Keywords has rounded off the year with three small acquisitions, very much in line with its stated M&A strategy: Kantan, a Dublin-based machine translation technology company (€7m); Ichi, a London-based video games creative and marketing services agency (£3.2m); and Syllabes, a Montreal-based audio recording studio (C$0.5m). Together, they have reported revenues of c €4.8m and have been acquired on a trailing multiple of c 2.3x revenues. As we approach year-end, we retain our view that Keywords remains strongly positioned as the only public games service provider at a global scale. The company’s P/E rating (25.7x FY20e) reflects its leading market position, track record and potential, and should fall further as Keywords continues its buy-and-build strategy successfully.
Keywords has announced three acquisitions for a total consideration of €11.2m, approximately 2.3x aggregate historic revenues of €4.8m. Kantan develops a machine translation technology that will allow Keywords to provide an automated, machine learning localisation service. The acquisition of Ichi expands Keywords’ marketing services capabilities, providing video game branding expertise from its base in London. Syllabes provides audio recording and casting services in French and English, and offers a games and film/TV audio recording studio, completing the full suite of services provided from Keywords' Montreal services hub.
As we approach year-end, it is worth reiterating that we anticipate a strong secondhalf performance from Keywords. Although management has stated it will invest in growth if the opportunity allows, H219 margins are expected to start to recover from the accelerated investment in H119, with operating margins normalising towards 15% over the course of FY20 (H119: 12.6%, FY19: 13.2%). The coming console transition (Thanksgiving 2020) should be a net benefit to Keywords, with increasing spend on next-generation console development in the run-up to launch. Management continues to see a healthy acquisition pipeline for FY20, with an emphasis on game development and marketing services.
Keywords has delivered an adjusted EPS CAGR of 51% from 2013 to 2018, and we believe it looks set to maintain double-digit revenue growth for the foreseeable future, driven by the growth of the games industry and increasing outsourcing, supported by M&A. We have updated our forecasts for the acquisitions, which otherwise remain unchanged. Organic growth has remained solid through a period of industry flux and in this context, we believe the 25.7x FY20e P/E is not overly undemanding.