UK Edition
Questor: on a bumpy track, video games veteran Codemasters is still in the driving seat
Questor share tip: it has not had an entirely smooth ride, but it is worth investing in this early race leader
From Manic Miner to Moshi Monsters, Britain’s expertise in computer gaming is undeniable, but it has rarely translated into domestic stock market success.
Even the industry’s most recognisable face, Lara Croft of Tomb Raider fame, is developed in California and owned via Tokyo these days. Go back far enough and Croft was selling bucketloads for games developer Eidos, but the firm stumbled with the PlayStation 2 version that put its finances under strain and forced it into a merger and later to sell out completely.
However, with an estimated 1,900 development studios across the country, it was never likely to be game over for British gaming firms prepared to take their chances as listed stocks.
In the past 12 months a new crop has assembled on Aim with valuations of about £200m. There is Team17, the developer behind the addictive Worms game, and Sumo Group, which is known for the PS3 hit LittleBigPlanet and for having a hand in the revival of Sonic the Hedgehog.
The most promising could also be the oldest in the pack. Codemasters originally made games for the Commodore 64 and ZX Spectrum. It has carved out a strong franchise in racing games, turning out Formula One’s official series among others.
The games industry used to be plagued by lumpy revenues because of the “console cycle” that caused fans to hold back from buying new games if the next Xbox or Nintendo device was due for release. Income has now been smoothed out by growing demand for mobile phone pursuits, which has contributed to market growth of more than 8pc a year.
Downloadable games have also boosted margins with the sale of extra features and removed the risk of investing heavily in physical stock. However, demand for higher production values has seen teams swell to more than 100 people per game, affecting costs.
It has not stopped companies’ fortunes from fluctuating like an unpredictable shoot ’em up. Shares in Team17 have had a terrible autumn, as have those of Frontier Developments, an earlier London listing behind the space flight simulation Elite Dangerous. Codemasters has also dipped since its shares listed at 200p in June.
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But a recent presentation to investors, £15m flotation proceeds to invest and maiden interim results have lifted hopes that they can rally like one of its on-screen cars.
Codemasters’ prospects revolve around three franchises. The firm has held the exclusive intellectual property rights over F1 games since 2009, recently renewing until 2021.
Off-road driving game DiRT is the company’s largest fully owned franchise and remains in rude health. Grid, a track racing game for touring cars, is ready for a revival, as its last console release came in 2014.
It is not all good news for the company, though. Onrush, an arcade racing game released in June, made a smaller revenue contribution than the other recent major releases and resulted in a £2.6m impairment of development costs.
Excitement that virtual reality headsets will transform gaming will be taken with a pinch of salt by anyone waiting for 3D to shake-up movie-going. But “esports” is more credible. Codemasters’ F1 esports series – where viewers essentially watch gamers playing games – has been aired on Facebook and Sky.
- Questor archive: telegraph.co.uk/questor
In its half-year results, Codemasters showed that one technology transformation is definitely under way. Digitally downloaded games accounted for 53pc of sales in the period, up from 33pc a year ago.
Analysts at Jefferies noted that each base game could be expected to generate more revenue from “deluxe editions, downloadable content, bundle deals, regular events and competitions and season passes”.
Liberum, the broker that brought Codemasters to market, estimated that a title from each franchise made roughly £20m-£25m of sales in their launch year, but digital innovation could drive that figure to £30m-£35m, with the majority of extra revenue dropping straight to the bottom line.
That sounds ambitious, but trading at 14 times next year’s earnings, the shares are still worth buying.
Questor says: buy
Ticker: CDM
Share price at close: 161p