Keywords delivered a strong performance in FY19 (revenue growth of 30.2% overall, 15.5% organic, 21.2% like-for-like), very much in line with its January trading statement. In the face of the uncertain impact of COVID-19, we are revising our FY20 revenue estimate down, assuming nominal l-f-l 1% revenue growth, with operating profit falling to €38.1m (11.2% margin). We introduce FY21 forecasts, with games industry growth in FY21 helping the business bounce back with 15% revenue growth. The company’s FY21e P/E multiple of 31.1x reflects continuing industry growth, a strong track record and leading market position. The group prudently cancelled its final dividend for FY19, but has a strong balance sheet with €112m of cash and undrawn facilities as at YE19, leaving it well positioned for M&A.
In FY19, Keywords delivered 30.2% revenue growth and 15.5% underlying organic growth. The company operates in the games sector, a growing industry (Newzoo: 8.4% CAGR 2019–22e) and net beneficiary of lockdown. The group has adequate liquidity, but nevertheless management has prudently sought to preserve cash, including cancellation of the FY19 final dividend. It is cash-generative, has a strong balance sheet with net debt of €17.9m at 31 December 2019 (0.4x net debt/ adjusted EBITDA) and total cash and undrawn facilities of €112m as at YE19.
As a result of COVID-19, we revise our FY20 revenue estimate down to reflect the disruption as staff move to remote working (across the business) or are temporarily furloughed (principally audio and testing) during the lockdown. For FY20, we assume nominal 1% like-for-like revenue growth to €339.5m, with operating profit falling by c 29% to €38.1m. We also introduce FY21 forecasts, with the business bouncing back strongly once lockdown measures ease. We forecast FY21 revenues of €390.4m (+15% y-o-y). Adjusted operating margins are set to improve in FY21 – we forecast margins of 13.4% (FY20: 11.2%), operating income of €52.1m (FY20: €38.1m) and normalised EPS of 56.6c, a 38% uplift on FY20 (41.0c).
Keywords’ shares trade on a P/E of 43.0x our updated FY20e estimates, falling to 31.1x in FY21e. We see no prospect for M&A in H120, although potential accretive acquisition activity in H220/FY21 would bring these multiples down. Despite the current challenges, Keywords’ strategy, which has delivered a five-year EPS CAGR of 42% to FY19, supported by the industry’s strong underlying growth, appears sustainable in the medium to long term.
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