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Keywords - a good H1 but higher expectations for H2

Emilie Stevens, Equity Analyst | 17 September 2020 | A A A
Keywords - a good H1 but higher expectations for H2

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Keywords Studios plc Ordianry Shares 1p

Sell: 2,200.00 | Buy: 2,204.00 | Change 28.00 (1.28%)
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First half revenues of €173.5m were 8% higher than last year, excluding the effect of acquisitions. Despite coronavirus disruption underlying margins nudged higher and underlying profit before tax was 18% ahead of last year at €21.7m.

Trading in the second half has started well with growth across all service lines and margins are expected to improve further. The group expects demand to be boosted by upcoming console launches.

Keywords plans to resume its dividend policy in 2021.

The shares were broadly flat following the announcement.

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

Our View

Gaming is one of the few sectors that's benefited from the lockdown - as increasingly large numbers of us were looking for entertainment at home.

But while there's certainly been an uplift, as a provider of services to game developers, rather than owners of games themselves, Keywords hasn't seen the astronomical boost game owners have enjoyed. However, looking ahead to the second half of the year, things could be different.

Now that the group and its clients are up and running remotely and back in the office where needed (audio and testing were service lines that struggled to be done remotely), it's well placed to service the increased demand for gaming content. The long awaited launches of PlayStation 5 and Xbox X Series, arriving to a much bigger market, are expected to boost demand too.

And while further lockdowns will still pose challenges, Keywords' size and reinforced balance sheet mean we don't think the group's at risk.

Improving underlying profitability remains a key focus though. Lower travel and marketing costs nudged margins higher over the first half, but we'd like to see more meaningful progress here. Keywords expects further improvements in the second half and a shift towards historic operating margins by the end of 2021.

Acquisitions have long been a key part of the group's strategy to become the go to provider of outsourced services to the computer games industry. Buying opportunities at lower prices would certainly be welcome, but discipline is still important and a careless buying spree could be damaging. Luckily the group's recent additions look more like the former and should add to the group's ability to service new content demand.

Overall we think Keywords has performed well. Revenues have continued to improve and trends emerging from the current crisis probably play in the group's favour. However, with the stock trading on a fairly intimidating PE ratio well above its long-term average, the pressure is on to execute.

Keywords Studios key facts

  • Price/Earnings ratio: 44.2
  • 5 year average Price/Earnings ratio: 30.1
  • Prospective yield: 0.1%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results

All but one of the group's seven service lines reported organic growth over the first half, despite initial operational disruption from lockdowns and studios closure. The Localization service line was impacted by delays elsewhere and saw revenue fall. Overall revenue growth was concentrated in Game Development which saw revenues rise by just over 30%, and is now Keywords' largest service line.

Overall operating costs increased by 9.1% to €32.1m, but the group reported a reduction in certain costs including travel and marketing due to lockdowns - which boosted margins.

Keywords acquired Coconut Lizard (game development studio) in June for €1.7m, bringing total acquisition costs for the first half to €2.5m. So far in the second half the group has acquired west coast game developer, Heavy Iron, and European marketing business Maverick Media.

Free cash flow generated by the group was €11.6m, compared to a small cash outflow last year. That reflects higher profits and €3.4m of COVID-19 related government subsidies largely from the Americas.

At the end of the half the group had net cash of €101m, up from €17.9m net debt at the start of the year. That reflects the proceeds of a €110m share placing and organic cash generation.

Find out more about Keywords Studios, including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.