Keywords Studios PLC (LON:KWS) shares smashed through the £10 barrier in July after another bumper set of results.
Not bad for a company priced at about 200p at the start of 2016.
The AIM-quoted firm, which provides services to the video games industry, 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).
Lucky Seven
All of the group’s seven service lines showed “good” like-for-like growth, with the exception of the Audio division which had a particularly tough comparative due to “exceptional performance” of Synthesis this time last year.
Underlying like-for-like revenue growth was 17% ahead compared to the first half of 2016, although that figure jumps to 28% when Synthesis is excluded from the calculations.
Confident in ‘at least’ meeting market expectations
“We are delighted with our progress so far this year,” said chief executive Andrew Day.
“This has enabled us to deliver a first half performance ahead of our expectations, underpinning our confidence in the group at least meeting market consensus for the year as whole.
“We continue to win new clients and grow market share and are regularly seeing the benefits of our wider geographic reach and broader range of services as we introduce additional services to established clients.”
Healthy pipeline of takeover targets
Keywords said it is delivering on its strategy of growing the business both organically and through acquisitions as it looks to become the ‘go-to’ supplier of technical services to the video games industry.
Since the start of the year, the group has made four acquisitions – Spov, XLOC, GameSim and Red Hot – which have extended its offering.
It spent just under €7mln on those purchases but it might not be done there, as it keeps an eye on a “healthy pipeline of high quality acquisition opportunities”.
The €35mln credit facility it agreed with Barclays back in April, combined with the cash it generates and the “judicious use” of shares, leaves the company well-positioned to complete more takeovers this year.
Broker lifts forecasts and price target
finnCap has upgraded its full-year revenue and pre-tax profit estimates following today's update.
The City broker is now expecting Keywords to turn a pre-tax profit of €22.4mln on higher revenues of €138.8mln for the 12 months to end December.
“Keywords has released a strong interim trading update, disclosing like-for-like revenue growth of +17%, or +28% when excluding Synthesis, which had an exceptionally strong performance in the first half of 2016,” said analyst Harold Evans.
“Profitability has also improved, with adjusted profit before tax margins up c.100bps year-on-year to 15.1%.
“Following this update, we lift [our full-year] revenue and adjusted profit before tax by 5% and our target price to £10.”
Synthesis the catalyst
Keywords bought the audio and localisation business in April 2016 in a deal which could be worth up to €18mln – its biggest purchase so far – and it has been a star ever since as the development of Virtual and Augmented Reality platforms has gathered pace.
Aside from Synthesis, Keywords acquired six other businesses in 2016 – Ankama, Mindwalk, Volta, Player Research, Enzyme and Sonox plus the remaining 50% of Kite Team it didn’t already own and this acquisition strategy has been the model in what remains a fragmented sector.
Big business
If you needed proof that computer games are very big business just look at global sales, which are expected to be around 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.
A a big performer
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.