Keywords Studios Plc

Keywords Studios Plc (KWS) is a technical services provider to the video games industry. The company provides a range of testing, translation, art production, customer care and audio services to video publishers and game developers. Keywords operate in Ireland, Japan, Italy, Canada, the US, India, Singapore and the UK. The company's operations are differentiated in five operating segments: Localization Services, Localization Testing, Audio/Voiceover Services, Functional Testing, and Art Creation Services.

Recent News
On 14th October 2019, Keywords Studios announced that Jon Hauck would take up his position as CFO (Chief Financial Officer) effective immediately.

Financial Highlights – H1 Financial Year 2019 (30^th June 2019, €, thousand)

(Source: Interim Report, Company Website)
 
In the first half of the financial year 2019, due to acquisition, the company’s revenue surged to EUR 153.2 million as against EUR 110.0 million in H1 FY2018.  Thelike-for-like revenue surged by 17.3 per cent on constant exchange rates (CER) basis to EUR 146.4 million from EUR 124.8 million in the first half of the financial year 2018. However, on account of the increased cost of goods sold, the gross profit margin of the company declined to 36.1 per cent in H1 FY2019 from 37.4 per cent in H1 FY2018. Adjusted EBITDA for H1 FY2019 was at EUR 25.8 million versus EUR 18.7 million in H1 FY2018. The company’s adjusted PBT (Profit before tax) surged by 14.3 per cent to EUR 18.4 million in H1 FY2019 from EUR 16.1 million in H1 FY2018. Adjusted earnings per share were at 18.36 cents in H1 FY2019 against 18.3 cents in H1 FY2018. The Board of directors of the company declared an interim dividend of 0.58p/share, which was 10 per cent higher against the interim dividend of 0.53p declared in the same period of the corresponding financial year.

Share Price Performance

Daily Chart as at 14^th October 19, before the market close (Source: Thomson Reuters)

On 14th October 2019, Keywords Studios Plc shares were trading at GBX 1,173.00 at the time of writing before the market close (at 1:48 PM GMT), down by 6.08 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,880.00/GBX 885.00.

Valuation Methodology

*Peers: Frontier Developments Plc, Team 17 Group Plc, Kainos Group Plc, accesso technology Group Plc and First Derivatives Plc.

Conclusion
The company’s financial performance has declined on a reported basis in the first half of the financial year 2019. With the increase in the demand across all business lines, particularly in Game Development and Functional Testing, has helped the company to become operationally strong.

The company’s acquisition pipeline is very healthy, and they are actively reviewing several lucrative acquisition deals that would increase critical mass, capacity, and enhance their service offerings or geographical penetration.

Over the course of 4 years (FY14 - FY18), the company’s revenue surged from EUR 37.3 million in FY14 to EUR 250.80 million in FY18. Compound annual growth rate (CAGR) stood at 61.03 per cent.

Therefore, based on the above rationale and future growth catalyst, we have given a "SPECULATIVE BUY" recommendation at the current price of GBX 1,173.000 (as on 14^th October 2019, before the market close), with single-digit upside potential, based on 27.89x NTM Price/Earnings multiple (approx.) on the FY19E earnings per share (approx.).
 

Petra Diamonds Ltd

Petra Diamonds Ltd (PDL) is a leading independent diamond mining group. The group specialises in the exploration, mining and sale of rough diamonds, and has one of the world's largest diamond resources. The company primarily operates in the Sothern Africa with operations in Tanzania, South Africa and Botswana, with interests primarily in five producing operations including one open pit mine in Tanzania and four underground mines in South Africa.

Financial Highlights – Financial Year 2019 (30^th June 2019, US$, million)

(Source: Annual Report, Company Website)
 
For the financial year ending 30^th June 2019, the company’s reported revenue stood at $463.6 million as against $495.3 million in FY2018. The decline in the revenue was due to lower diamond prices realised for the period. In the FY2019, the mining activity profit stood at $161.1 million versus $205.1 million in FY2018. The company’s adjusted EBITDA was at $153 million in FY2019 versus $195.4 million in FY2018. The Adjusted net loss was reported at $13.2 million for FY2019 versus an adjusted PAT (profit after tax) of $1.6 million in FY2018. The company’s LAT (loss after tax) stood at $258.1 million in the Financial year 2019 against a LAT (loss after tax) of $203.1 million in FY2018. The adjusted loss per share for FY2019 stood at 2.63 cents as against adjusted earnings per share of 0.50 cents in FY2018. The basic loss per share stood at (continuing and discontinued operations) 26.19 cents FY2019 versus 31.29 cents in FY2018. The basic loss per share for FY2019 (continuing operations) stood at 20.18 cents as against 15.85 cents in FY2018.

Share Price Performance

Daily Chart as at 14^th October 19, before the market close (Source: Thomson Reuters)

On 14th October 2019, Petra Diamonds Ltd shares were trading at GBX 7.48 at the time of writing before the market close (at 2:56 PM GMT), down by 3.73 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 46.42/GBX 6.18.

Valuation Methodology


Conclusion
The company’s operations have been impacted by the weak diamond prices, which resulted in a decline in the revenue of the company for the financial year 2019. The senior project team is actively looking forward to identifying and drive improvement and efficiencies in recently launched Project 2022. They are targeting to achieve free cash flow (cumulative) between US$150 - 200 million in the period of 3 years.
The company has identified cost-saving opportunities in both Cullinan and Finsch and is set to be implemented in the first quarter of the financial year 2020. The company is primarily focussing on minimizing cost inefficiencies and streamlining operations across the portfolio.

The company, through a weakness in ZAR: USD has able to offset the impact of weaker diamond prices for the period. The company expects the diamond market to remain full of challenges in the near future and the company with its available cash, and banking facilities has sufficient headroom.

Over the course of 4 years (FY15 - FY19), the company’s revenue surged from USD 425 million in FY15 to USD 463.60 million in FY19. Compound annual growth rate (CAGR) stood at 2.2 per cent.

Based on the above rationale and supported by valuation done using the above method, we have given a "SPECULATIVE BUY" recommendation at the current price of GBX 7.48 (as on 14^th October 2019, before the market close) with single-digit upside potential based on 1.12x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.Currency exchange rate taken for 1 EUR = 0.87949 GBP, 1 USD = 0.7955 GBP

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