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Keywords Studios’ profits surge despite pandemic disruption

Trading improved between the first and second halves of 2020 as the gaming technical services provider adapted to remote working
Keywords Studios’ profits surge despite pandemic disruption
  • Keywords’ adjusted cash profits rose by close to 30 per cent last year
  • The group moved into a net cash position despite making seven acquisitions

Providing technical services to videos games developers, Keywords Studios (KWS) generated organic revenue growth of 12 per cent in 2020. That is despite the pandemic restricting access to testing and audio facilities and disrupting the flow of content from clients to its ‘localisation’ business.

Organic growth accelerated from 8 per cent in the first half of the year, to 15 per cent in the second half, as Keywords and its clients adapted to new ways for working – for example, undertaking audio recordings virtually.

The ‘localisation’ business – which ensures that games can be played across multiple regions – was the only division where sales declined last year, although it accounts for less than 10 per cent of the total. The larger game development segment increased its revenue by more than a fifth to €80m (£69m) amid robust demand and a tailwind from acquisitions.

With the benefit of operational gearing, as well as lower travel and marketing costs, the group’s adjusted cash profits (Ebitda) therefore surged by almost 30 per cent to €74m, with the margin expanding by 2.3 percentage points to 19.9 per cent.

Thanks to €53m of free cash flow and a €110m placing in May, Keywords swung from €18m of net debt in 2019, to €103m of net cash (excluding lease liabilities). While the group is not handing shareholders a dividend for 2020, it intends to reinstate the pay-out this year. Broker Shore Capital has pencilled in a 1.8p per share dividend for 2021.

Keywords moved into a net cash position even as it spent €40m on acquisitions during the year. Taking advantage of a fragmented market, it purchased seven businesses to support its game development, marketing and audio services. This includes the acquisition of US-based ‘AAA’ game developer High Voltage in December, for an initial consideration of $34m.

Earlier this month, the group also acquired an 85 per cent stake in game developer Tantalus for a maximum consideration of $47m, marking its entry into the Australian video games market.

Keywords says that momentum from the back end of 2020 has continued in the first quarter of this year. With the addition of Tantalus, Shore Capital is forecasting that adjusted cash profits will rise to €92m in 2021.

Amid the pandemic-driven video games boom, publishers are likely to double down on developing new content to keep gamers engaged, and Keywords is starting to see stronger demand following the launches of Sony’s (JP:6758) PlayStation 5 and Microsoft’s (US:MSFT) Xbox X|S Series consoles. The group is well-placed to capitalise on long-term growth in the video games industry, counting 23 of the world’ top 25 games companies as customers. Buy.

KEYWORDS STUDIOS (KWS)  
ORD PRICE:2,512pMARKET VALUE:£ 1.86bn
TOUCH:2,510-2,516p12-MONTH HIGH:2,958pLOW: 1,220p
DIVIDEND YIELD:NILPE RATIO:96
NET ASSET VALUE:501p*NET CASH:£74m
Year to 31 DecTurnover (€m)Pre-tax profit (€m)Earnings per share (¢)Dividend per share (p)
201696.69.4011.21.33
201715112.012.41.46
201825122.123.21.61
201932717.415.20.58
202037432.530.3nil
% change+14+87+99-
Ex-div:na   
Payment:na   
£1 = €1.16, *Includes €241m in intangible assets or 325¢ a share

Last IC View: Buy, 2,226p, 17 Sep 2020