At the capital markets day (CMD) on 14 November, management offered a comprehensive review of Keywords’ business and its drivers. This was the first event with Jon Hauck formally in place as CFO, who brings useful experience from his background at Rentokil Initial. Keywords appears to be well positioned to continue to perform robustly in FY20 despite the Q420 console transition (which may even be a net benefit to the group), balancing strong growth with a margin recovery back to more normalised levels (c 15%) with M&A, particularly in game development and marketing, very much front of mind. Keywords remains the only public games service provider at a global scale. We have updated our forecasts, but these are largely unchanged as the year end approaches.
Management developed four core themes: 1) the benefits of being the scale player, offering an increasingly attractive professional service proposition to a global client base; 2) acquisitions and integration – the heads of a number of studios underlined the attractions of a Keywords acquisition – the integration of central processes and systems leaving them with autonomy to grow the business; 3) ‘land and expand’ – leveraging new locations from a single service line in a new hub to offer the full suite of services as client demand grows; and 4) studios are incentivised to crosssell and cross-promote other service lines as part of the ‘Keywords family’, to support Keywords to become the ‘go-to’ provider for outsourced services to the games industry.
We have slightly updated our numbers to take account of the acquisition of TV+ Synchron in Berlin and now forecast an FY19 P/E of 36.6x and 25.7x for FY20. With the share price back down from its £18+ highs over the summer, investors have taken the opportunity to add to their exposure to Keywords after the CMD.
Keywords continues to trade at a premium to its peers in the current year (FY19: 36.6x vs 25-30x), although with the strong EPS growth forecast, FY20 PE falls to 25.7x, in line with its peer group (22-26x). Adjusted for blended average growth in FY19 and FY20, we derive a PEG ratio of 1.0x, materially below the majority of its peers (1.3-1.7x). There is limited scope for M&A in FY19, however accretive acquisition activity in FY20 (at historic multiples) could bring the 2020e P/E down further. With strong underlying growth (10%+), we continue to believe sustained execution should drive robust returns for shareholders.