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Keywords Studios PLC: THE INVESTMENT CASE

Keywords Studios into the major leagues with VMC acquisition

New shares sold through a book build exercise in about two hours at a tiny discount to the market price to rasie £75mln
picture of virtual reality headset
INVESTMENT OVERVIEW: KWS The Big Picture
Virtual reality is the next big thing

Just a week after Keywords Studios PLC (LON:KWS) picked up a gong for AIM growth business of the year, it has pulled off its largest deal to date.

North America-focused VMC Consulting for US$66mln, to be exact, an acquisition Keywords expects to be ‘significantly earnings enhancing’ almost immediately.

An underwritten placing to raise about £75mln at £14 will fund the deal.

Placing sells out within hours

The fact that the new shares sold through a book build exercise in about two hours underlines how highly regarded is the video games services group at present.

And it’s not hard to see why investors are clamouring to pick up what stock is on offer.

Shares this year have risen to 1,430p (from 520p) as the carefully built portfolio that ranges from translation services through to augmented and virtual reality has driven large rises in sales and earnings.

VMC looks more of the same. Keywords expects the latest addition to be ‘significantly earnings enhancing’ almost immediately.

Adjusted revenue of the US group in the year to October was US$57.4mln and underlying profits [adjusted EBITDA] an annualised US$6.4mln.

The purchase will more than double Keywords' customer support operation in the North American market as well as growing market share and footprint.

Long time admirer

It is what Keywords can add, however, that seems to be an even bigger reason the market likes the deal

 Andrew Day, Keywords’ chief executive, added VMC was a significant step in its consolidation of the fragmented video games services sector.

"VMC is an organisation we've admired for several years for its reputation, scale and high quality service as well as its attractive embedded technical services and crowd-based testing services. 

"With secure testing labs in Seattle and Montreal, very close to Keywords own studios, we expect to be able to leverage the strengths of both organisations while achieving significant cost synergies to deliver profit performance similar to that of the rest of the group.”

Through a network of vetted private individuals VMC is one of the leading video games beta testers and offers many cross selling and roll-out opportunities.

Cross–selling potential

Cross-selling opportunity is a familiar refrain heard throughout the group’s rapid ascent.

Since the start of the year, the group has made nine acquisitions not including VMC.

None have been remotely on the VMC scale but the AIM-quoted firm saw revenues jump 50% to €63.7mln (H1 2016: €42.4mln) during the six months to June, while adjusted pre-tax profits surged by 60% to €9.6mln (H1 2016: €6mln).

"We have delivered another strong set of results for the first six months of the year as we continue to pursue our strategy of organic and acquisition led growth as we build our global games services business," said Andrew Day, chief executive.

"Our success in providing a wider range of services to our existing client base, which is comprised of 23 of the 25 leading video game companies around the world, is evidenced by a 40% increase in the number of clients buying three or more services from us," Day said.

Prior to the VMC deal finncap was predicting Keywords to turn a pre-tax profit of €22.4mln on higher revenues of €138.8mln for the 12 months to end December driven by Synthesis, the largest acquisition up to now.

Keywords bought the audio and localisation business in April 2016 in a deal which could be worth up to €18mln and it has been a star ever since as the development of Virtual and Augmented Reality platforms has gathered pace.

Video games a huge business

Global computer games are very big business. Sales are expected to be about US$115bn by 2018, with the vast majority of games publishers now customers of Keywords.

Established in 1998 and headquartered in Dublin, it operates across Europe and Asia, as well as from studios in Canada, US and Brazil.

Most video games are developed in English, but sales are global and that has created a business in translating games into local languages and cultures.

The original business specialised in these localisation services but the scope is now much broader and includes artwork creation for video games, such as concept art and character animation.

Virtual reality (VR) and augmented reality (AR) are expected to play a big part in the evolution of gaming in the coming years.

Synthesis was seen as such a big deal as at the time it was a major rival with an impressive list of games to its name, including Call of Duty, Grand Theft Auto, World of Warcraft and Assassins Creed.

The acquisition gave the group a 15% share of the global outsourced localisation market, since when it has not looked back.

Healthy pipeline of takeover targets

Keywords’s aim is to be the ‘go-to’ supplier of technical services to the video games industry, VMC looks like another big piece of jigsaw has been slotted in.

 

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Keywords Studios PLC Timeline

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