Keywords Studios’ (KWS:AIM) profit upgrade today looks to have been driven largely by €30m of acquisition spend, according to back-of-the-envelope calculations by Shares.
Video game testing and localisation specialist Keyword Studios says profit will be significantly ahead of market expectations for the year to 31 December 2016.
But investors should have been expecting significant gains in profitability on the back of acquisition spend totalling €27.7m at current exchange rates in the last 12 months.
Profit-before-tax will be not less than €14m (£12.5m) according to chief executive Andrew Day, implying a second half result of around €8m versus €5.8m a year earlier.
That doesn’t imply stunning organic profit growth, in our view.
| ACQUISITION DRIVE | ||
| Keywords - Acquisitions benefiting second half | ||
| Date | Target | Consideration |
| 26-Oct-16 | Player Research | £1.6m |
| 29-Jul-16 | Volta Creation | CAD5.25m |
| 31-May-16 | Mindwalk Studios | $3.9m |
| 13-Apr-16 | Synthesis | €18m |
| 06-Apr-16 | Kite Team (50%) | €1.15m |
| 22-Mar-16 | Ankama | Not given |
| Total at current exchange rates: | €27.7m | |
Source: Shares
Performance at Synthesis, a business Keywords bought for €18.8m in April this year, is the main reason for today’s profit upgrade, according to Day.
Strong demand for Synthesis’ localisation and audio services since acquisition is continuing into the second half of the year.
Analysts at Finncap increased revenue estimates by 1.3% to €87.7m, an gain of 51% versus Keywords’ 2015 number of €58.0m
Profit-before-tax was upgraded by around 8.6% to €14.2m. Adjusted earnings per share (EPS) is now estimated at 18.9p, a gain of 49% year-on-year.
‘Management also highlight two trends of note,’ writes Finncap analyst Harold Evans.
‘First, the acceleration of the trend for clients to consolidate their supplier base - we anticipate that Keywords will be a net beneficiary considering its scope of services and geographic reach.
‘Second, the growing importance of augmented reality and virtual reality (AR/VR) - while longer term this should be positive, in the shorter term, support companies may experience some contraction of workflow as in-house developers explore this new medium of gaming, instead of working on ‘tried and tested’ methodologies.
‘As a result, we are cautiously optimistic regarding prospects for 2017 and hold back from upgrading our existing forecasts, which assume circa 10% organic growth over and above an exceptionally strong 2016.’
Shares in Keywords trade 8.6% higher at 462p and have gained 125% year-to-date.
