Team17 pandemic tailwinds have reversed

Of all companies, you would expect games developers to be some of the best at dealing with the challenges of working from home. However, at Team17 (TM17) the ‘Teamsters’ – an affectionate term for their employees – are struggling to maintain productivity.

The pandemic provided increased demand for gaming and that can be seen in the 9 per cent increase in revenue to £90.5mn and an 11 per cent jump in adjusted cash profit (Ebitda) to £35.8mn. A concern, though, is that operating cash conversion dropped eight percentage points to 101 per cent.

The fall in cash conversion is in part because of a rise in receivables by £509,000 - this was a large reversal from a fall of £4.9mn last year. This reversal was presumably because of “remote working and disrupted supply lines”  – six titles have had delayed releases. The conversion figure would have fallen even further were it not for a £5mn provision that pushed up the trade and other payables by 41 per cent to £24.3mn. 

Management also expects higher wage inflation to increase group costs next year by £1.7mn. This is in addition to the ongoing conflict in Ukraine hitting group revenues by c.£4mn and adjusted profits by c.£2.5mn. Due to these concerns broker Peel Hunt sees a potential 10 per cent cut to cash profit.

NewZoo has forecast the global gaming market to grow at a CAGR of 7 per cent until 2024. This will be a factor in the FactSet broker consensus still guiding for EPS to rise to 23.7p in 2022, giving a forward PE ratio of 24.

Game developer tinyBuild (TBLD) currently isn’t suffering from the same development issues and is trading at a slightly more affordable multiple. tinyBuild also has 80 per cent of its revenue from its own IP compared with just 22 per cent at Team17. Hold for now.

Last IC View: Buy, 785p, 14 Sep 2021