Last close As at 05/08/2026
—
— 0.00 (0.00%)
Market capitalisation
—
Research: TMT
Keywords Studios looks structurally well placed to continue performing well in an industry where change and innovation are the norm. The company again showed the resilience of its model in FY18, delivering 10.1% l-f-l revenue growth and 53% adjusted EPS growth in the face of considerable industry turbulence. Looking ahead, we see sustained growth from the launch of streaming services by industry majors and the continued shift towards outsourcing. Keywords’ strategy, which has delivered a five-year EPS CAGR of 53%, appears sustainable. As such, we believe that the shares remain set for continued appreciation.
Written by
Keywords Studios |
Structural strength |
Results update |
Software & comp services |
16 April 2019 |
Share price performance
Business description
Next event
Analysts
Keywords Studios is a research client of Edison Investment Research Limited |
|||||||||||||||||||||||||||||||||||||||||||||||
Keywords Studios looks structurally well placed to continue performing well in an industry where change and innovation are the norm. The company again showed the resilience of its model in FY18, delivering 10.1% l-f-l revenue growth and 53% adjusted EPS growth in the face of considerable industry turbulence. Looking ahead, we see sustained growth from the launch of streaming services by industry majors and the continued shift towards outsourcing. Keywords’ strategy, which has delivered a five-year EPS CAGR of 53%, appears sustainable. As such, we believe that the shares remain set for continued appreciation.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/17 |
151.4 |
23.1 |
30.0 |
1.46 |
56.2 |
0.10 |
12/18 |
250.8 |
37.9 |
45.8 |
1.61 |
36.8 |
0.11 |
12/19e |
298.9 |
44.1 |
54.3 |
1.77 |
31.1 |
0.12 |
12/20e |
334.7 |
49.4 |
60.9 |
1.95 |
27.7 |
0.13 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
FY18: Robust performance despite some headwinds
Strong progress continued in FY18 with Keywords showing its resilience in the face of industry turbulence. Results were essentially in line with our estimates, with revenues of €250.8m up 66% y-o-y, and up 10.1% on a l-f-l basis (implying a pick-up in H2 from 8.6% in H1), with PBT increasing by 64% to €37.9m. Profit was boosted by higher than forecast games industry tax credits (€12.2m vs Edison €7.4m), offset somewhat by a €1.7m bad debt provision against studio closures. Year-end net debt of €0.4m (2017: €11.1m net cash) and a facility of up to €105m leave ample firepower for future acquisitions.
Revised FY19 and introduction of FY20 estimates
Management has commented that the year has started encouragingly and growth drivers for FY19 look positive. H119 should benefit from projects that slipped from H218; the drag from VMC should reduce (before VMC returns to growth in FY20) and the company looks well placed for a sustained benefit from the launch of streaming services by the tech majors. Consequently we nudge up our l-f-l revenue growth from 9.4% to 11.0% (a conservative estimate), with profit and cash flows largely unchanged. Management reports a healthy M&A pipeline (potentially €40m+ indicated), which should further support growth and earnings accretion.
Valuation: Positive returns from continued execution
Following a recent pick-up, Keywords’ shares trade on a 2019e P/E of 31.1x our updated estimates falling to 27.7x in 2020, but we see scope for organic upside and potential accretive acquisition activity should bring this down further (see sensitivity analysis in Exhibit 3). Keywords’ strategy, which has delivered 53% adjusted EPS growth in FY18 and a five-year EPS CAGR of 53%, appears sustainable. As such, we believe that the shares remain set for continued appreciation.
FY18 results and estimate revisions
Our estimates for FY19 have not changed substantially and we introduce estimates for FY20. Our latest estimates are shown in Exhibit 1.
Revenues: We have made some small changes to our 2019 estimates, the principal among these being to increase like-for-like revenue growth from 9.4% to 11.0% (vs 10.1% in FY18), conservative by historical standards and towards the lower end of management’s 10–15% guidance. There appear to be a number of drivers that should support higher growth in FY19 over FY18: H119 should benefit from projects that slipped from H218; the drag from VMC should reduce (management expects flat revenues in FY19, vs an estimated 20%+ decline in FY18, before a return to growth in FY20); and the company should continue to benefit from the launch of streaming services by the tech majors.
Margins: Our 15% operating margin forecast implies a slight contraction for FY19. We believe the company could achieve a higher margin, but this level leaves headroom for reinvestment in growth. Otherwise, we have assumed gross margins remain at c 37% for both FY19 and FY20.
Tax rate: Through effective planning, Keywords’ tax rate has reduced progressively from 22% in FY16 to 19% in FY18. We expect this trend to continue and forecast a tax rate of 18.5% in FY19 and 18.0% in FY20.
Capex: Management expects lower capex in 2019 compared to 2018, so we have eased our FY19 capex assumption to €9.0m from €9.4m in 2018.
Deferred consideration: The company has a liability of c €15.9m contingent consideration on the balance sheet. We forecast that essentially all of this amount, up to €15m, will be payable in FY19 if performance conditions are met.
We have also assumed tax credits – the Multimedia Tax Credit (MMTC – Canada) and the Video Games Tax Relief (VGTR – UK) – in 2019 are maintained at the 2018 level.
Exhibit 1: Revised estimates
€000s |
2018 |
2019e |
2020e |
||||
Old |
New |
Change |
New |
y-o-y growth |
|||
Revenue |
250,805 |
293,234 |
298,858 |
1.9% |
334,721 |
12.0% |
|
Cost of Sales |
(154,997) |
(186,134) |
(188,015) |
1.0% |
(212,043) |
12.8% |
|
Gross Profit (inc multimedia tax credits) |
95,808 |
107,099 |
110,843 |
3.5% |
122,678 |
10.7% |
|
EBITDA |
44,232 |
50,152 |
51,291 |
2.3% |
57,318 |
11.8% |
|
Op. Profit (before amort. and except.) |
38,916 |
44,054 |
45,094 |
2.4% |
50,378 |
11.7% |
|
Profit Before Tax (norm) |
37,911 |
43,119 |
44,089 |
2.3% |
49,373 |
12.0% |
|
Profit After Tax (norm) |
30,720 |
34,926 |
35,933 |
2.9% |
40,486 |
12.7% |
|
EPS - normalised (c) |
45.8 |
53.4 |
54.3 |
1.6% |
60.9 |
12.2% |
|
EPS - (IFRS) (c) |
23.6 |
42.2 |
40.4 |
-4.2% |
46.6 |
15.3% |
|
Dividend per share (p) |
1.61 |
1.77 |
1.77 |
0.0% |
1.95 |
10.0% |
|
Closing net debt/(cash) |
424 |
(171) |
5,554 |
(8,596) |
|
||
Source: Company accounts, Edison Investment Research
The final dividend was as expected at 1.08p (FY17: 0.98p), implying a 10% FY increase to 1.61p per share (FY17: 1.46p). We estimate continuing 10% y-o-y dividend growth for FY19 and FY20.
Acquisition pipeline supports growth
Keyword’s strategy of using earning enhancing acquisitions while consolidating a fragmented games outsourcer market is intrinsic to the investment case. Management has stated the acquisition pipeline remains healthy and that it continues to receive healthy inbound interest from around the world. With a debt facility of up to €105m, the company retains good firepower for M&A activity and has guided towards €40m–€80m of acquisitions in FY19.
Management has highlighted Engineering, Art Services (including Marketing) and Audio Services as service lines that are likely to see acquisition activity over the course of the year.
While our base case estimates do not reflect any material contribution from M&A, our sensitivity analysis in Exhibits 2 and 3 suggests that if management retains historical price discipline (ie paying between 7–11x PBT for acquisitions) and deploys at least €40m in cash (plus equity, assuming a 70/30 cash/equity split) in acquisitions, then it is reasonable to expect at least 30% accretion to our FY20 EPS estimate.
Exhibit 2: Sensitivity analysis – estimated 2020 EPS (c) assuming €40m in cash spend on acquisitions in FY19e
2020 EPS adjusted for 2019 acquisition pipeline |
Average EV/PBT paid for acquisitions in FY19 (x) |
|||||
7.0 |
8.0 |
9.0 |
10.0 |
11.0 |
||
Organic revenue growth |
10.0% |
82.3 |
80.8 |
79.6 |
78.6 |
77.8 |
12.5% |
85.7 |
84.2 |
82.9 |
82.0 |
81.2 |
|
15.0% |
89.2 |
87.6 |
86.4 |
85.4 |
84.7 |
|
Source: Edison Investment Research
Exhibit 3: Sensitivity analysis – estimated 2020 P/E (at share price of 1,455p) assuming €40m in cash spend on acquisitions in FY19e
2020 P/E multiple (x) adjusted for 2019 acquisition pipeline |
Average EV/PBT paid for acquisitions in FY19 (x) |
|||||
7.0 |
8.0 |
9.0 |
10.0 |
11.0 |
||
Organic revenue growth |
10.0% |
20.5 |
24.2 |
24.6 |
24.9 |
25.2 |
12.5% |
19.7 |
23.3 |
23.6 |
23.9 |
24.1 |
|
15.0% |
18.9 |
22.4 |
22.7 |
22.9 |
23.1 |
|
Source: Edison Investment Research
Exhibit 4: Financial summary
€'000s |
2016 |
2017 |
2018 |
2019e |
2020e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
96,525 |
151,430 |
250,805 |
298,858 |
334,721 |
Cost of Sales |
(59,907) |
(96,345) |
(154,997) |
(188,015) |
(212,043) |
||
Gross Profit (inc multimedia tax credits) |
36,618 |
55,085 |
95,808 |
110,843 |
122,678 |
||
EBITDA |
|
|
16,833 |
26,645 |
44,232 |
51,291 |
57,318 |
Operating Profit (before amort. and except.) |
|
|
15,030 |
23,915 |
38,916 |
45,094 |
50,378 |
Intangible Amortisation |
(1,629) |
(3,038) |
(6,872) |
(5,500) |
(5,500) |
||
Exceptionals |
(1,316) |
(3,016) |
(5,296) |
0 |
0 |
||
Other |
(686) |
(1,426) |
(4,129) |
(4,542) |
(4,996) |
||
Operating Profit |
11,399 |
16,435 |
22,619 |
35,053 |
39,882 |
||
Net Interest |
(287) |
(818) |
(1,005) |
(1,005) |
(1,005) |
||
FOREX |
(1,737) |
(3,623) |
791 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
14,804 |
23,097 |
37,911 |
44,089 |
49,373 |
Profit Before Tax (FRS 3) |
|
|
9,375 |
11,994 |
22,405 |
34,048 |
38,877 |
Tax |
(3,223) |
(4,731) |
(7,191) |
(8,157) |
(8,887) |
||
Profit After Tax (norm) |
11,581 |
18,366 |
30,720 |
35,933 |
40,486 |
||
Profit After Tax (FRS 3) |
6,152 |
7,263 |
15,214 |
25,891 |
29,990 |
||
Average Number of Shares Outstanding (m) |
55.9 |
58.7 |
64.3 |
64.1 |
64.4 |
||
EPS |
|
|
20.8 |
31.3 |
47.8 |
56.1 |
62.9 |
EPS - normalised (c) |
|
|
20.2 |
30.0 |
45.8 |
54.3 |
60.9 |
EPS - (IFRS) (c) |
|
|
11.0 |
12.4 |
23.6 |
40.4 |
46.6 |
Dividend per share (p) |
1.33 |
1.46 |
1.61 |
1.77 |
1.95 |
||
Gross Margin (%) |
37.9% |
36.4% |
38.2% |
37.1% |
36.7% |
||
EBITDA Margin (%) |
17.4% |
17.6% |
17.6% |
17.2% |
17.1% |
||
Operating Margin (before GW and except.) (%) |
15.6% |
15.8% |
15.5% |
15.1% |
15.1% |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
61,873 |
142,927 |
198,055 |
211,323 |
208,883 |
Intangible Assets |
55,495 |
131,610 |
180,086 |
191,698 |
186,198 |
||
Tangible Assets |
5,498 |
10,111 |
15,002 |
16,658 |
19,718 |
||
Investments |
880 |
1,206 |
2,967 |
2,967 |
2,967 |
||
Current Assets |
|
|
38,677 |
80,182 |
100,348 |
101,870 |
124,077 |
Stocks |
0 |
0 |
0 |
0 |
0 |
||
Debtors |
13,879 |
27,473 |
37,019 |
41,091 |
46,022 |
||
Cash |
17,020 |
30,374 |
39,870 |
34,740 |
48,890 |
||
Other |
7,778 |
22,335 |
23,459 |
26,039 |
29,164 |
||
Current Liabilities |
|
|
(27,830) |
(51,677) |
(95,031) |
(74,168) |
(74,168) |
Creditors |
(19,805) |
(32,734) |
(54,960) |
(34,097) |
(34,097) |
||
Short term borrowings |
(8,025) |
(18,943) |
(40,071) |
(40,071) |
(40,071) |
||
Long Term Liabilities |
|
|
(6,016) |
(10,420) |
(11,158) |
(10,718) |
(10,718) |
Long term borrowings |
(345) |
(337) |
(230) |
(230) |
(230) |
||
Other long term liabilities |
(5,671) |
(10,083) |
(10,928) |
(10,488) |
(10,488) |
||
Net Assets |
|
|
66,704 |
161,012 |
192,214 |
228,307 |
248,073 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
17,108 |
21,389 |
38,484 |
33,185 |
35,798 |
Net Interest |
(58) |
(253) |
(502) |
(1,005) |
(1,005) |
||
Tax |
(2,129) |
(4,731) |
(6,304) |
(8,157) |
(8,887) |
||
Capex |
(2,306) |
(3,803) |
(9,440) |
(9,000) |
(10,500) |
||
Acquisitions/disposals |
(21,104) |
(90,090) |
(30,296) |
(19,014) |
0 |
||
Financing |
643 |
82,936 |
174 |
0 |
0 |
||
Dividends |
(825) |
(867) |
(1,080) |
(1,141) |
(1,255) |
||
Net Cash Flow |
(8,671) |
4,581 |
(9,916) |
(5,131) |
14,151 |
||
Opening net debt/(cash) |
|
|
(17,284) |
(8,650) |
(11,094) |
424 |
5,554 |
Forex gain on cash |
1 |
(891) |
(3) |
0 |
0 |
||
Other |
36 |
(1,246) |
(1,599) |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(8,650) |
(11,094) |
424 |
5,554 |
(8,596) |
Source: Keywords Studios accounts, Edison Investment Research
|
|
The completion of the feasibility study (FS) on the T3 copper-silver deposit, located in Botswana, is an important de-risking event for MOD Resources. The metrics contained in the FS give us a higher level of confidence in our valuation as well as the NPV and IRR calculations completed by the company. With the FS now in hand, MOD Resources can advance its mining licence application and secure the finance required to move T3 into production.