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Codemasters surges as it ups earnings forecasts on back of development partnership with Chinese firm

Published: 08:42 08 Jan 2019 GMT

Mobile gaming
The two firms will work together to develop a game for the mobile market

Codemasters Group Holdings PLC (LON:CDM) shares surged in early trading Tuesday after it upgraded its earnings forecasts on the back of a mobile game development deal with Chinese internet and online gaming firm NetEase Inc (NASDAQ:NTES).

The AIM 100 game developer, which specialises in racing games, said the under the terms of the joint development agreement NetEase would commit an internal mobile development team, apply its proven knowledge of mobile game design, and take on all operational and publishing activities while Codemasters would provide assistance with its proprietary technology, resources and existing game assets.

READ: Codemasters shares tick up despite swing to loss in maiden interims as it targets two game launches in second half

The firm will receive a minimum of US$8mln in revenue over the next three years as part of the agreement, with US$4mln to be received in the current financial year.

The total lifetime revenue received from the deal will depend on sales of the game as profit generated by the project, following the recoupment of the aforementioned US$8mln by NetEase, will be shared between the two parties.

Based on these terms, Codemasters said it now expected its adjusted underlying earnings (EBITDA) for the full year to be “ahead of expectations”.

Frank Sagnier, chief executive of Codemasters, said global expansion was “a key part” of the firm’s strategy and that the partnership with NetEase would “accelerate our growth, particularly in China's world-leading mobile game market [estimated to be worth around US$23bn]”.

The agreement isn’t the first partnership Codemasters has signed with NetEase, with the two firms inking a strategic PC publishing partnership last November.

Broker says shares “materially undervalued”

In a note to clients, City broker Liberum upgraded its 2019 profit forecasts for the firm by 10%, citing the US$8mln revenue figure but “more importantly the option value and profit share upside from a major future mobile game launch by NetEase”.

The broker added that the shares were now holding a price-earnings ratio of 13x, “a major discount to the sector, and in our view materially undervalued in the context of the company's leading gaming IP and the implied opportunities for further major partnerships and deals”.

Shares were up 13% at 182.5p.

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