Keywords Studios: Making Hay While The Sun Shines
Edison | Aug 06, 2021 07:15
Keywords Studios (LON:KWS) has delivered exceptional growth in H121, reflecting continued strong demand from video games developers driven by gamers desperate for new content. Expected revenues of €238m are up c 37% y-o-y, with organic growth of 23% as all service lines performed well against a weak H120 comparator (initial impact of COVID-19). Margins were also elevated, with adjusted PBT of €40m, an 80% y-o-y increase and a margin of 16.8%, continuing the uplift in margins seen in H220. With costs expected to start to normalise towards the end of the year, we have raised our FY21 adjusted PBT margin to 16%, but have left our FY22 and FY23 margins at 15%. Keywords trades on a P/E of 39.4x our updated FY21 estimates, falling to 37.1x in FY22. However, we expect that further M&A will lower Keywords’ rating.
Keywords’ trading update shows a strong H121, with revenues of €238m (H120: €173.5m), up c 37% y-o-y, and organic growth of 23% (H220: 15.0%, FY20: 11.7%) with all service lines performing well against a weak H120 (initial impact of COVID-19). Adjusted PBT is expected to be c €40m, a more than 80% increase year-on-year (H120: €21.7m), a margin of 16.8% (H120: 12.5%, H220: 16.6%) and a continuation of the strong margins seen in H220. The group ended H121 with net cash of €84m (FY20: €102.9m), having spent €45m on M&A in the period (Tantalus, Climax and €5m of deferred consideration). With strong positive cash flow, Keywords will restart its progressive dividend policy in 2021.
h3 FY21 estimates revised upwards/h3
Get The App
Given the combination of strong organic growth (H121: 23%) and elevated adjusted PBT margins (H121: 16.8%) versus long-term guidance of 15%, we feel it appropriate to raise our FY21 estimates. Conservatively, we are leaving revenues unchanged, but increasing our adjusted PBT margins to 16% to reflect the super-normal margins in H121. However, with the assumption that costs will start to normalise towards the end of the year, we have increased our margin assumptions for FY22 and FY23 only incrementally to 15%, in line with long-term guidance.
h3 Valuation: Keywords justifies a premium valuation/h3In our opinion, Keywords’ shares warrant a premium valuation, trading on a P/E of 39.4x our updated FY21 estimates, falling to 37.1x in FY22. With high growth driven by substantial underlying demand for its services, the group remains capacity constrained. However, with net cash of €84m, as well as €100m of undrawn facilities, the group retains substantial financial firepower and we expect to see further M&A in the coming periods, which should lower Keywords’ rating.
h3 FY21 revised upwards, FY22/23 largely unchanged/h3We had expected Keywords’ business to bounce back in FY21, supported by pent-up demand from its core client base and underpinned by strong consumer demand for games across all platforms and geographies. This bounce-back in demand is now visible in Keywords’ H121 trading update, constrained only by resource capacity and the company’s ability to meet increased demand.
Revenues: despite 23% organic growth in H121, well above the company’s guidance of 10–15% long-term organic growth, we have conservatively decided not to increase our FY21 revenue estimate. We also leave our assumptions for 12% organic growth in FY22 and 10% in FY23 unchanged. However, we see no reason why growth should slow materially in H221, save that the company appears to be resource constrained, with more demand than it can meet at present. This points to the likelihood of further acquisitions in the coming periods, which we do not factor into our estimates.
Margins: the adjusted PBT margin in H121 was 16.8% (H120: 12.5%, H220: 16.6%), a continuation of the elevated margins seen in H220. Despite a trend of strengthening margins, we see this level of margin as unlikely to be sustained as costs start to normalise towards the end of the year. In particular, we anticipate more normal levels of capex, marketing spend and travel in FY22. Accordingly, we have raised our adjusted PBT margin for FY21e to 16%, implying PBT of €78.8m, but have only nudged our margin estimates for FY22 and FY23 up to 15%, the group’s long-term margin guidance.
Other assumptions remain unchanged.
Click on the PDF below to read the full report:
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.