Venture: UK Tech

Venture: UK Tech

Issue 27;

Keywords Studios (KWS UK)

Keywords is a growth company, trusted and relied upon by the world’s leading video game and entertainment companies to work alongside them during the full game development cycle to bring immersive content to life for the joy of billions of people across the world. We are a critical enabler of a large, dynamic industry, and are building out our proprietary technology platform to augment our future growth.”

You might also read their investment case, which is fairly convincing. They are essentially a shovel provider to the gaming industry and, therefore, have broad exposure across the industry as opposed to being game owners collecting royalties. That’s helpful because not being a gamer, I couldn’t tell one game from another, and my focus is strictly on the financial data and the future prospects.

KWS has resurfaced since I first looked at it late last year in a value and growth screen. It was interesting, but the news flow and technicals suggested we revisit it at a later date. With the earnings forecasts now stable, the Hollywood strikes behind us, and a forward PE of 12x, this is a cheap growth stock.

Listed in 2013, it has completed 60 acquisitions since inception and 51 acquisitions since listing. There have been no divestitures. That basically makes this a story of expansion through a mix of acquisitions and organic growth. If it’s just the former, there is no added value, but it is not, as organic growth is a management priority. I can confirm this historically from the key metrics on a per-share basis, which stands up, but the real opportunity is for the company to see more organic growth in the future.  

Starting with the share capital, which has been used to fund many of the acquisitions, the shares in issue grew by 80% between 2014 and 2020, and that has slowed since.

KWS Growth in Shares Outstanding

Source: Bloomberg

This is primarily an earnings growth story, and both profits and revenues have done well while the share price has languished, peak-to-trough by 65%. Notice how the high valuation in 2021 coincides with the recent technology bubble and market surge in liquidity. The forward PE is just 12x for this year, the lowest in a decade.

KWS Sales and Profits

Source: Bloomberg

I am not sure how measurable or useful book value per share is in this case, but it shows sustained value creation. In addition, price-to-book also indicates a low valuation.

KWS Grows Book Value Per Share

Source: Bloomberg

With two simple measures confirming the acquisitions have been accretive, I turn to the EV/sales for the valuation, which is also at the lowest level in 10 years.

KWS Enterprise Value to Sales

Source: Bloomberg

The company has €151 (it reports in euros) of outstanding debt, which is modest for a company with €780 million of sales, and €72.7 million of free cash flow. In terms of profitability, the gross margins have been at a stable 38% since 2012, with the one metric that has deteriorated being return on capital as net margins have fallen.

With around 50 offices around the world, there must be the potential to reduce costs, but the company says its primary focus is on growth. Sales have followed employees, but profitability has stalled.

KWS Sales and Employees

Source: Bloomberg

In the recent results, the management discussed the negative impact of the actors’ and writers’ strikes in Hollywood, where they have a strong presence. Several of their audio and marketing businesses were impacted. The hit was around €20 million in revenues, or 3% of the bottom line. The strikes have subsequently been resolved, which will boost next year’s results.

The CEO, appointed in 2021, is straight from the textbook. Bertrand Bodson has an MBA from Harvard, then a stint at Boston Consulting, before being a senior manager at Amazon. He also had roles at Sainsbury Argos and RS Group and was the chief digital officer at Novartis. He’s a non-exec director at both Tesco and Wolters Kluwer - quite the chap. Bodson replaced the founder, Ross Graham, who retired in 2021 under doctor’s orders. He won the FTSE/AIM award that year and did an exceptional job.

The qualitative measures show that this is a global business, with 22% of revenues coming from the USA, 20% from Canada and just 17% from the UK. Having built an arsenal of services, KWS hope to leverage their relationships, which can be sold across multiple platforms.

The shareholder register is strong but includes several UK-active managers who have suffered fund outflows. This alone would explain much of the share price weakness. 13 analysts cover the stock with 12 buys and one hold. The implied upside is 64% of their average target price.


The shares are liquid, with around €4 million traded on an average day. The price volatility has been 42% over the past year, which is higher than it probably deserves to be. The business is diversified, has a strong balance sheet, and an attractive valuation. I deem this to be medium to high risk.

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