Frontier's new growth horizon

Frontier earned its stripes as a 'work for hire' developer for third parties, creating titles such as Screamride for Microsoft and Tales from Deep Space for Amazon. The company, which listed in the summer of 2013, recently completed its transition to self-publishing. It now takes the lion's share of profits from its games, while avoiding the costs of producing, packaging and distributing discs by selling its games online as digital downloads. The model also makes it harder to pirate the games or resell pre-owned copies. And the strategy allows Frontier to earn 50 to 100 per cent of its games' retail price, which is more than triple its cut under previous arrangements.

The company launched its first self-published title, space simulator Elite: Dangerous, in December 2014. The game racked up 1.4m in unit sales - at around £30 to £40 each - by the end of December 2015. Broker Numis expects 1.3m sales this financial year and at least 1.5m the year after. Its success has created a large owner base - which Frontier keeps engaged by regularly adding new features and content - to which the group can sell paid-for expansions such as Horizons, released in December 2015. Frontier has also expanded the game's potential audience by translating it for foreign audiences, rolling it out on more platforms - such as Apple Mac and Xbox One - and leveraging distribution channels including Steam and Amazon.

Frontier plans to launch its second self-published title, theme park simulator Planet Coaster - a follow-up to the smash-hit Roller Coaster Tycoon 3, which sold around 10m units - before the end of 2016. It also has a third franchise in the works. Moreover, the studio's proprietary software, COBRA, speeds up the process and lowers the costs of creating cross-platform games. Frontier also offers exposure to the enormous digital games market, which industry researcher Superdata valued at $61bn (£42.2bn) in 2015.

The success of Elite: Dangerous drove Frontier's first-half revenues up 50 per cent to £10.9m. However, the investment in self-publishing and development of Planet Coaster is expected to weigh on earnings and the net cash pile in the first half fell by £1.8m to £8.6m. It is hoped this will prove money well spent, with Numis forecasting that net cash will have risen to £23.1m at the 2017 year-end. If the broker's earnings forecasts are also met, this would put the shares on a cash-adjusted 2017 PE ratio of just 5. That would prove a staggeringly low rating should the new titles prove a hit and if the forecasts can be achieved.

The main concern for investors will be whether Frontier can successfully upsell expansions to Elite: Dangerous players and whether Planet Coaster and its third franchise are successful. Recent discounting of the original game and the reduced cost of Horizons to existing players should boost conversion rates. And the group's track record gives us confidence its next two titles could be winners.