UK gaming: just warming up?

UK gaming: just warming up?
Frontier Developments levels up over lockdown.
Dan Lane
February 3, 2021

The US and Far East tend to get the attention in the gaming world. But when it comes to investing in some of the sector’s production giants, it’s worth looking closer to home first.

Last year the video game market in the UK was worth £5.3bn, up from £4.8bn in 2019.

Being confined to our four walls for the lion’s share of 2020 certainly helped drive us in the direction of our PCs and consoles. 

But, for gamers and investors in the space, the rise won’t come as a surprise. The value of the UK’s gaming market has been on a steady growth trend since at least 2012 and is showing no signs of stopping.

Source: PwC September 2020, Statista 2021. *Future year predictions.

The sector is projected to increase to an estimated £7bn by 2024, contributing to the roughly $200bn global total expected by then. And for investors looking to take part, there are a range of UK-listed firms making names for themselves right here at home.

Frontier fronting up

Even with 2020 set to hard mode, Jurassic World Evolution maker Frontier Developments looks like it’s thumb-bashing its way to even bigger growth this year.

Interim results released this morning showed year on year revenue growth of 15% for the Cambridge-based game publisher, up to £36.9m and in line with analyst expectations.

We’ve had idle hands for a lot of the past year and it looks like Frontier has been able to get their games into them.

A stronger December than anticipated will be a boon for Frontier as it starts 2021 but one of the most important aspects of today’s results is the cash pile the group is sitting on. 

Even with its share purchases into the employee benefit trust, £35m is a decent amount to have on hand. A raft of firms across the country have had to rely on emergency loans and share placings just to keep the lights on during the pandemic. 

Having the funds available to keep the growth trajectory steady is a real win for Frontier. Close attention to the balance sheet means they can avoid penny pinching and can spend where necessary to maintain quality and hit deadlines if need be.

The company could well be one of the standout winners in the gaming sector over the long term and it looks like the market has cottoned on. 

Currently trading at around 50x earnings might seem expensive but quality doesn’t often come cheap. And while there’s no guarantee the firm’s positive run will continue, management has reiterated it expects to hit the guided revenue range for the full year of £90-95m.

Welcome player two

But it’s not all about Frontier.

The likes of Worms owner Team17 has had a stellar run over the past few years and kicked off 2021 with a £12m acquisition of current partner Golf With Your Friends. 

Speaking last week, the firm said it expected its 2020 results to top expectations with revenues set to come in £20m higher than a year ago to more than £80m.

A lockdown boost and the acquisition of US studio Pipeworks put AIM-listed Sumo Group on the front foot heading into 2021.

And the game developer is expecting that form to continue, with higher than predicted revenues and earnings for 2020 seemingly coming up.

The addition of Oregon-based Pipeworks is a play on tapping into the current consolidation in the video gaming space, and should allow Sumo to reach more publishers across the pond.

And shares in racing game developer Codemasters got a big lift late last year on the news that Electronic Arts (EA) had swooped in with a takeover bid.

If the £945m offer goes through upon shareholder approval, it might just give the US giant the ability to start releasing a new racing game every year, on par with the likes of FIFA.

And then there are the companies offering support services to the industry like Keyword studios. The firm provides translation, testing and art creation to game developers, with a client base spread across the globe.

Just like Levi’s kitted out the gold prospectors heading out west, Keyword is helping gaming companies mine their own futures.

Tell us what you think about Frontier Developments and the UK gaming sector on the community forum:

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