Keywords Studios should have "very minimal impact" on acquisitions from leadership change, says broker

Keywords Studios PLC (LON:KWS) shares are trading at an “unjustified” 15% discount to UK peers, says broker Liberum, reiterating its ‘buy’ recommendation.   Last week’s news that chief executive Andrew Day will be retiring “has created some concern that the company’s growth and acquisition plans will be impacted, at least in the short term”, the broker noted. “Whilst these queries are valid, overall we believe they are overly cautious and expect there to be very minimal impact (if at all) on the company’s acquisition roadmap,” Liberum analyst Olivia Honychurch said. “Whilst Day was heavily involved in Keywords’ M&A activities, the business has a dedicated acquisition team with experienced heads to continue delivering on the strategy in his absence. Similarly, even if Day’s replacement were to have limited experience in acquiring businesses, we see this as less of a concern given the wealth of expertise which the internal team have built up over the last few years [with 40 acquisitions since 2016.” With the board having initiated a full search process to appoint a successor and Day available in an advisory capacity for six months, news on a successor is not expected until the end of the year, the analyst said, adding that she has no doubt that top quality talent can be attracted into the role thanks to the group’s strong footing in the industry and growth trajectory. But she believes in the meantime that the company “will benefit from industry drivers in 2021 and a growing demand for gaming content”, with a high pace and volume of content ramping up in 2021. Following the positive trading update last week, with the first four months of FY21 seeing 25% organic revenue growth, Liberum’s forecasts have been upped in line with the expectation for Keywords to continue benefitting this year from industry tailwinds. As such the company is now forecast for FY21 revenue to reach €488mln, rising to €557mln and €613mln in the following years. Taking into account management’s comments that organic growth rates are likely to moderate in the second half of the year against the tougher H2’20 comparison, full-year organic growth of 14% is forecast for 2021, up from the previously implied 11%, falling to 10% in the outer years. These top line estimates drop through to a new adjusted EBITDA forecast of €94.6mln for this year, followed by €107.9mln and €117.9m for 2022 and 2023, with according adjusted PBT estimates of €73.2mln, €83.8mln and €92.2mln respectively, translating to a 19% CAGR in earnings over that period that is up from a previous forecast of 12%.