Globalizing the video games industry
Keywords Studios (LONDON:KWS) is becoming a one-stop outsourced technical services provider to the fast-growing video games industry. In a fragmented industry ripe for consolidation, recent acquisitions have created a company with a global footprint and an unrivalled range of services. These attributes should enable the company to take advantage of the significant cross-selling opportunity available to it. We believe that the company’s valuation is undemanding given its strong potential to continue FY14’s double-digit organic growth in the medium term.
Video games industry continues to grow strongly
The video games market is growing strongly, a trend which is expected to continue (forecast 6.3% CAGR to $89bn market in 2018, source: PWC). Technological advancements are offering developers new means of monetisation and are leading to increasing levels of game complexity. At the same time, rising incomes in emerging markets are enabling the industry to draw in previously untapped gamers. Global success is increasingly being driven by developers’ ability to localise their content for individual markets. As a result they are looking to external service providers to provide cost-efficient solutions that broaden games’ appeal and extend their shelf-lives.
Position strengthened by strategic acquisitions
With most of the world’s top games developers already customers of its localisation services, Keywords has carried out a number of strategic acquisitions in order to both increase the range of services it can offer and satisfy the need to be close to its clients, wherever they are in the world. The recent acquisition of Lakshya has had the effect of giving the company access to the larger and higher margin art production business, increasing Keywords’ addressable market approximately threefold. The purchase of community management business Alchemic gives Keywords access to the emerging online community management service area.
Valuation: Growth prospects underappreciated
Keywords trades on an EV/EBIT of 10.3x FY15e. This is below the peer group median. We believe that given the company’s high earnings visibility and attractive growth profile, its multiple is unjustifiably low even after considering Keywords’ relatively small size. We believe that the company can reasonably grow revenue at double digits for the next three to four years. The biggest positive share driver is likely to come from evidence that the multi-service expansion is leading to increased penetration among its customers via the significant opportunity to cross-sell.
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