Keywords Studios PLC – Resilient business model deliver robust revenue growth.

Keywords Studios PLC (LON: KWS) is a FTSE AIM UK 50 Index listed Company, which is involved in the creative and technical services platform for the video games industry. It was established in 1998 and now operates in 21 countries.

Investment Rationale – Hold at GBX 2,054.00

• From the technical standpoint, 14-day RSI (35.81) is supporting the upside potential.
• As per valuation metric, EV/Sales, Price/Earnings and Price/Book multiples of the KWS are currently lower as compared to the corresponding multiples of the Technology industry.
• Despite the coronavirus disruption, underlying margins of KWS nudged higher in H1 FY20, while underlying profit before tax increased by 18% year-on-year due to growth across all service lines as gaming is one of the few sectors that benefitted from the lockdown.
• The acquisition of Heavy Iron Studios, Maverick Media, and Coconut Lizard would strengthen the Company’s balance sheet.

Risk Assessment

• There is a significant operational risk through Covid-19 pandemic and technology changes.
• It is also exposed to financial risk associated with the availability of substantial funding, credit and liquidity risk, and fluctuation in foreign exchange and interest rates.
• Further, macroeconomic uncertainties can impact consumer confidence and reduce non-discretionary expenditures.

Recent News

17 September 2020: KWS announced the acquisition of entire issued share capital of Heavy Iron Studios, Inc for a total consideration of up to US$13.3 million.

Financial Highlights for the six months ended 30 June 2020 (as on 17 September 2020)

(Source: Company Website)

• The Company has shown robust growth in revenue of 13.3% year-on-year, with an increase in all service lines, particularly in the Group's largest service line (Game Development).
• Demand for most of the services has remained strong, despite the operational disruption. PBT (profit before tax) increased by 66% year-on-year.
• As of 30 June 2020, total net cash stood at €101.0 million and €100 million of further funds available from undrawn committed facilities under the KWS’s Revolving Credit Facility (RCF), reflecting robust balance sheet position.
• The trading performance in July 2020 and August 2020 has been decent with continued growth seen across all the service lines.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

In the past six months, the Company has undertaken the acquisitions of Coconut Lizard, Maverick Media, and Heavy Iron, which will further bolster the Company’s financial performance. During the pandemic, it successfully raised £100 million in a placing, and it expects to complete further acquisitions over the months ahead from the strong and attractive pipeline of opportunities.

During H2 FY20, the Company anticipates robust demand for their services, supported by the upcoming new console launches, development of new streaming platforms, and increased game play. Therefore, it expects good revenue growth in the H2 FY20 despite the Covid-19 related challenges on their testing business. Moreover, it is likely to continue to drive incremental margin increases until the end of FY21. Subsequently, the Board remains committed to resuming its progressive dividend policy in 2021. Stock 52 week High and Low were GBX 2,404.00 and GBX 1,159.28, respectively.

Based on the above rationale and valuation methodology, which are supported by valuation done using the above method, we have given a “Hold” recommendation on Keywords Studios PLC at the current price of GBX 2,054.00 (as on 19 November 2020, before the market close at 8.08 AM GMT).

Ideagen PLC – Delivering growth both organically and through acquisition.

Ideagen PLC (LON: IDEA) is a FTSE AIM 100 listed Company, which provides information management software solutions. It develops and supplies software solutions along with associated support services.

Investment Rationale – Hold at GBX 229.00

• From the technical standpoint, shares were trading well above the support level of 20-day (220.03) reflects an uptrend in the stock.
• In terms of trading multiples, Price/Earnings and Price/Cash Flow are lower than the corresponding multiples of the Technology industry.
• Moreover, it operates in a fragmented market with substantial acquisition opportunities. The Group has grown both organically, and through acquisitions, which is underpinned by the 10th consecutive year of growth in revenue, adjusted EBITDA, and adjusted earnings per share.
• Overall, the Company has demonstrated continued organic growth, with a diverse and blue-chip customer base. It has a stable platform for future growth with an integrated solution set.

 Risk Assessment

• The worsening economic environment can lead to reduced expenditure on IT systems and services. Moreover, the economic downturn can lead to reduced capital expenditure and may impact the future growth trajectory.
• Also, the Group operates in a dynamic market environment, which constantly seeks attention to ensure the solutions it offers are competitive.
• Furthermore, the Group is exposed to exchange rate fluctuations due to the global scale of operations.

Recent News

17 November 2020: IDEA announced that it has changed its registered office to Ruddington, Nottingham.

Pre-Close Trading Update for the six months ended 31 October 2020 (as on 12 November 2020)

• The trading for H1 FY21 was ahead of the same period last year, which underpins the Board’s prospects for H2 FY21.
• The annual recurring revenue (ARR) is expected to £24.4 million in H1 FY21, representing 83% of total revenues.
• The Company expects total revenue to be surged by 7% at approximately £29.2 million in H1 FY21 (H1 FY20: £27.3 million), which the adjusted EBITDA is expected to increase by 25%.
• At the end of H1 FY21, net bank debt stood at £27.9 million, while the gross cash balance was £12.1 million.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Board is confident in the long-term prospects of the Group. During the pandemic, the trading has remained robust, and the Group expects to witness strong demand for products from new potential customers. The Company continues to generate substantial growth through recurring revenues and repeat business. Moreover, the Group is anticipating significant synergy benefits from the acquisitions made in the previous year. Stock 52 week High and Low were GBX 240.00 and GBX 136.00, respectively.

Based on the above rationale and valuation methodology, which are supported by valuation done using the above method, we have given a “Hold” recommendation on Ideagen PLC at the current price of GBX 229.00 (as on 19 November 2020, before the market close at 8.15 AM GMT).

*All forecasted figures and Industry/Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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