Frontier Developments PLC (AIM:FDEV) shares currently offer a “buying opportunity” for investors after a 45% decline last year and ahead of an expected record-breaking year, Shore Capital said, upgrading its recommendation on the video games publisher.
Having closed at 975p overnight, down from 1,600p in September, Frontier Developments shares sit well below the broker’s 1,350p fair value based on discounted cash flow, with the shares trading for around 15 times forecast earnings, compared to historical p/e ratios of 50 times.
This situation is despite a larger profile of games titles and an “arguably more sophisticated” business model, said Shore Cap analyst Katie Cousins in a note to clients, as she upgraded the recommendation to ‘buy’.
She currently forecasts an £11mln increase in cash year-on-year for the current financial year, resulting in a closing balance of around £50mln, with profit margins forecast to strengthen and earnings per share growth of almost 21%.
“Therefore, in our view, a healthy financial position to continue its short/medium term strategy," the analyst said.
The share price decline follows a couple of years that have not been "smooth”, with games launch delays, downgrades to forecasts and negative consumer reactions for some of titles, which had led to Shore Cap’s more cautious ‘hold’ stance previously.
But Cousins said the broker has been pleased with the group’s “ability to listen and react to fans’ feedback and consistently support titles”, with its financial position and launch-and-nurture strategy giving it “a strong portfolio of games, which actively contribute to the group’s total revenues, despite some launching several years ago”.