Keywords Studios has again showed the resilience of its model in H120, delivering 8% l-f-l revenue growth, 19% adjusted EBITDA growth and 17% adjusted EPS growth despite the impact of COVID-19. Adjusted EBITDA margins of 17.8% have held up better than we expected. Looking ahead, we see sustained industry growth, led by the console transition in Q420, with publishers increasingly recognising the resilience Keywords adds to their development processes. Following its third acquisition of the year, we see management once more focusing on M&A with net cash of €101m. Keywords’ strategy, which has delivered a five-year EPS CAGR of 42%, appears sustainable, with dividend payments to be resumed in FY21. As such, we believe that the shares remain set for continued appreciation.
Keywords has demonstrated its resilience in the face of COVID-19. Having downgraded our estimates at the start of the pandemic, this is our second upgrade for the year, with H120 revenues of €173.5m up 13% y-o-y, and up 8% on a like-forlike basis, with adjusted PBT increasing by 18% to €21.7m. Profit was boosted by a strong performance across its service lines, particularly Game Development, with Localisation and Audio showing weakest growth. At 30 June 2020, after the €110m share placing in May, net cash stood at €101m (H119: €9m net debt) with a further €100m of undrawn committed facilities.
Management has commented that H220 has started positively, with growth drivers for the medium term looking positive. As such, we have assumed continued 8% l-f-l growth in H220 (a conservative estimate), while also normalising PBT margins towards 13% in FY21. With three deals already announced this year, despite COVID-19, management reports a healthy M&A pipeline, with large as well as smaller deals, which should further support growth and earnings accretion.
Sentiment towards the games industry is extremely positive, given the sector’s performance this year and its outlook. As such, Keywords’ shares trade on an FY20e P/E of 46.2x, falling to 42.2x in FY21e. We see scope for organic upside as well as the potential for material accretive acquisition activity with €100m+ for M&A (see sensitivity analysis, Exhibits 2 and 3). Keywords’ strategy, which has delivered a five-year EPS CAGR of 42%, appears sustainable. In this context, we believe that the shares remain set for continued appreciation.