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Frontier Developments shows longer-term growth potential

The video gaming specialist is well placed to tap into an anticipated rise in market spending over the coming years
Frontier Developments shows longer-term growth potential
  • Solid sales growth was generated from the existing portfolio of games
  • The games market is expected to grow at a compound annual rate of 8 per cent until 2023

Video gaming specialists can count themselves among the canon of pandemic-resistant companies – a point borne out by the performance of Frontier Developments (FDEV) during the first half. Additional in-game content, growth in the player base and new platform releases for Planet Coaster and Jurassic World Evolution meant the group was able to generate a 15 per cent rise in revenue despite no new title launches.

Lower distribution costs and a greater proportion of revenue being generated from its own intellectual property titles offset a rise in development costs, boosting the operating margin to 19 per cent, a five percentage point increase from the prior half year.  

The group was not completely immune from the impact of the pandemic – the challenges of collaborative working during lockdown caused management to push back the PlayStation and Xbox releases of its next major launch, Elite Dangerous: Odyssey, to 2022. However, management has retained guidance for revenue of £90m to £95m this year, which would result in an increase of up to a quarter on the FY2020 figure. 

To what extent will the pace of demand continue past the pandemic? “There has been a transition and lockdown has merely accelerated that,” argued chief executive David Braben. 

The business has a strong record of generating sales growth from existing games, which, given the lower associated development costs, bodes well for future returns. What’s more, spending in the global video games market is expected to grow, rising 9 per cent in 2020 and at a compound annual rate of 8 per cent until 2023, according to games research provider Newzoo. Frontier’s forward price/earnings multiple of 49 could prove worth stumping up for. Buy. 

Last IC view: Hold, 2,350p, 9 Sep 2020

TOUCH:3220-3280p12-MONTH HIGH:3,470pLOW: 952p
Half-year to 30 NovTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
% change+15+53-37-
*Includes intangible assets of £58.9m, or 150p a share