Video game services provider Keywords Studios (KWS:AIM) shares shed 4.5% to £12.75 despite releasing a strong set of results for the first half to 30 June. Were investors simply waiting for the confirmation of the positive numbers before taking profit?
We predicted this might happen last week, the company’s shares have appreciated by over 50% since telling the market in July that its half year results would be stellar.
And indeed they are. Its adjusted pre-tax profits are up 60% to €9.6m in the first half and revenue has increased 50% to €63.8m. Its adjusted earnings per share figure rose 55% to €0.13 and the company has even upped its interim dividend to 0.48p.
This is impressive growth although signs that some thought it might be hard to sustain the share price momentum was revealed by fund managers selling the stock in the summer. In our article about small cap value, we revealed that a few firms had been selling Keywords Studios, including BlackRock and Amati Global Investors.
WHY GET OFF NOW?
One of the issues that FinnCap analyst Harold Evans points out is that the company is ‘ticking every box except valuation’. The company is trading on a sky price to earnings ratio of 43.1-times 2017 earnings, this is more than double the FTSE 250 ratio.
Given the number of times Keywords has been re-rated in the past 12 months, Evans has abandoned an earnings derived valuation of the company moving instead to an ‘addressable market’ valuation.
According to industry reports, the global games market is forecast to be worth $130bn by 2020. With 23 of the top 25 games producers as clients it’s foreseeable that the company can keep on with its advance.
As games reach new markets, additional languages may be required for the games to be translated into. This is is one of Keywords strengths. Its others include game testing, audio, customer care and art production.
Andrew Day, Keywords CEO, tells Shares 'If clients are only using part of our services, we have cross-selling opportunities into our existing client base'.
He adds that growth is not going to come from acquiring more clients as the company already has the majority of the largest games producers.
With acquisitions being a large part of Keywords success story, it bought four French firms last month, it would only take a couple of bad deals to derail this growth machine.
So far, the company seems to have picked wisely and its targets have been earnings accretive but ‘buy and build’ can be a risky strategy.
