Keywords Studios PLC

Keywords Studios (KWS) is a technical services provider to the video games industry. The company provides a range of translation, testing, audio, customer care and art production services to video game developers and publishers. Keywords operates 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 18^th April 2019, Keywords Studios PLC of Republic of Ireland acquired the entire share capital of Wizcorp Inc, a Chuo-Ku, Tokyo-based maker of online games from Ankama SAS and Silicon Studio Corp, for a total consideration of JPY 120 million (USD 1.071 million).

On 21^st February 2019, Keywords Studios PLC of Republic of Ireland acquired GetSocial BV, a Hague-based provider of computer systems design services.

Financial Highlights (FY2018, €’000)

(Source: Annual Report, Company Website)

In 2018, the group had delivered strong growth in revenue, profit and underlying cash generation, due to the good organic growth and substantially completed the acquisitions which have further stretched its service offering, geographic reach and market penetration. The company reported revenue from contracts with customer surged by 66 per cent to €250.8 millionas compared with the financial year 2017 of €151.4 million, due to the strong growth in both organic and acquisitive. Gross profit increased from €55.1 million in 2017 to €95.8 million in 2018, while the gross margin rose to 38.2 per cent. EBITDA was €34.3 millionagainst the financial year 2017 of €21.9 million. Adjusted EBITDA climbed by 66 per cent to €43.7 millionas compared to €26.3 million in FY2017. Profit before tax for the year stood at €22.1 million, while adjusted profit before tax was up by 65 per cent to €37.9 million against the €23.0 million in FY17.The profit for the year 2018 surged from €7.3 million to €14.9 million. Basic and diluted earnings per ordinary share were 23.16 cents and 22.24 cents. Adjusted earnings per share rose by 53 per cent to 47.8 cents as compared with the previous year. The company generated operating cash flow increased from €16.7 million in 2017 to €32.2 million in 2018. The management board proposed a final dividend per share of 1.08 pence, which will make the total dividend per share for the year ending December 31, 2018 to 1.61 pence, an increase of 10 per cent as compared with the prior year.

Share Price Performance

Daily Chart as at May-17-19, before the market closed (Source: Thomson Reuters)

On 17^th May 2019, at the time of writing (before the market close, GMT 9:15 AM), KWS shares were trading at GBX 1,659, down by 0.873 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 2,110/GBX 885. The company’s stock beta was 1.47, reflecting higher volatility as compared to the benchmark index.

Valuation Methodology

(Note:All forecasted, and peer information have been taken from Thomson Reuters. All EUR figures have been converted into GBP; EUR: GBP - 0.87).
 
Key Risks and Uncertainties
The acquisition strategy is central to Keywords.There are risks associated with any future acquisition and the company will need to ensure that it continues to identify strong targets and retain talent while integrating them successfully. Major risks include - failure to deliver services, cross contamination, financial performance failure to meet expectation, sudden business interruption, breaches to technology and information security, global political risk and uncertainty, inadequate financial and operational controls, failure to manage human resources/talent effectively and non-compliance with legal and ethical standards.

Conclusion
The decent financial performance withfocus on research and development and emphasis on games are the company’s major strengths, whereas geographic concentration remains an area of concern. In the future, risks associated with counterfeit products, foreign exchange risk and stringent regulations could affect its business growth. KWS management highlights "An encouraging start to 2019, with the first quarter in line with the expectations". KWS sees a healthy pipeline with a focus on marketing, engineering and audio. The structural growth within the games services market could attract private equity funding into a competitor, which could threaten the company’s leading position and bid up multiples for assets. With ample M&A firepower, Keywords is likely to deliver both organic and M&A-driven upgrades in FY2019. On the base of above valuation, we recommend investors to keep a cautious “Watch” approach on the stock at the closing price of GBX 1,673 (as on 16th May 2019) with any new catalysts need to be evaluated at a later stage.

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