Keywords Studios’ capital markets day (CMD) on 5 February 2020 was very well attended and reassuring. The company will continue to grow a balanced, diversified business. Organic growth remains strong over the short to medium term: for FY20 we forecast 15% y-o-y revenue growth, up 12% on the FY19 closing annual run rate (ARR), supported by the launch of next-gen consoles. Increasing scale helps to attract larger clients and raise barriers to entry. Keywords’ strategic approach to ‘buy and build’ delivers for both the company and the studios. We retain our view that Keywords is strongly positioned as the only games service provider at a global scale. The company’s P/E rating (29.2x FY20e) reflects its leading market position, track record and potential, but should fall further as Keywords continues to execute its buy-and-build strategy.
Keywords has been investing in its platform and capacity to ensure that it can deliver its full suite of services, with a similar level of professionalism, to clients wherever they are based – with services able to be delivered on a round-the-clock, distributed basis. Keywords’ next step is to demonstrate to even the largest, most demanding AAA clients that it now uniquely has the scale to be a professional and reliable partner for all their studios.
In FY19, Keywords delivered 30% revenue growth and 15% underlying organic growth. Underpinned by a growing industry (Newzoo: 8.4% CAGR 2019–22), this trend looks set to continue – we forecast FY20 revenues of €374.9m (+15% y-o-y, +12% on an FY19 closing ARR basis). Adjusted operating margins are set to improve through FY20 – we forecast 14.2% (FY19: 13.1%), operating income of €53.4m (FY19: €42.7m) and normalised EPS of 64.8c, a 41% uplift on FY19 (46.0c). Keywords benefits from the trend towards outsourcing, increasing its market share as a market leader in a fragmented global industry with growth further supplemented by M&A. With the console transition in Q420, the medium-term growth outlook remains robust.
Keywords has delivered an adjusted EPS FY13–19 CAGR of 43% and we believe it looks set to maintain double-digit revenue growth for the foreseeable future. In this context, we believe that a 29.2x FY20e P/E is not overly demanding and fairly reflects Keywords’ leading market position, track record and potential. This rating should fall further as Keywords continues to execute its buy-and-build strategy, focused around higher-margin marketing and development.