Join our community of smart investors

Keywords buying in a fragmented market

The provider of technical services to the video games industry enjoyed huge sales growth, despite relatively meagre organic momentum
September 19, 2018

Keywords Studios’ (KWS) top-line momentum over the first half was impressive, but more so when you strip out the negative impact of the weakening dollar. Indeed, at constant currencies, sales soared 84 per cent to €118m (£104m), though this reduces to a more prosaic 8.5 per cent on a like-for-like basis, once you take on board the impact of acquisitions. 

IC TIP: Buy at 1860p

This differential stemmed, in part, from Keywords’ purchase of VMC last October – its largest deal to date. Sales for the business, a customer support provider, had been under pressure prior to the acquisition, while its operating margin was running at 9.1 per cent. Encouragingly, it has now been fully-integrated and cost synergies have engendered “significantly enhancing operating margins”. In fact, ignoring acquisition expenses and currency movements, the group operating margin came in at 14.5 per cent. And management expects VMC to return to revenue growth “in the near to medium term”.

The steep rise in intangibles shows Keywords - a provider of technical services to the video games industry - remains on the acquisition trail, with four completed in the half-year and another five completed since the period-end. It remains a fragmented industry, though its ongoing growth demonstrates why the Dublin-based firm is determined to expand. In the first six months of 2018, US consumers alone spent $19.5bn (£14.9bn) on video game products, according to market researcher NPD Group. 

Broker Peel Hunt expects adjusted pre-tax profits of €40.8m and EPS of 50.4ȼ for 2018 (2017: €23m and 25ȼ).

KEYWORDS STUDIOS (KWS)  
ORD PRICE:1,860pMARKET VALUE:£ 1.18bn
TOUCH:1,860-1,864p12-MONTH HIGH:2,110pLOW: 1,174p
DIVIDEND YIELD:0.1%PE RATIO:114
NET ASSET VALUE:276ȼ*NET CASH:€0.1m
Half-year to 30 JunTurnover (€m)Pre-tax profit (€m)Earnings per share (ȼ)Dividend per share (p)
201763.85.56.10.48
201811010.812.10.53
% change+72+97+99+10
Ex-div:04 Oct   
Payment:26 Oct   
*Includes intangible assets of €152m or 238ȼ a share £1 = €1.12