Team17 takes more of a shrinking market

Team17 (TM17) is taking market share in the gaming world. Last year, when the wider industry shrunk against tough pandemic comparators, Team17’s organic revenue rose 4 per cent. Since 2016, the wider market has grown 6 per cent per year, yet Team17’s organic growth has been 40 per cent on average.

Broker Peel Hunt compiled those numbers as evidence of Team17 knowing “the right games to back”. Own intellectual property (IP) releases of Construction Simulator and Hell Let Loose both hit their targets this year which helped boost own IP revenue to 41 per cent. As own IP doesn’t require licensing costs this helped raise gross margin by one percentage point to 51 per cent.

Adjusted profit before tax increased 35 per cent to £47.1mn. However, once adjustments are stripped out, profit before tax dropped 1 per cent and basic earnings per share was down 10 per cent. The adjustments included £9mn of acquisition-related costs and £10.3mn for amortisation of intangible assets.

In total, there are now £241mn of intangible assets on the balance sheet, up from £80mn last year. The main concern with gaming companies is that a few bad releases can cause intangible assets to lose their value quickly and become a source of write-downs. Team17 has not yet missed the mark, but recent acquisitions were made at the peak of the market – issues at Frontier Developments last year are a classic cautionary tale. 

Peel Hunt expects adjusted profit before tax to be flat next year in the face of “tough macro” conditions but then to rise to £50.8mn in 2024. This gives a 2024 price/earnings ratio of 16.7 which is about par for the industry but down significantly from last year's peak. We move to buy.

Last IC View: Hold, 549p, 30 Mar 2022