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Keywords - challenges but also some increased demand

Nicholas Hyett, Equity Analyst | 25 March 2020 | A A A
Keywords - challenges but also some increased demand

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Keywords Studios plc Ordianry Shares 1p

Sell: 1,766.00 | Buy: 1,772.00 | Change -15.00 (-0.84%)
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A request from regulators that companies delay full-year results means Keywords won't be announcing full year results this week, although guidance for those numbers remains unchanged. However, it's given a short update on the coronavirus impact.

The group has converted a significant chunk of its workforce to work from home arrangements and has actually seen demand increase in some business areas. Demand looks set to outstrip the group's ability to fulfil it in the near term.

Keywords finished 2019 with net debt of €18m, a net debt to cash profits (EBITDA) ratio of 0.4 times. The group currently has access to €82m of cash through existing credit facilities and is taking steps to preserve cash through cost cutting, cutting working capital and delaying certain capital projects.

Given the rapidly changing conditions the group has decided not to issue guidance for the coming year.

The shares fell 1.3% in early trading.

See the latest Keywords Studios share price, charts and how to trade

Our View

Gaming looks set to be one of the few areas which sees spending increase during the next few months, with Chinese groups reporting an increase in activity during quarantines there.

Keywords won't be a direct beneficiary, since it doesn't make games of its own. However, increased spending in the sector bodes well for a business which is crucial to the development of hundreds of games every year.

The group has offices all over the world and teams are used to working together remotely, which could help mitigate the impact of lockdowns. However, whether the company can transition enough staff out of the office remains to be seen, and it already seems like it's struggling to meet demand. A good problem to have, but still not ideal.

In the event that activity is disrupted, and to some extent that's inevitable, we take comfort in the fact the group has a relatively modest €18m net debt. That reflects acquisitions Keywords has made in recent years which have helped turbo charge earnings. Those deals are less likely in the current climate, but conserving cash would be the right thing to do anyway.

We remain, very cautiously, optimistic about the group's prospects this year. However, it's worth bearing in mind that the shares have, so far, held up well through the market sell off and trade on a relatively high price to earnings ratio of 22.6 times. If performance slips then the shares could fall dramatically.

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Full Year Trading Update - 30/01/20

Keywords' full year revenue will be in the region of €326m, up 30%, boosted by acquisitions. Organic revenue is expected to rise 15%.

Adjusted profit before tax is expected to rise just 8% to around €41m, as increased investment and the incorporation of recent acquisitions saw costs rise and weighed on margins.

Organic revenue growth slowed in the second half, with full year growth of 15% below first half growth of 17.3% - although remains significantly above the 10.1% posted last year.

The Functional Testing and Game Development divisions continue to perform well. However, the group as a whole has been navigating the slowdown in the development cycle for the current generation of games consoles, partially offset by upcoming releases for the new Xbox and PlayStation later in 2020.

Investment during the year includes expansion of facilities in Montreal, Katowice, Manila, Brighton, Mexico City, Tokyo, Sao Paolo and New Delhi and a new studio in Leamington Spa. However, this increased operational costs and combined with the integration of early stage businesses acquired in 2018, and a large underperforming fixed price contract, negatively impacted margins.

The group completed 8 acquisitions during the year at a total upfront cash cost of around €13m. Keywords also paid out €15m for deferred settlements on acquisition made in previous years, for a total acquisition cash cost of €28m.

Net debt at the year-end stood at €18m, from €0.4m a year earlier.

Find out more about Keywords Studios, including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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