Keywords Studios Plc (LON:KWS)’ trading update highlighted a stronger than anticipated first half, with expected H1 revenue growth of c 39% to €153.1m and adjusted PBT growth of c 15% to €18.4m, and growth seen across all seven service lines. Investment accelerated in H1 to manage the high level of demand, which means margins should benefit from this extra investment in H2. The group also agreed terms for a new RCF to replace the existing €105m facility. With strong underlying demand, the potential for margin leverage and an increased M&A capacity, Keywords looks set for a strong H2. Our forecasts are essentially unchanged for now, but we will review them later in the year.
Strong underlying growth
Keywords’ trading statement highlighted a stronger than anticipated first half, with expected H1 revenue growth of c 39% to €153.1m (H118: €110m) and adjusted PBT growth of c 15% to €18.4m (H118: €16.0m). Organic growth was particularly strong, with revenues on a constant currency, l-f-l basis rising 17% to €146.4m (H118: €124.8m). Growth was broadly spread, with all seven service lines, led by Functional Testing and Game Development, demonstrating l-f-l growth of 5–33%.
The group incurred additional costs in H1 to manage the level of demand growth, which means margins should benefit from leveraging this extra investment in H2.
Our forecasts for FY19 have changed marginally to reflect the four acquisitions in H119, but otherwise remain unchanged. Our FY19 estimates were based on a conservative 11% organic growth rate (although we noted that demand from streaming services, reduced drag from VMC and H218 projects slipping into H119 might boost this). In light of the strength of the H1 performance, we may need to review our forecasts for FY19 later in the year.
New financing facility underpins M&A agenda
Keywords announced a new revolving credit facility (RCF), subject to final contract, for €100m over a three-year term, with the option to increase the facility to €140m and extend it to five years. The RCF replaces the existing €105m facility, on the same terms. As expected, net debt increased to €9.0m in H119 (FY18: €0.4m) as Keywords invested €5.2m in four acquisitions in H119 (Sunny Side Up, GetSocial, Wizcorp and Descriptive Video Works) and paid deferred consideration of €1.8m on previous deals. Keywords continues to see a healthy pipeline of acquisition candidates. The new RCF will allow management to continue to deliver growth, both organically and through acquisition.
Business description
Keywords Studios is the leading and most diverse supplier of outsourced services to the games industry. Through regular acquisitions, the company is building its scale, geographic footprint and delivery capability. Its ambition is to become the ‘go-to’ supplier across the games industry.