Shore Capital has kicked off coverage of the video games sector with a trio of initiations, citing a “very attractive demand backdrop” and new revenue opportunities in the industry.
Racing game developer Codemasters Group Holdings PLC (LON:CDM), which ShoreCap pegged as its “preferred play” with a ‘buy’ rating and 292p target price, is well placed to capitalise on market growth thanks to its broad IP portfolio and focus on the racing genre, which the broker said attracted a loyal fanbase and in which Codemasters had built “a strong specialisation”.
The company, whose games include the official Formula 1 racing series, had also widened its exposure and portfolio through a partnership with major Chinese mobile game maker NetEase, ShoreCap said, a strategic move that had helped it create a “broad revenue base”.
Meanwhile, its analysts initiated on fellow AIM-listed developer Frontier Developments PLC (LON:FDEV) with a ‘buy’ rating and 1,304p target price, saying that while the company only had three franchises so far - Elite Dangerous, Planet Coaster and Jurassic World Evolution - it was scaling up its portfolio to deliver “long-term revenue and earnings growth”.
ShoreCap also cited Frontier’s record half-year performance in February, when it reported £21.7mln in underlying earnings (EBITDA) and a revenue jump to £64.7mln from £19mln the year before.
“We believe Frontier is well placed to scale up its development and to capitalise on a strong demand backdrop across various platforms”, the broker said.
The company, which does not publish games under its own label like Codemasters and Frontier, had a “low-risk model” that would allow it produce high-quality games and capitalise on growth in the market, ShoreCap said, adding that in comparison with the other stocks Sumo’s contract wins gave it increased financial visibility of 88% for its 2019 financial year compared to a normal visibility of around 60%.
The broker added that Sumo had got an early foot in the door for the new video game streaming market after clinching a deal to develop two games for Apple Arcade, the tech giant’s gaming platform that is scheduled to launch in the Autumn.
All three of these companies would be able to tap into the “scale and growth potential” of the video games industry, ShoreCap said, citing estimates from market research group Newzoo that the industry will reach a global value of US$148bn this year with 2.5bn players.
They also pointed out that the advent of “digital delivery” through Apple Arcade and Google’s equivalent, Stadia, would bring several benefits including game life extension, the use of data to identify new revenue opportunities and reducing distribution costs.
In late-morning trading on Monday, Codemasters’ shares were flat at 207.5p, Frontier was up 0.7% at 998 and Sumo was down 0.4% at 142.5p.