Keywords Studios — Another electrifying M&A deal

Keywords Studios (LN: KWS)

Last close As at 01/11/2024

2,920.00

50.00 (1.74%)

Market capitalisation

2,207m

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Research: TMT

Keywords Studios — Another electrifying M&A deal

Keywords has announced its largest deal of the year so far, the acquisition of High Voltage Software (HVS), a US-based, full-service, work-for-hire, AAA games developer for up to US$50m, payable two-thirds up front, with one-third after 12 months subject to performance conditions. Keywords will make an initial payment of US$33.5m, with US$23.75m in cash. The total consideration represents 5.6x HVS FY21e EBITDA (c US$9m), within Keywords’ target range of 5–7x EBITDA. HVS is Keywords’ fifth deal of the year, the third in games development and its third US-based deal. We suspect Keywords was attracted by HVS’s close relationship with Epic Games, publisher of Fortnite. We have left our FY20 estimates unchanged, but the deal is 8% EPS enhancing based on our revised FY21 estimates.

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Keywords Studios

Another electrifying M&A deal

M&A update

Software & comp services

16 December 2020

Price

2,564p

Market cap

£1.90bn

€1.10/£

Net cash (€m) at 30 June 2020 (excluding lease liabilities)

101.0

Shares in issue

74.0m

Free float

90%

Code

KWS

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

23.3

13.3

83.1

Rel (local)

19.5

5.1

104.2

52-week high/low

2,564p

1,232p

Business description

Keywords Studios is the largest and most diverse supplier of outsourced technical and creative services to the games industry. Through regular acquisitions, the company is building its scale, geographic footprint and delivery capability to become the ‘go-to’ supplier across the industry.

Next event

FY20 trading update

January 2021

FY20 results

March 2021

Analysts

Richard Williamson

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5700

Keywords Studios is a research client of Edison Investment Research Limited

Keywords has announced its largest deal of the year so far, the acquisition of High Voltage Software (HVS), a US-based, full-service, work-for-hire, AAA games developer for up to US$50m, payable two-thirds up front, with one-third after 12 months subject to performance conditions. Keywords will make an initial payment of US$33.5m, with US$23.75m in cash. The total consideration represents 5.6x HVS FY21e EBITDA (c US$9m), within Keywords’ target range of 5–7x EBITDA. HVS is Keywords’ fifth deal of the year, the third in games development and its third US-based deal. We suspect Keywords was attracted by HVS’s close relationship with Epic Games, publisher of Fortnite. We have left our FY20 estimates unchanged, but the deal is 8% EPS enhancing based on our revised FY21 estimates.

Year end

Revenue

(€m)

PBT*
(€m)

EPS*
(c)

DPS
(p)

P/E
(x)

Yield
(%)

12/18

250.8

37.9

45.5

1.61

62.0

0.06

12/19

326.5

40.9

48.8

0.58

57.8

0.02

12/20e

367.0

52.0

58.0

0.00

48.6

0.00

12/21e

454.3

66.8

70.6

1.91

40.0

0.07

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

High Voltage Software: US games developer

HVS is based in Chicago and New Orleans and is Keywords’ largest acquisition of the year. HVS has a 27-year history, working on over 100 games across multiple genres and platforms, including franchises such as Fortnite, Saints Row, Mortal Kombat, Hunter the Reckoning, The Conduit and Lego Racers. The HVS team has worked closely with Epic Games on Fortnite, meaning it has expertise with Epic’s Unreal Game Engine.

Acquisition multiple of 5.6x FY21e EBITDA

Keywords will make an up-front payment of US$23.75m in cash and US$9.75m in shares, together with deferred consideration of up to US$16.5m (in a mix of cash and shares), based on performance conditions to 31 December 2021. Total consideration represents a multiple of 5.6x HVS FY21 EBITDA (c US$9m), within management’s target acquisition range. Revenues were not disclosed. We have updated our estimates and calculate that the deal is 8% EPS enhancing based on our revised FY21 estimates. Given the deal is so close to the end of the year, we have chosen not to make any changes to our FY20 estimates.

Valuation: HVS 8% earnings enhancing in FY21

Incorporating HVS into our model, Keywords’ shares trade on a P/E of 40.0x our updated FY21e estimates, falling to 35.1x in FY22e, in line with its UK games industry peers. With substantial net cash after the deal, together with €100m of undrawn facilities, Keywords remains well placed to complete further deals in FY21 and continue to follow management’s proven buy-and-build strategy, with strong organic games industry growth supplemented by M&A.

Exhibit 1: Financial summary

€'000s

2018

2019

2020e

2021e

2022e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

250,805

326,463

367,011

454,304

508,821

Cost of Sales

(154,997)

(206,234)

(228,363)

(281,462)

(314,678)

Gross Profit (inc multimedia tax credits)

95,808

120,229

138,649

172,842

194,143

EBITDA (adjusted)

 

 

43,729

57,611

69,910

88,661

99,631

EBITDA (reported)

 

 

34,304

43,375

60,198

76,833

86,621

Operating Profit (before amort. and except.)

 

 

38,916

42,983

55,521

69,261

78,131

Amortisation of acquired intangibles

(6,872)

(7,318)

(11,324)

(14,148)

(15,846)

Exceptionals

(5,296)

(4,348)

(2,370)

0

0

Other (incl share based payments)

(4,129)

(9,775)

(10,753)

(11,828)

(13,011)

Operating Profit

22,619

21,542

31,074

43,285

49,275

Net Interest

(1,316)

(2,513)

(3,500)

(2,500)

(2,500)

FOREX

791

(1,658)

0

0

0

Profit Before Tax (norm)

 

 

37,911

40,913

52,021

66,761

75,631

Profit Before Tax (FRS 3)

 

 

22,094

17,371

27,574

40,785

46,775

Tax

(7,191)

(7,462)

(9,488)

(12,176)

(13,794)

Profit After Tax (norm)

30,720

33,451

42,533

54,585

61,837

Profit After Tax (FRS 3)

14,903

9,909

18,086

28,609

32,981

Average Number of Shares Outstanding (m)

64.3

65.1

69.6

74.2

74.5

EPS - normalised (c)

 

 

45.5

48.8

58.0

70.6

80.4

EPS - normalised fully diluted (c)

 

 

43.7

47.2

55.8

68.4

78.1

EPS - (IFRS) (c)

 

 

23.2

15.2

26.0

38.5

44.3

Dividend per share (p)

1.61

0.58

0.00

1.91

2.11

Gross Margin (%)

38.2%

36.8%

37.8%

38.0%

38.2%

EBITDA Margin (%)

13.7%

13.3%

16.4%

16.9%

17.0%

Operating Margin (before GW and except.) (%)

15.5%

13.2%

15.1%

15.2%

15.4%

PBT Margin (%)

15.1%

12.5%

14.2%

14.7%

14.9%

BALANCE SHEET

Fixed Assets

 

 

198,215

223,992

249,339

259,456

261,157

Intangible Assets

180,086

196,769

220,643

222,368

213,981

Tangible Assets

15,002

22,163

23,636

32,028

42,116

Investments

3,127

5,060

5,060

5,060

5,060

Current Assets

 

 

100,348

120,483

224,162

261,251

316,745

Stocks

0

0

0

0

0

Debtors

37,019

43,243

46,785

52,399

58,687

Cash

39,870

41,827

139,064

165,941

209,999

Other

23,459

35,413

38,313

42,911

48,060

Current Liabilities

 

 

(95,031)

(49,551)

(49,948)

(33,311)

(26,102)

Creditors

(54,960)

(49,471)

(49,868)

(33,231)

(26,022)

Short term borrowings

(40,071)

(80)

(80)

(80)

(80)

Long Term Liabilities

 

 

(11,158)

(71,528)

(71,194)

(73,194)

(75,194)

Long term borrowings

(230)

(59,671)

(59,671)

(59,671)

(59,671)

Other long term liabilities

(10,928)

(11,857)

(11,523)

(13,523)

(15,523)

Net Assets

 

 

192,374

223,396

352,358

414,202

476,606

CASH FLOW

Operating Cash Flow

 

 

33,954

46,069

66,181

79,833

88,478

Net Interest

(502)

(9,411)

(6,263)

(3,425)

(2,276)

Tax

(6,304)

(13,288)

(9,488)

(12,176)

(13,794)

Capex

(9,440)

(13,145)

(11,083)

(18,293)

(20,488)

Acquisitions/disposals

(25,766)

(27,762)

(39,109)

(17,637)

(8,289)

Financing

0

0

97,000

0

0

Dividends

(1,080)

(1,197)

0

(1,425)

(1,574)

Net Cash Flow

(10,090)

(18,734)

97,238

26,877

43,057

Opening net debt/(cash)

 

 

(11,094)

431

17,924

(79,314)

(106,191)

Forex gain on cash

(3)

1,293

0

0

0

Other

(1,432)

(52)

0

0

0

Closing net debt/(cash)

 

 

431

17,924

(79,314)

(106,191)

(149,248)

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Keywords Studios and prepared and issued by Edison, in consideration of a fee payable by Keywords Studios. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Frankfurt +49 (0)69 78 8076 960

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New York +1 646 653 7026

1185 Avenue of the Americas

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United States of America

Sydney +61 (0)2 8249 8342

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Keywords Studios and prepared and issued by Edison, in consideration of a fee payable by Keywords Studios. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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