tinyBuild wants to be more hardcore

tinyBuild (TBLD) has historically been the creator of simple, mostly child-friendly games, for consoles, PCs and phones. The acquisition of Bad Pixel, the creator of hardcore multiplayer shooter Deadside for $6.5m (£4.7m) is therefore a slightly off-brand move for the company. The hope is that it will be able to find some synergies between designing puzzle games and producing updates for its new post-apocalyptic open-world survival game.

In the first half of the year, its revenue was up fractionally to $18.6m from $18.5m. The modest increase in sales can be expected given the tough comparators from 2020, but what investors should be happy with is the impressive cash profit margin of 42 per cent. This was a 600 basis point jump from last year thanks to an increase in revenues from own-IP games.

Own-IP games have better margins because there are no licencing fees involved. In the first half, own-IP games made up 78 per cent of group revenues, up from 67 per cent in 2020 and around 50 per cent in 2017.

House broker Berenberg is bullish about tinyBuild’s prospects, citing its strong pipeline of 29 games and its five acquisitions this year, including its largest yet for Bad Pixel, as reasons to upgrade the 2022 guidance. Berenberg is now estimating 7.3p EPS for FY2021 and 8.1p for FY2022.

tinyBuild’s share price dipped slightly on the morning of the results, despite the board announcing that it is on track to deliver results in line with expectations. There is always a 'blue-sky' element when assessing games stocks. Some would argue that the dip provides a viable entry point given a forward PE of 36 times forecast earnings. That isn't outlandish given the sector, but much depends on earnings growth matching broker forecasts. Buy.

Last IC View: Buy, 225p, 29 July 2021