Trading in the second half of the year has been in line with expectations at video games services provider Keywords Studios PLC (LON:KWS).
As previously revealed in its July trading update, the group had a strong first half to the year and it has been keeping its foot down in the second half, with three acquisitions, a strengthened senior management team and further investment in eight facilities to add up to 700 seats across Player Support, Functionality Testing (FT), and Localisation Testing to accommodate organic growth in response to market demands.
The acquisitive group said it is also reviewing a strong acquisition pipeline.
READ: Keywords picks La Marque Rose as best of the bunch
As for the rear view window, the first half of the year saw revenue rise 50% to €63.76mln from €42.41mln the year before, with organic growth of 17%.
Profit before tax more than doubled to €5.52mln from €2.61mln the year before, paving the way for a 10% increase in the interim dividend to 0.48p from 0.44p last year.
"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 of Keywords.
"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.
"We continue to invest in larger facilities and additional talent in our existing business in support of organic growth while welcoming new businesses to the group through our active strategy to lead the consolidation of a highly-fragmented market," he added.
READ: Keywords Studios acquires clutch of French computer games service suppliers
Shares in Keywords opened 50p lower at 1,284.55p after finnCap moved from ‘buy’ to ‘hold’ in view of the stock’s exceptionally strong run.
“Keywords already provides services to 23 of the top 25 leading game companies globally. As such, we believe the company's principal growth opportunity is to maximise 'revenue per title' by cross/up-selling add-on services or those in different geographies. To this end (and as validation of the company’s strategy) we note a 40% increase in clients taking three or more services to 84 (out of c.400),” observed finnCap’s Harold Evans.
“In revenue terms, we suspect these clients represent significantly more than this 21% (84/400) by number. Cross selling could be a reason behind the group’s accelerating growth – as rather than the divisions 'moving' independently, there is now greater positive correlation,” Evans speculated.
“Despite reservations that growth in Localisation should abate (due to maturity in the ‘trend to outsource'), evidence is to the contrary, with exceptionally strong growth being maintained y-o-y. We also flag strong performances within FT and CS [customer support] – both represent material step-ups relative to prior years.
“The only disappointment was Audio; however, we are expecting a busier H2 and furthermore are optimistic regarding the acquisitions of La Marque Rose, Asrec and the subsidiaries Dune Media post period-end – here Keywords plans to consolidate operations and now undertake production work (not sub-contract). This model potentially offers higher margins and better quality control,” Evans said.
Numis Securities has also moved from ‘buy’ to ‘hold’, despite grumbling that today’s update revealed “relatively little new” following the trading update in late July.
The statement noted significant organic investment in the business in the second half of the year, and Numis surmises that management expects this will hold back the normally seasonally stronger second-half profitability.
“The shares are up by almost 50% since the trading update. We continue to believe that Keywords is exceptionally well positioned, both for organic growth and for value-creative M&A. This is reflected in a valuation of c.40x CY18 EV/NOPAT. We expect that multiple to come down as the group makes acquisitions; however, we leave our 1,400p price target unchanged today, and our recommendation moves from Buy to Hold,” the broker said.
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