Studios, Edison Investment Research
Valuation
At 29x FY17 earnings Keywords’ rating is a premium to peers (average 19x), with a wide range, but we believe the company’s growth prospects justify this. In the near term, further acquisition activity or upgrades could quickly bring the rating more in line. Looking longer term, we believe the company has a strong platform to continue generating double-digit earnings growth. Hence, prospects for further share price appreciation continue to look good.
Exhibit 2: Peer group valuation
Name |
Ticker |
Current price (ccy value) |
Quoted currency |
Market cap (m) |
EV/Sales FY1 (x) |
EV/Sales FY2 (x) |
EV/ EBITDA FY2 (x) |
EV/ EBITDA FY2 (x) |
P/E FY1 (x) |
P/E FY2 (x) |
Outsourced services |
||||||||||
Keywords Studios Plc |
KWS LN |
593 |
GBP |
323 |
3.8 |
3.2 |
22.2 |
19.4 |
33.0 |
28.7 |
Lionbridge Technologies Inc |
liox us |
6 |
USD |
349 |
0.8 |
0.7 |
8.6 |
7.3 |
11.5 |
8.9 |
Sdl Plc |
sdl ln |
482 |
GBP |
491 |
1.5 |
1.5 |
12.5 |
10.9 |
19.9 |
17.8 |
Rws Holdings Plc |
rws ln |
345 |
GBP |
930 |
5.4 |
5.2 |
20.4 |
19.5 |
27.3 |
26.1 |
Capita Plc |
cpi ln |
505 |
GBP |
4,214 |
1.2 |
1.3 |
8.5 |
8.6 |
8.1 |
8.6 |
Serco Group Plc |
srp ln |
146 |
GBP |
2,009 |
0.6 |
0.6 |
13.1 |
14.9 |
30.5 |
47.2 |
Wipro Ltd-Adr |
wit us |
9 |
USD |
22,218 |
2.4 |
2.3 |
11.5 |
10.6 |
17.7 |
16.1 |
Poletowin Pitcrew Holdings |
3657 JT |
1,082 |
JPY |
184 |
0.8 |
0.8 |
nm |
nm |
15.2 |
13.2 |
Capgemini |
cap fp |
76 |
EUR |
13,918 |
1.2 |
1.2 |
9.2 |
8.6 |
14.3 |
13.1 |
Games Industry |
||||||||||
Microsoft Corp |
MSFT US |
63 |
USD |
490,157 |
4.7 |
4.4 |
12.6 |
11.3 |
21.4 |
19.5 |
Sony Corp |
6758 JT |
3,573 |
JPY |
40,253 |
0.6 |
0.6 |
7.1 |
5.2 |
65.8 |
17.9 |
Square Enix Holdings Co Ltd |
9684 JT |
3,170 |
JPY |
3,459 |
1.1 |
1.1 |
6.9 |
5.7 |
18.4 |
14.6 |
Ubisoft Entertainment |
UBI FP |
31 |
EUR |
3,753 |
2.1 |
1.9 |
5.4 |
4.0 |
22.5 |
18.0 |
Bandai Namco Holdings Inc |
7832 JT |
3,040 |
JPY |
6,018 |
0.8 |
0.8 |
6.0 |
5.5 |
15.9 |
14.5 |
Konami Holdings Corp |
9766 JT |
4,455 |
JPY |
5,701 |
2.4 |
2.1 |
10.6 |
9.1 |
24.5 |
20.5 |
Electronic Arts Inc |
EA US |
82 |
USD |
25,342 |
4.5 |
4.2 |
12.8 |
12.4 |
21.4 |
19.7 |
Source: Bloomberg, Edison Investment Research. Note: Priced at 8 February 2017.
Exhibit 3: Financial summary
€000s |
2014 |
2015 |
2016e |
2017e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
37,293 |
57,951 |
96,600 |
115,248 |
Cost of Sales |
(24,566) |
(36,172) |
(60,671) |
(70,301) |
||
Gross Profit (inc multimedia tax credits) |
12,727 |
21,779 |
35,929 |
44,947 |
||
EBITDA |
|
|
6,027 |
9,459 |
16,544 |
18,984 |
Operating Profit (before amort. and except.) |
|
|
5,159 |
8,162 |
15,044 |
17,224 |
Intangible Amortisation |
(468) |
(857) |
(1,357) |
(1,357) |
||
Exceptionals |
(1,461) |
(1,089) |
(1,500) |
0 |
||
Other |
(156) |
(392) |
(392) |
(392) |
||
Operating Profit |
3,074 |
5,824 |
11,795 |
15,475 |
||
Net Interest |
(106) |
(264) |
(260) |
(250) |
||
FOREX |
467 |
(474) |
(1,200) |
0 |
||
Profit Before Tax (norm) |
|
|
5,053 |
8,007 |
14,784 |
16,974 |
Profit Before Tax (FRS 3) |
|
|
3,435 |
5,086 |
10,335 |
15,225 |
Tax |
(1,215) |
(1,832) |
(3,105) |
(3,395) |
||
Profit After Tax (norm) |
3,838 |
6,175 |
11,679 |
13,581 |
||
Profit After Tax (FRS 3) |
2,220 |
3,254 |
7,230 |
11,831 |
||
Average Number of Shares Outstanding (m) |
45.0 |
48.2 |
54.7 |
55.3 |
||
EPS - normalised (c) |
|
|
8.5 |
12.8 |
21.3 |
24.6 |
EPS - normalised fully diluted (c) |
|
|
8.5 |
12.6 |
20.9 |
24.0 |
EPS - (IFRS) (c) |
|
|
4.9 |
7.0 |
13.2 |
21.4 |
Dividend per share (p) |
1.10 |
1.21 |
1.33 |
1.46 |
||
Gross Margin (%) |
34.1% |
37.6% |
37.2% |
39.0% |
||
EBITDA Margin (%) |
16.2% |
16.3% |
17.1% |
16.5% |
||
Operating Margin (before GW and except.) (%) |
13.8% |
14.1% |
15.6% |
14.9% |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
20,874 |
32,132 |
77,186 |
73,395 |
Intangible Assets |
17,677 |
27,675 |
69,727 |
67,052 |
||
Tangible Assets |
2,761 |
3,486 |
6,487 |
5,372 |
||
Investments |
436 |
971 |
971 |
971 |
||
Current Assets |
|
|
23,120 |
34,884 |
41,092 |
54,499 |
Stocks |
0 |
0 |
0 |
0 |
||
Debtors |
6,203 |
7,519 |
16,500 |
19,500 |
||
Cash |
11,014 |
19,018 |
17,065 |
25,972 |
||
Other |
5,903 |
8,347 |
7,527 |
9,027 |
||
Current Liabilities |
|
|
(9,746) |
(13,128) |
(30,373) |
(30,967) |
Creditors |
(9,746) |
(11,965) |
(22,910) |
(23,504) |
||
Short term borrowings |
0 |
(1,163) |
(7,463) |
(7,463) |
||
Long Term Liabilities |
|
|
(2,607) |
(3,294) |
(4,393) |
(4,393) |
Long term borrowings |
0 |
(571) |
(570) |
(570) |
||
Other long term liabilities |
(2,607) |
(2,723) |
(3,823) |
(3,823) |
||
Net Assets |
|
|
31,642 |
50,594 |
83,512 |
92,534 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
2,412 |
4,768 |
18,829 |
16,614 |
Net Interest |
11 |
(58) |
120 |
120 |
||
Tax |
(522) |
(1,362) |
(2,288) |
(3,395) |
||
Capex |
(1,252) |
(1,635) |
(2,783) |
(3,618) |
||
Acquisitions/disposals |
(8,889) |
(7,409) |
(20,697) |
(3,500) |
||
Financing |
7,342 |
14,199 |
(700) |
3,500 |
||
Dividends |
(609) |
(737) |
(724) |
(814) |
||
Net Cash Flow |
(4,256) |
7,194 |
(8,244) |
8,907 |
||
Opening net debt/(cash) |
|
|
(15,271) |
(11,014) |
(17,284) |
(9,032) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
(1) |
(924) |
(8) |
0 |
||
Closing net debt/(cash) |
|
|
(11,014) |
(17,284) |
(9,032) |
(17,939) |
|
Source: Keywords Studios, Edison Investment Research |
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