Keywords announced a £100m equity placing on 14 May 2020. The funds are to increase flexibility for the group’s buy-and-build M&A strategy and reinforce its financial position. Management also updated on trading over March and April (7% y-o-y growth), with January and February showing 21% y-o-y growth. Recognising this resilience during lockdown, we have raised our revenue growth forecast for FY20 to 8% y-o-y (4% previously), with a consequential impact on FY21e (€405.8m, 15% growth). We maintain our view that Keywords is well placed as the only games service provider on a global scale. The P/E rating (45.8x FY20e, 34.9x FY21e) reflects the company’s leading market position, track record and potential, but should fall further as Keywords executes its buy-and-build strategy.
The equity placing was announced after close of business on 14 May 2020 and carried out through an accelerated bookbuild on a non-pre-emptive basis (although in consultation with its major shareholders) to minimise cost, risk and management distraction. 6.9m shares, representing a c 10.5% increase in the issued share capital on a pre-placement basis, were issued at a price of 1,450p, a 5.8% discount to the closing price on 14 May 2020 (1,540p). £100m (gross) has been raised through the placing and will be used to provide management with increased flexibility around its buy-and-build M&A strategy, as well as to reinforce the group’s financial position.
Keywords’ trading update confirms that short-term trading has been more resilient than we had assumed (7% y-o-y growth reported in March and April) and with hindsight, we may have been overly aggressive in our estimate cuts in April. Accordingly, we have increased our estimates to reflect 5% annual growth on the FY19 year-end revenue run rate (8.1% y-o-y), where previously we had assumed revenue growth of 1%. We have not changed our key assumptions for FY21, with forecast revenue growth of 15% over FY20 (€405.8m), operating margins normalising to 13.4% (FY20e: 11.3%) and the tax rate held at 18.2%
Keywords’ shares trade on a P/E of 45.8x our updated FY20e estimates, falling to 34.9x in FY21e. We see little prospect for material M&A in H120, although accretive acquisitions in H220/FY21 would bring these multiples down. Despite current uncertainties, Keywords’ buy and build 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.