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Keywords Studios’ “best-in-class” platform set for growth in outsourced game development sector

Published: 09:00 21 Aug 2018 BST

Video game media with player
The firm has made around 7 acquisitions so far in 2018

Keywords Studios PLC (LON:KWS) is rapidly becoming the 800lb gorilla of a very fragmented computer games ancillaries sector.

Partly this is the result of organic growth but buying out smaller operators that do similar things has been as important.

Keywords supplies a range of technical services to computer games developers and publishers.

The company is trusted and relied upon by many of the world’s leading video game companies to work alongside them during the concept, development and post-publication phases.

A laundry list of the services it provides includes art services, software engineering, audio services, functionality quality assurance (QA), localisation (enabling games to be published in several languages), localisation QA, and player support.

Established in 1998 it now has delivery facilities in more than 42 locations in 20 countries across four continents.

The buy-and-build strategy means that most likely, by the time you read this, the article will need updating, such is Keywords’ appetite for acquisitions.

Management likes to make six small bolt-on acquisitions each year and one or two larger purchases.

Examples of “larger purchases” include North America-focused VMC Consulting, which it bought for US$66mln, financed by an underwritten share placing that sold out within hours.

Berenberg ups target price on back of co-development growth

Analysts at German bank Berenberg are upbeat about the company’s prospects following its acquisition of Studio Gobo and Electric Square Ltd on 20 August, which expanded its global game development team to 610 people.

The broker, which upped its target price for the stock to 2,150p from 2,060p, said the deal meant Keywords was “is establishing itself as a leading co-development player, despite entering the vertical only in May 2017”.

The analysts have also upped their 2018 and 2020 financial year EBIT forecasts for the group to around 4.4% and 9% respectively, adding that the group M&A strategy is expected to continue with “a slight co-development and engineering focus in the near term”.

“Keywords’ addressable market is expected to outgrow the video game segment (at a 7% [compound annual growth rate]) as developers continue to outsource a larger percentage of the development cycle, thereby adding growth over and above that of the underlying market” said Berenberg.

They added that the firm’s “best-in-class end-to-end platform and geographical reach” would allow it to capitalise on growth in the outsourced game development market and “organically win market share”.

The bank currently forecasts in its ‘blue-sky’ scenario that Keywords could deliver organic revenue growth of 15% in 2018 to the end of 2020, with a 75% upside risk to its 2021 estimates if this materialises.

At last close on 20 August, Keyword’s shares were trading at 1,812p, a 15% discount to Berenberg’s new target, giving it a market cap of around £1.1bn.

Trading update forecasts profit growth of over 60% in first half of 2018

In a trading update in early August, Keywords said it was anticipating pre-tax profit growth of over 60% in the first half of the year as its numerous acquisitions began to contribute to its balance sheet.

The group said it expected adjusted pre-tax profits to be €15.9mln, a 66% increase on the same period a year ago, while revenues were forecast to grow 72% to €109.9mln.

Keywords said the result had been achieved despite the incorporation of VMC, a historically lower margin business it acquired in October 2017, and weakness of the US dollar against the Euro.

The group added that it was expecting a “strong second half performance” and that the full year performance would be in line with current market expectations.

At the time, Keywords’ chief executive Andrew Day said the profit growth had come in spite of the incorporation of VMC, a historically lower margin business, adding that “one of the real highlights” aside from the groups 7 acquisitions in 2018 was that all its businesses were performing in line with expectations.

“We’ve increased our space quite considerably in a number of locations around the world, and all of that is there for the future [to] support organic growth” Day says.

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