In Keywords Studios’ trading update, management expectations are for H120 revenues of approximately €173.5m, delivering organic growth of 8% and a rise of 13% over H119 (€153.2m). Adjusted EBITDA is expected to be €30.8m (17.8% margin), a 19% increase on H119 (€25.8m), with adjusted PBT of €21.7m, 18% higher than H119 (€18.4m). Given the impact of COVID-19, this represents a strong performance, helping to demonstrate the benefits of a diversified services business, with a global footprint. We maintain our view that Keywords is well placed as the only games service provider on a global scale. The P/E rating, though undoubtedly high (52.8x FY20e, 40.1x FY21e), reflects the increasing recognition of Keywords’ resilient growth credentials, but should fall further as Keywords executes its buy-and-build strategy. Following its placing in May, Keywords has c €200m of dry powder to convert a ‘strong and attractive’ M&A pipeline.
Since February, the vast majority of Keywords’ 7,300 staff have been moved to remote-working, with a lower than anticipated reduction in utilisation and productivity compared to office-based delivery. Only audio and testing service lines have been significantly constrained.Management also took steps to preserve cash and cut costs, helping to deliver profit margins ahead of our expectations.
Although Keywords is resource constrained in the short term, management expects to see growth opportunities in the medium term, driven by structural factors such as the continuing trend towards outsourcing, investment in developing streaming platforms and the next-generation console launches in Q420.
However, given that uncertainty from COVID-19 is likely to persist throughout FY20, management is not in a position to provide market guidance. Despite the strong adjusted PBT evident in H120 (58% of our FY20 estimate) and despite a typical H2 weighting to the business, we propose to leave our forecasts unchanged for now until we see the full H120 results on 17 September 2020.