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Buy Frontier Development's growing portfolio

The group's recent releases have been big hits, and its partnership initiative promises to expand its pipeline of launches
December 5, 2019

Historically, the performance of video game developers has been similar to that of small film studios – periodically release a new title and hope it is a hit. This is reflected in the peaks and troughs of Frontier Developments’ (FDEV) historical annual profits. But, as it has grown, the group has started to marry its track record of producing winning new titles with more frequent releases, a steady stream of new content to bolster its existing games, and development of a publishing initiative to deepen its pipeline of launches.

IC TIP: Buy at 1,212p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Chart-topping releases

Publishing initiative

Increased franchise launches

Strong balance sheet

Bear points

Lumpy revenues

Recent CEO share sale

Frontier is the UK’s largest independent game studio, with more than 460 staff and sales of more than 8m self-published games – generating more than £200m – over its 25 years in the industry. It exclusively targets the downloaded/boxed PC and console games markets, leaving out smartphone, tablet and browser-based titles. According to research firm NewZoo, its segments of the market are estimated to have been worth $73.5bn (£56.8m) in 2018, rising to roughly $90.9bn by 2021.

Its latest launch, zoo simulator Planet Zoo, was released in early November and looks to have been well received, topping the Steam gaming platform’s global rankings on the release date. House broker Liberum forecasts that the title will bring in revenues of £25m – equivalent to 28 per cent of 2019 revenues – in the current financial year to the end of May 2020. There are more titles on the way – in March the group announced it had secured a “major global IP licence” for a game to be released in 2021.

Successful launches underpin confidence in strong sales in the coming year. Meanwhile, in order to smooth out its lumpy revenue streams, the group plans to expand its release pipeline. Part of its answer is Frontier Publishing, an initiative to form partnerships with external developers to boost its publishing capabilities. External developers stand to benefit from Frontier's commercial partnerships and financial resources, as well as its industry experience. It announced its first partnership in June this year, and a second was unveiled in early November. Alongside publishing, management is exploring commissioning games through outsourced developers or making acquisitions to expand its portfolio and capabilities.

Ultimately, the group wants to release one new franchise every year. But the work does not end at launch. After this, the group releases a steady stream of both paid and free-to-download content, expanding and upgrading its games to attract new players and bring in additional revenue from existing ones. The group’s first franchise, Elite Dangerous, came out in 2014, but delivered £9m in sales in the last financial year, according to broker Jefferies. Planet Coaster, released in 2016, also generated £9m.

Frontier Developments (FDEV)   
ORD PRICE:1,212pMARKET VALUE:£466m  
TOUCH:1,210-1,214p12-MONTH HIGH:1,344pLOW:730p
FORWARD DIVIDEND YIELD:NILFORWARD PE RATIO:24  
NET ASSET VALUE:187p*NET CASH:£35.3m  
Year to 31 MayTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
201737.47.8022.70nil
201834.22.909.60nil
201989.719.7045.40nil
2020**70.610.4023.60nil
2021**95.122.8051.20nil
% change+35+119+117-
NMS:2,000    
BETA:-0.18    
*Includes intangible assets of £36m, or 95.3p a share
**Jefferies forecasts, adjusted PTP and EPS figures