Buy shares in Code­mas­ters to play the boom in the gam­ing in­dus­try

The rac­ing games spe­cial­ist is off to a strong start on the stock mar­ket

Shares - - CONTENTS -

Shares in video games de­vel­oper and pub­lisher Code­mas­ters (CDM:AIM) have raced 35% higher to 270p since join­ing the stock mar­ket on 1 June. We feel the share price could rise fur­ther in the short term as more peo­ple be­come aware of the stock.

War­wick­shire-head­quar­tered Code­mas­ters has raised £15m of new growth funds and a fur­ther £170m was raised for sell­ing share­hold­ers in­clud­ing man­age­ment and Reliance Big En­ter­tain­ment, part of the In­dian con­glom­er­ate Reliance.

One of the most recog­nised Bri­tish games de­vel­op­ers with a 30 year track record of pro­duc­ing hit titles, Code­mas­ters spe­cialises in high qual­ity rac­ing games. It cur­rently man­ages three es­tab­lished fran­chises, ‘DiRT’, ‘GRID’ and ‘F1’, with a fourth fran­chise, ‘ONRUSH’, launch­ing this month.

Founded by the Dar­ling fam­ily in 1986, Code­mas­ters boasts a loyal fan club of gamers, a bal­anced rac­ing games port­fo­lio and strong ties to lead­ing car man­u­fac­tur­ers and au­to­mo­tive brands.

The com­pany has been suc­cess­fully turned around by the cur­rent man­age­ment team, led by CEO Frank Sag­nier, with sales and ad­justed earn­ings be­fore in­ter­est, tax­a­tion, de­pre­ci­a­tion and amor­ti­sa­tion (EBITDA) hav­ing in­creased year-on-year since 2015.

For the year to March 2018, revenue grew by 27% to £63.6m and ad­justed EBITDA shot up al­most 90% to over £11.7m.

The new money raised at the AIM flota­tion will help Code­mas­ters to ex­tend the reach of its ex­ist­ing fran­chises onto more plat­forms such as mo­bile and vir­tual re­al­ity and beef up mar­ket­ing to reach a wider au­di­ence of gamers.

From the launch of ONRUSH on­wards, Code­mas­ters will di­rectly sup­ply its new re­leases to digital re­tail­ers and app stores with­out the need for a third party dis­trib­u­tor. This will pro­vide the group with better mar­gins as there are no dis­tri­bu­tion fees or cost of goods fees from con­sole man­u­fac­tur­ers, plus there is no in­ven­tory risk.

Code­mas­ters’ IPO share plac­ing was over­sub­scribed, re­flect­ing in­vestors’ healthy ap­petite for ac­cess to the video games in­dus­try. It is one of few bright spots in the wider con­sumer space, where quoted in­vest­ment op­tions in­clude Sumo (SUMO:AIM), Fron­tier De­vel­op­ments (FDEV:AIM), tech­ni­cal ser­vices provider Key­words Stu­dios (KWS:AIM) and pub­lisher Team17 (TM17:AIM).

Be­sides ‘large, tech­ni­cally com­pe­tent and well cap­i­talised’ competitors, risks flagged in the ad­mis­sion doc­u­ment in­clude reliance on the success of any new titles launched, de­te­ri­o­ra­tion in the pop­u­lar­ity of F1 as a sport and the im­por­tance of the F1 li­cence.

The lat­ter was re­cently re­newed un­til 2021 by new F1 owner Lib­erty Me­dia but Code­mas­ters says a loss in the fu­ture of this ex­clu­sive li­cence ‘could ma­te­ri­ally ad­versely af­fect the busi­ness of the group and its trad­ing per­for­mance’.

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