Keywords Studios

(KWS:AIM) £16.14

Profit to date: 26.5%

In September we said investors should snap up shares in leading video games service provider Keywords Studios (KWS:AIM) while they were depressed.

A big fall in the PE (price to earnings) ratio of growth shares in reaction to rising interest rates saw Keywords’ rating pushed down to almost single digits.

We argued the stingy PE failed to recognise Keywords’ continued growth potential and its dominant market position. Pleasingly, the shares are up 26.5% compared with a 1% gain for the FTSE AIM index over the same period.

WHAT HAS HAPPENED SINCE WE SAID TO BUY?

The company provided a full-year trading update (25 January) which showed revenues grew 17% in constant currencies to around €780 million.

The outcome fell slightly shy of market expectations due to the Hollywood strikes, which had a €20 million or 2.6% impact, and a small adverse foreign exchange movement.

Excluding these items, underlying organic growth increased approximately 9% which was in line with medium-term guidance. During the period, the company completed five ‘high quality’ acquisitions for a maximum consideration of €225 million.

Encouragingly, the firm said it expected to report ‘strong’ adjusted operating profit of €122 million, representing a margin on sales of 15.6%, which is above the consensus.

The better-than-expected result is attributable to cost-saving measures and operating efficiencies across the group.

Looking forward, the company expects to deliver ‘strong’ revenue and profit growth in 2024 driven by mergers and acquisitions as well as organic growth while maintaining operating margins above 15%.

Organic growth is expected to accelerate in the second half as Hollywood works through the backlog of projects and the industry’s appetite for new content returns.

WHAT SHOULD INVESTORS DO NOW?

A resilient performance against a difficult backdrop for the video gaming industry demonstrates the quality of the group’s business model. The company continues to increase market share and consolidate its leading position. We remain positive on the shares. 

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