Video game services provider Keywords Studios (KWS:AIM) made 11 acquisitions in 2017. In that time the company's share price soared more than 200%, becoming a 10-bagger (when the share price increases more than 10-fold) since its 123p per share flotation back in 2013.
Such spectacular returns probably explain the modest down tick today, drifting around 1% lower to £15.66.
Today's additions take the acquisitions tally to 29 after securing two more deals on Monday (9 April).
Keywords is buying Cord Worldwide and Laced Music for a total of £4.5m, plus Maximal Studio for up to €0.5m.
These new businesses will bolster the company's audio offering, one of the seven service lines the company operates.
WHAT IS IT BUYING?
Laced specialises in licencing soundtracks for video games companies. Cord provides music composition and audio branding.
Maximal Studio is a voice-over specialists for video games.
Keywords' full year 2017 results put into hard and fast numbers the company's stunning success. Revenue of €151.4m came in slightly above its guidance in the February trading update of ‘not less than €150m’.
Adjusted pre-tax profits of €23m will be touch above February guidance of ‘at least €22.5m’.
MARKET HAS HIGH EXPECTATIONS
AJ Bell’s investment director Russ Mould says ‘expectations for these results were sky-high after a bullish trading update in February, the shares already trade on a premium valuation and there are some slight wrinkles in these numbers which could have unnerved investors’.
These ‘wrinkles’ include a 1.6 percentage point decline in the company’s gross margin on a year-on-year basis. Keywords attributes this to the lower margin VMC business, which was the company’s largest acquisition to date costing $66m.
NEW TARGETS
Andrew Day, Keywords CEO, tells Shares that he looks for companies to build on existing service lines and it’s not the cost that could be problematic, rather the ‘cultural fit’.
AJ Bell’s Mould says ‘frequent deals can be a red flag for investors, although most of Keywords transactions have been bolt-on rather than dreaded ‘transformational’ purchases which can trip companies up’.
So far Day’s stated aim of increasing the cross selling opportunities the company has with its existing clients seems to be paying off. Keywords counts 23 of the top 25 video game producers as clients so winning new ones is not a priority. For 2017, Keywords recorded a 45% increase in clients using three or more of its services.
PAYING A HEFTY PREMIUM
Using Numis’ forecasts, Keywords is trading on 37.7-times 2018’s 41.16p of earnings.
Numis upgraded its 2018 earnings per share figure by 4% in light of today’s acquisition announcement, suggesting it believes the company still has a fair bit of growth in it.
As we said last September, the company’s share price may be falling despite good results as investors waited for confirmation before taking profit.
