Berenberg has raised its target price for Keywords Studios PLC (LON:KWS) following the two acquisitions announced by the provider of computer game development services.
The acquisitions, both of which were focused on beefing up Keywords’ audio services capability, should enhance earnings, prompting upgrades of 1-3% in Berenberg’s forecasts for fiscal 2018-20 and a 20p increase in the target price to 2,060p.
READ: Keywords Studios beefs up its video games soundtrack capabilities
The German bank believes Keywords is “better positioned than ever” to capitalise on the organic and acquisition opportunities available in the highly fragmented sector.
The Dublin-based company has secured a new three-year credit facility of €75mln on improved terms, which, coupled with strong cash generation, gives it “ample firepower” for future mergers & acquisitions (M&A).
Management has previously indicated it aims to make six small bolt-on acquisitions each year and one or two larger purchases, so “further material accretive M&A is inevitable”, in Berenberg’s view.
“We maintain our FY18/19 organic growth forecasts of 12.5%/10%, but acknowledge that if current momentum is sustained that is likely to prove conservative,” Berenberg said.
Warming to its theme, the bank noted that the number of clients using three or more of Keywords’ services increased to 93 in 2017 from 64 in 2016 and 51 in 2015.
It sees this as evidence that computer games publishers and developers are moving away from “tactical outsourcing” towards strategic arrangements with trusted partners.
“Keywords also indicated it is seeing some benefits from the rapidly growing eSports market, mostly through the provision of its services for game development and in-game support, but also via marketing and communications management of the events themselves. Keywords highlights that it is continuing to seek out ways to leverage the growth in eSports further,” Berenberg observed.
Shares in Keywords were up 7.2% to 1,736p on Tuesday morning, still more than three quid below Berenberg’s price target, which is based on a discounted cash flow model that does not take into account future acquisitions.