- Pre-tax profits fell on acquisition-related charges
- Stronger focus on IP puts it in good stead for the long run
Deliveroo’s (ROO) trading debut could mark the beginning of a new generation of high-growth, loss-making tech companies on the London Stock Exchange. A herd of start-ups may end up stampeding to the market if listing rules are changed – but not all of the players in the sector look so precarious.
This morning video game developer Sumo (SUMO) revealed that its gross profits grew by almost a third to £31.5m in 2020, still beating market expectations after an industry-wide boom during the pandemic.
The BAFTA-winning company launched 12 new games over the course of the last year, including five titles where it owns the intellectual property (IP). There could be more to come: management hinted that it was exploring a number of new own-IP concepts – and the launch of Secret Mode, its new publishing division, will help bring more internally developed games to market.
That is not to say that the company was not impacted by the pandemic. Its utilisation rate dropped to 92.6 per cent from 95.8 per cent in 2019, likely as a result of developers making the switch to working from home.
This may have contributed to the 5 per cent drop in the share price in the hours following the release of the results. A glaring fall in pre-tax profits also spooked investors, after the company was hit by £7.3m-worth in charges connected to the acquisition of Pipeworks last year. But that has not discouraged management from pursuing its M&A strategy further, citing the active pursuit of a number of new targets.
Sumo is growing fast, ending 2020 with a headcount of 1,043, compared to 766 with 2019, and has strong visibility on trading for 2021: more than four-fifths of its projected digital development revenues are already either contracted or near contracted for this year.
Despite the dip on the release of the full-year figures, the shares are still far from cheap relative to earnings. Analysts appear bullish – broker Peel Hunt forecasts that adjusted pre-tax profits and EPS will grow to £18.8m and 8.6p in 2021,respectively, rising to £21.6m and 10p in 2022.
Sumo’s stronger focus on own-IP should create more value for the business, and the new cycle of consoles from Microsoft (US:MSFT) and Sony (JP:6768) will help to sustain the gaming lockdown boom. The company is richly valued at the moment, but we think it still looks like a quality pick in the long run. Hold.
| SUMO (SUMO) | ||||
| ORD PRICE: | 346p | MARKET VALUE: | £591m | |
| TOUCH: | 346-349p | 12-MONTH HIGH: | 388p | LOW: 153p |
| DIVIDEND YIELD: | nil | PE RATIO: | 320 | |
| NET ASSET VALUE: | 56p* | NET DEBT: | 6% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2016 (pre-IPO) | 24.1 | -2.10 | 0.90 | nil |
| 2017 | 28.6 | -28.0 | -389 | nil |
| 2018 | 38.7 | -0.90 | -0.40 | nil |
| 2019 | 49.0 | 7.40 | 5.19 | nil |
| 2020 | 68.9 | 0.86 | 1.08 | nil |
| % change | +41 | -88 | -79 | - |
| Ex-div: | na | |||
| Payment: | na | |||
| *Includes intangible assets of £102m, or 60p a share | ||||
Last IC View: Buy, 212p, 30 Sep 2020
