Numis Securities has given the thumbs-up to the acquisition of VMC by Keywords Studios PLC (LON:KWS) and upgraded the stock to 'buy' from 'hold'.
The technical services provider to the video games industry has a history of shrewd acquisitions and Numis said the latest one is “at a typically attractive valuation” albeit, at 11.5 times annual earnings, a tad higher than usual, reflecting the scale of the company being acquired, which is three times the size of Keywords' previous largest acquisition.
READ: Keywords Studios into the major leagues with VMC acquisition
“Based on the expected total cash paid of c.$71m, Keywords is acquiring VMC for 1.25x trailing revenues and we estimate a post synergy P/E [price/earnings ratio] of 11.5x,” Numis said, as it readjusted its target price to 1,865p.
For comparison purposes, Numis noted Keywords itself is valued at six times 2017 pro forma revenues and trades on a P/E of more than 50.
In addition to US$2.5mln of targeted synergies, VMC brings two new service approaches to Keywords: 1) embedded technical services; 2) the "Global Beta Test Network", described by Keywords' chief executive Andrew Day as “testing games in a real world scenario".
Numis said VMC's embedded technical services expertise could open the door to “long hoped-for broader outsourcing contracts”, which in turn could deliver significant longer-term organic growth.
READ: Keywords Studios' largest acquisition to date to be "significantly earnings enhancing"
“We model VMC delivering flat revenues in 2018, and look for improved processes to generate growth in 2019,” Numis said.
In yesterday's analysts' call, Day noted the significant disparity in VMC's margins and Keywords' own, and expressed confidence that Keywords could get VMC's margins up to Keywords' level.
“VMC's revenue excluding discontinued low margin contracts has been flat over 2015-2017, which we think is a poor result in a growing market, and we think better execution should deliver an improved performance in due course,” Numis said.
Shares in Keywords were up 9% at 1,632p in mid-morning trade.