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Keywords Studios PLC (AIM:KWS, OTC:KYYWF) (KWS), a prominent player in outsourced services for the video game industry, remains a strong business despite the share price ‘de-rating’, according to a research note from Peel Hunt.
The retracement of the stock, driven by fears around artificial intelligence (AI) displacing the business, has not shaken the boutique investment bank’s confidence in the company’s long-term prospects.
It retains a ‘buy’ recommendation with a target price of 3,300p, emphasising KWS’s market-leading position and continued investment in AI.
Trading performance & divisional overview
In its first-half trading update, KWS reported expected revenue of €383 million, marking a 19% increase compared to the same period last year, with 10% organic growth.
The adjusted operating profit is anticipated to grow 5% year-on-year to €59 million, with a margin of 15%, in line with previous management guidance.
Divisional insights
Shore Capital, a regional broker, provided a detailed analysis of KWS’s mixed divisional performance.
It said the Create division continues to see strong demand, with only slight moderation from last year.
It reckons the Globalize division has faced more pronounced moderation, albeit against a tough comparative from strong growth post-pandemic.
The Engage division, Shore said, has been impacted by a weaker mobile market, with some marketing projects slipping into the second half of the year.
Acquisitions & debt reduction
KWS completed four acquisitions during H1 FY23, supporting marketing and game development service lines.
Shore Capital calculates an average EBITDA (earnings before interest, taxes, depreciation and amortisation) transaction multiple of 6x, consistent with the group’s previously announced target range.
These deals have added approximately €50 million of annual pre-acquisition revenue and brought along complementary resources.
Net debt
The company’s net debt has been reduced to €11 million, down from €82 million, reflecting the acquisitions made in the period. This reduction in debt, along with the new four-year $400 million revolving credit facility (RCF), provides further flexibility and liquidity more akin to the business size, analysts said.
AI investment & future prospects
Peel Hunt highlights KWS’s AI-focused investments to utilise its 4,000-strong developer team. This strategic focus on AI aims to unlock the value of the latest technologies, building understanding to deliver value to clients, the core of KWS’s business.
Long-term outlook
Both Shore and Peel expressed confidence in KWS’s future. Shore Capital maintains a ‘buy’ recommendation at 1,775p, citing the company’s attractive characteristics, including global relationships, ongoing investment into new technologies, and a well-funded balance sheet.
And finally…
The analysis provided by Peel Hunt and Shore Capital reflects a positive outlook for the company that is at odds with the share price fall on Tuesday.
KWS’s ongoing investment in AI, acquisitions, and strong financial position appear central to its growth strategy, reinforcing its position as a strong business in the eyes of these investment firms.
With the stock down 42% year-to-date, the stock is in bargain basement territory on the foregoing analysis. Only time will tell whether this is the case.
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