Keywords Studios plc (KWS) Ordinary Shares 1p
HL comment (24 March 2021)
Keywords reported full year revenues of €373.5m, up 14.4% year-on-year (or 11.7% on an organic basis once acquisitions and currency movements are excluded).
Profit before tax rose 86.8% to €32.5m, with earnings per share up 99.1% to 30.32 eurocent. That reflects proactive cost control and also lower travel and marketing expenses due to the pandemic.
The company did not pay a dividend in 2020, but intends to resume its progressive dividend policy in 2021.
The shares rose 3.3% in early trading.
As an outsourced supplier to the gaming industry Keywords doesn't rely on the success of individual titles. Instead it benefits from overall industry growth.
It's often said that during the California goldrush the big winners weren't the miners themselves, but those that sold the equipment needed to dig. We see Keywords as a purveyor of pickaxes in the digital goldrush that is global gaming - no bad place to be while the boom lasts. However, it also means Keywords didn't see the stellar revenue boost game publishers enjoyed in 2020.
After some initial disruption (audio and testing are difficult service lines to deliver from home) the group and its clients are up and running remotely. As the year's progressed the boom has started to trickle through too, with full year organic growth up 12% compared to 8% in the first half.
The group is upbeat about the potential for increased demand to last beyond the pandemic. A host of new games are expected following the launches of the PlayStation 5 and Xbox X Series, and smaller developers will be looking to cash in on recent market growth as well as hold on to new gamers.
We're particularly impressed with the improvement in profitability - with profit growth comfortably outpacing revenues. However, we suspect temporary tailwinds like lower travel and marketing costs have nudged margins higher this year, and we're keen to see higher margins sustained going forwards.
Despite several acquisitions this year, a €100m share placing in May 2020 and significant free cash flow means the group has a sizeable chunk of cash sitting on the balance sheet. That will no doubt fund future deals, long a key part of the group's strategy to become the go to provider of outsourced services in the industry. However, discipline is still important and a careless buying spree could be damaging. Luckily recent additions look to be at reasonable valuations 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 the trends emerging from the current crisis probably play in the group's favour. The shares have come back a bit since the start of the year, and at 37 times future earnings, the valuation is not quite as daunting as it once was. That reflects the strength of the group's end market, but still demands the group delivers near perfect execution going forwards.
Keywords Studios key facts
- Price/Earnings ratio: 37.0
- Average Price/Earnings ratio since listing: 27.8
- Prospective dividend yield (next 12 months): 0.1%
All ratios are sourced from Refinitiv. 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.
Full Year Results
Looking at each of the group's key service lines in turn;
- Art Creation & Marketing (15.3% of group revenues) reported 31.4% revenue growth year-on-year with organic growth of 17.9%
- Game Development (21.4% of group revenues) reported 20.7% revenue growth year-on-year with organic growth of 17.1%
- Audio (12.6% of group revenues) reported 12.6% revenue growth year-on-year with organic growth of 5.8%
- Functional Testing (21.0% of group revenues) reported 13.9% revenue growth year-on-year with organic growth of 16.1%
- Localisation (12.2% of group revenues) reported a 3.6% decline in revenue year-on-year with an organic decline of 4.0%
- Localisation Testing (6.3% of group revenues) reported 3.1% revenue growth year-on-year with organic growth of 4.4%
- Player Support (11.2% of group revenues) reported 15.8% revenue growth year-on-year with organic growth of 17.5%
Functional and Localisation testing as well as Audio experienced particular disruption from the pandemic in the first half, as studios were forced to close. These and the rest of the group's operations have since moved largely to home working, with 6,900 staff working from home around the world.
Despite rising 3.4%, administrative costs as a percentage of total revenues fell from 30.2% a year ago to 27.3% - reflecting some benefits from scale as well as declines in marketing and travel expenses. As a result, reported operating margins increased from 6.6% a year ago to 11.0%.
Free cash flow more than tripled to €62.5m from €19.6m a year ago. That reflects higher reported profits as well increased collection of tax credits and the increase in non-cash share option payments.
The group announced seven acquisitions during the year, for a maximum total consideration of €97.2m. Acquisitions included additions to the Marketing Services, Game Development and Audio businesses, and a further 85% stake in Australian developer Tantalus announced after the end of the year. The cash cost of acquisitions during the year was 39.9m.
A €110m share placing in May 2020 meant Keywords finished the year with net cash of €102.9m (2019: €17.9m net debt).
Trading so far in 2021 has been good, continuing momentum from the second half of 2020. That follows the launch of the next generation of consoles (PlayStation 5 and Xbox X/S) as well as continued growth in subscription and steaming gaming models.
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 Refinitiv. 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.
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