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Keywords offers exposure to the video game boom

It provides services to video game designers who have seen a lockdown induced spike in demand.
September 15, 2021
  • Margins improved
  • Capex returned to normal

There was nothing unexpected in Keywords Studios' (KWS) results given that the video game services provider posted a trading update in August. Both revenue and profit were exactly in line with the update, which suggests that the dip on the morning of the results was more to do with the company’s unknown succession plans. Long-term chief executive Andrew Day stepped down following a health scare in June and has yet to be replaced, with chief financial officer Jon Hauck and chief operating officer Sonia Sedler acting as joint interim bosses.

In terms of its trading performance it was as strong first half for Keywords. Group revenue was up 37.6 per cent to €239m (£204m), while its organic revenue (which adjusts for acquisitions and exchange rate changes) was up 22.9 per cent. Its revenue has been driven by a buoyant video game market. Companies have been pushing game development as they catch-up from the Covid-19 related delays in development.

As well as generating more revenue, profitability has also been pleasing. Cash profits were up 64.6 per cent to €50.7m, which pushed the underlying margin up 3.4 percentage points to 21.2 per cent. Cash conversion was strong with the adjusted rate over 90 per cent. This gave the company the ability to return to normal levels of capex.

Management believes the outlook for 2021 is reflected by the current market consensus. The FactSet broker consensus estimate is for EPS of 69¢ for FY21 before rising to 76c for FY22.

Keywords’ share price was down 4 per cent on the morning of results. This could offer a good chance to gain exposure to the growing video game industry and a forward PE of 52 times forecast earnings is by no means unusual in the sector, but there a lot of positive assumptions underpinning the rating. Hold.

Last IC View: Buy, 2,512p, 24 March 2021

KEYWORDS STUDIOS (KWS)  
ORD PRICE:3,096pMARKET VALUE:£ 2.35bn
TOUCH:3,092-3,09812-MONTH HIGH:3,366pLOW: 2,018p
DIVIDEND YIELD:0.0%PE RATIO:63
NET ASSET VALUE:564c*NET CASH:€43m
Half-year to 30 JunTurnover (€m)Pre-tax profit (€m)Earnings per share (c)Dividend per share (p)
202017411.19.50nil
202123921.920.90.70
% change+37+97+120-
Ex-div:07 Oct   
Payment:29 Oct   
£1 = €1.17 *Includes intangible assets of €343m or 452c a share