Last close As at 05/08/2026
—
— 0.00 (0.00%)
Market capitalisation
—
Research: TMT
Keywords’ recent trading update indicated that the company continues to perform robustly despite industry turbulence. The acquisition of GetSocial, a cloud marketing services platform, for an undisclosed sum highlights the potential for Keywords’ M&A strategy to benefit from the weaker funding environment. We adjust our estimates to reflect slightly greater investment of profit back into the business in FY19 (EPS -3%), while adjusting working capital and deferred consideration payments upwards. We retain our view that Keywords remains strongly positioned, with an undemanding rating given the company’s leading market position, track record and potential.
Written by
Keywords Studios |
Opportunities in industry turbulence |
Trading update |
Software & comp services |
26 February 2019 |
Share price performance
Business description
Next events
Analysts
Keywords Studios is a research client of Edison Investment Research Limited |
|||||||||||||||||||||||||||||||||||||||||||||||||
Keywords’ recent trading update indicated that the company continues to perform robustly despite industry turbulence. The acquisition of GetSocial, a cloud marketing services platform, for an undisclosed sum highlights the potential for Keywords’ M&A strategy to benefit from the weaker funding environment. We adjust our estimates to reflect slightly greater investment of profit back into the business in FY19 (EPS -3%), while adjusting working capital and deferred consideration payments upwards. We retain our view that Keywords remains strongly positioned, with an undemanding rating given the company’s leading market position, track record and potential.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/16 |
96.6 |
14.9 |
20.3 |
1.3 |
65.6 |
0.12 |
12/17 |
151.4 |
23.0 |
29.9 |
1.5 |
44.4 |
0.13 |
12/18e** |
250.1 |
37.9 |
47.0 |
1.6 |
28.3 |
0.14 |
12/19e |
293.2 |
43.1 |
53.4 |
1.8 |
24.9 |
0.15 |
Notes: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **12/18e numbers have been revised in line with the company’s trading update.
GetSocial acquisition
GetSocial represents a small acquisition (revenues and consideration not disclosed) that adds to Keywords’ technology platform and strengthens the group’s marketing services offering, particularly in the mobile and casual games space. We understand that c €9m had been invested into the technology platform over five years, but progress was hampered by a lack of scale. Management believes it will be able to generate good sales leverage through Keywords established, global platform. From a technology standpoint, management sees potential for integration of the platform with Yokozuna Data, the analytics platform acquired in July 2018. We believe that in the current unsettled market environment, other businesses may become available at attractive valuations.
Solid l-f-l growth, forecast housekeeping
Newsflow from industry majors (Activision Blizzard, Take-Two and Electronic Arts) indicates that there is still turbulence in the industry, but we believe that Keywords remains well placed. The company’s January trading update was reassuring, with like-for-like growth of 10.1% (implying a pick-up in H2 from 8.6% in H1). PBT was slightly ahead of forecast €37.8m (Edison: €37m), while acquisitions and a lower tax rate drove 51% growth in adjusted EPS to 47c (Edison: 44.6c.) We are revising our FY19 estimates (EPS -3%) to reflect slightly higher reinvestment back into growth (adjusted EBIT of 15.0% vs 15.7% previously), together with a more conservative stance on deferred consideration payments and cash conversion (see below).
Valuation: Undemanding given growth potential
Keywords has delivered an adjusted EPS CAGR of 51% from 2013 to 2018, and we believe it looks set to retain a robust double-digit trajectory. Organic growth has remained solid through a period of industry flux, while the environment for accretive acquisitions may have become more favourable. In this context, we believe the 24.9x 2019e P/E is now undemanding.
Revision to our 2019 estimates
Given the disrupted trading reported by industry majors, Keywords’ January trading update provided reassurance. FY18 revenues of at least £250m grew by 10.1% on a like-for-like basis, implying a pick-up in H2 from the 8.6% stated in H1. Adjusted PBT of €37.8m (Edison: €37.0m) grew 64% y-o-y, while adjusted EPS of 47.0c (Edison 44.6c) grew 51%, with the outperformance supported by a reduction in the tax charge (19.0% from 20.5%). Year-end net debt stands at €0.4m (Edison: €2.8m cash), while the company’s €105m facility leaves ample scope for further acquisitions.
Our estimate revisions are shown in Exhibit 1. We assume a nominal £1m of revenue contribution from the GetSocial acquisition but, in the absence of other information, we assume a negligible acquisition cost and impact on profits. The latest acquisition aside, we pare back our adjusted EBIT margin slightly (to 15.0% from 15.7%), reflecting the investment of profit back into generating sustainable growth (of which the GetSocial acquisition is an example). The reduction in our year-end 2019 net cash position from €3.1m cash to €0.2m reflects a lower cash conversion forecast (75% operating profit to cash flow from operations, from 85% previously), while we also conservatively assume two thirds of deferred/contingent payments of €15m (ie €10m) are paid out in FY19.
Exhibit 1: Estimate changes
€000s |
2018e |
2019e |
|||||
Old |
New |
Change (%) |
Old |
New |
Change (%) |
||
PROFIT & LOSS |
|||||||
Revenue |
|
249,967 |
250,080 |
0.0% |
292,111 |
293,234 |
0.4% |
Cost of Sales |
(157,579) |
(157,653) |
0.0% |
(185,394) |
(186,134) |
0.4% |
|
Gross Profit (inc multimedia tax credits) |
92,389 |
92,427 |
0.0% |
106,718 |
107,099 |
0.4% |
|
EBITDA |
|
42,357 |
43,237 |
2.1% |
51,451 |
50,152 |
-2.5% |
Operating Profit (before amort. and except.) |
|
37,157 |
38,037 |
2.4% |
45,374 |
44,054 |
-2.9% |
Profit Before Tax (norm) |
|
37,014 |
37,894 |
2.4% |
44,439 |
43,119 |
-3.0% |
Profit After Tax (norm) |
29,685 |
31,300 |
5.4% |
35,996 |
34,926 |
-3.0% |
|
EPS - normalised (c) |
|
44.6 |
47.0 |
5.4% |
55.1 |
53.4 |
-3.0% |
EPS - (IFRS) (c) |
|
30.4 |
32.9 |
8.3% |
43.8 |
42.2 |
-3.8% |
Dividend per share (p) |
1.61 |
1.61 |
0.0% |
1.77 |
1.77 |
0.0% |
|
Closing net debt/(cash) |
|
(2,783) |
397 |
-114.3% |
(3,108) |
(171) |
-94.5% |
Source: Edison Investment Research
Exhibit 2: Financial summary
€'000s |
2016 |
2017 |
2018e |
2019e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
96,585 |
151,430 |
250,080 |
293,234 |
Cost of Sales |
(59,907) |
(96,345) |
(157,653) |
(186,134) |
||
Gross Profit (inc multimedia tax credits) |
36,678 |
55,085 |
92,427 |
107,099 |
||
EBITDA |
|
|
16,893 |
26,645 |
43,237 |
50,152 |
Operating Profit (before amort. and except.) |
|
|
15,090 |
23,915 |
38,037 |
44,054 |
Intangible Amortisation |
(1,629) |
(3,038) |
(5,000) |
(5,500) |
||
Exceptionals |
(1,316) |
(3,016) |
(3,400) |
0 |
||
Other |
(686) |
(1,426) |
(1,854) |
(2,410) |
||
Operating Profit |
11,459 |
16,435 |
27,783 |
36,144 |
||
Net Interest |
(287) |
(872) |
(143) |
(935) |
||
FOREX |
(1,737) |
(3,569) |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
14,864 |
23,043 |
37,894 |
43,119 |
Profit Before Tax (FRS 3) |
|
|
9,435 |
11,994 |
27,640 |
35,209 |
Tax |
(3,223) |
(4,731) |
(6,594) |
(8,193) |
||
Profit After Tax (norm) |
11,641 |
18,312 |
31,300 |
34,926 |
||
Profit After Tax (FRS 3) |
6,212 |
7,263 |
21,046 |
27,017 |
||
Average Number of Shares Outstanding (m) |
55.9 |
58.7 |
63.9 |
64.1 |
||
EPS |
|
|
20.9 |
31.2 |
49.0 |
54.5 |
EPS - normalised (c) |
|
|
20.3 |
29.9 |
47.0 |
53.4 |
EPS - (IFRS) (c) |
|
|
11.2 |
12.4 |
32.9 |
42.2 |
Dividend per share (p) |
1.33 |
1.46 |
1.61 |
1.77 |
||
Gross Margin (%) |
38.0% |
36.4% |
37.0% |
36.5% |
||
EBITDA Margin (%) |
17.5% |
17.6% |
17.3% |
17.1% |
||
Operating Margin (before GW and except.) (%) |
15.6% |
15.8% |
15.2% |
15.0% |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
61,873 |
143,872 |
166,197 |
175,878 |
Intangible Assets |
55,495 |
132,555 |
151,135 |
157,414 |
||
Tangible Assets |
5,498 |
10,111 |
13,856 |
17,259 |
||
Investments |
880 |
1,206 |
1,206 |
1,206 |
||
Current Assets |
|
|
38,677 |
80,182 |
86,134 |
98,623 |
Stocks |
0 |
0 |
0 |
0 |
||
Debtors |
13,879 |
27,473 |
37,134 |
43,985 |
||
Cash |
17,020 |
30,374 |
18,882 |
19,450 |
||
Other |
7,778 |
22,335 |
30,118 |
35,188 |
||
Current Liabilities |
|
|
(27,830) |
(52,503) |
(64,319) |
(53,006) |
Creditors |
(19,805) |
(33,560) |
(45,376) |
(34,063) |
||
Short term borrowings |
(8,025) |
(18,943) |
(18,943) |
(18,943) |
||
Long Term Liabilities |
|
|
(6,016) |
(10,420) |
(10,442) |
(10,132) |
Long term borrowings |
(345) |
(337) |
(337) |
(337) |
||
Other long term liabilities |
(5,671) |
(10,083) |
(10,105) |
(9,795) |
||
Net Assets |
|
|
66,704 |
161,131 |
177,570 |
211,364 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
17,168 |
18,373 |
31,359 |
33,424 |
Net Interest |
(58) |
(253) |
(143) |
(935) |
||
Tax |
(2,129) |
(4,731) |
(5,780) |
(8,193) |
||
Capex |
(2,306) |
(3,803) |
(8,500) |
(9,500) |
||
Acquisitions/disposals |
(21,104) |
(87,074) |
(26,200) |
(13,088) |
||
Financing |
643 |
82,936 |
0 |
0 |
||
Dividends |
(825) |
(867) |
(1,027) |
(1,140) |
||
Net Cash Flow |
(8,611) |
4,581 |
(10,591) |
568 |
||
Opening net debt/(cash) |
|
|
(17,284) |
(8,650) |
(11,094) |
397 |
Forex gain on cash |
1 |
(891) |
0 |
0 |
||
Other |
(24) |
(1,246) |
(900) |
0 |
||
Closing net debt/(cash) |
|
|
(8,650) |
(11,094) |
397 |
(171) |
Source: Keywords Studios data, Edison Investment Research
|
|
Over the past two to three years, we have seen the re-emergence of a listed small- and mid-cap games sector in the UK and Europe, with a wave of IPOs supported by a period of sustained outperformance of the industry majors against a backdrop of healthy equity markets. The more recent reversal of performance of the sector has been equally dramatic and largely indiscriminate. Mixed trading results from the industry majors reflect, in our view, the re-basement of expectations from unrealistic highs, as well as disruption from digital distribution and recurring monetisation models. The small-cap games sector mainly comprises companies with business models designed to exploit this new model, and trading for the most part has been robust. The dynamic nature of the market will continue to create disruption, offering opportunities and risks, but we believe the small-cap European sector now offers exposure to a number of well-run, innovative businesses and good execution will generate significant value.