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Frontier Developments making steady progress

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Frontier Developments AIM:FDEV, the UK-based video games developer, reported its results for the full year to 31st May earlier this week. The announcement was a bit of a mixed bag, but the general direction of travel, unlike some of its IP like Screamride, a roller-coaster simulator, was upwards.

Adjusted EBITDA for FY22 was in line with expectations at GBP6.7m compared to GBP11.8m for FY21, with EBITDA reported of GBP41.1m against GBP38.1m for the same period the year before.

Operating profit in FY22 was reduced to GBP1.5m following the previously announced one-off non-cash accounting charge following the under-performance of the major Elite Dangerous: Odyssey expansion which released in May 2021. This was compared to GBP19.9m for FY21.

The developer’s bank account remains healthy with a cash balance of GBP38.7m as at 31st May 2022. However, cash balances did decline by GBP3.7m over the year, which Frontier said in a statement: “reflected a greater investment in significant game developments for release in future years, working capital movements, and the GBP5.0m purchase of shares by the Employee Benefit Trust undertaken in April 2022”. As at 31st August 2022 Frontier’s cash position was GBP53.1m

The company said: “Our major game release in FY22, Jurassic World Evolution 2 – released November 2021 –was the biggest sales contributor to FY22, and in June 2022, after the end of FY22, we successfully launched a major themed expansion alongside the Jurassic World Dominion film. Jurassic World Evolution 2 has so far delivered over GBP60m of revenue as at 31st August 2022.”

Frontier Developments has a loyal following

The company, established in 1994, has a significant back catalogue of games, with Elite, a flight simulator and outer space trading game, being one of the longest-running game franchises, having been originally released in 1984. As such, Frontier has a dedicated and loyal following which has helped its profitability through the last decades. The company said in a statement: “Our portfolio of established titles which released before the start of FY22 each achieved material revenues in FY22, and each game continues to deliver sales and reach new players.”

The statement continued: “Planet Zoo performed especially well in FY22 with an annual revenue sustain rate of 94%, supported by four new paid-downloadable content (PDLC) packs released in FY22, alongside free content.”

Katie Cousins, an analyst for Shore Capital, which has Frontier Developments under coverage said: “FDEV has published its full-year figures […] for the 12-month period ending May 2022. The period has achieved record revenue for the second consecutive year, despite earlier disruption.  The group continues to benefit from its launch and nurture strategy, whilst actively growing the future launch pipeline for both its core trading and Foundry division.”

Overall, Shore Capital remained positive on Frontier, with a ‘Hold’ rating and target share price of 1,192p. Frontier opened trading today (23rd September) at 1,304p and had declined to 1,260p by mid-morning. Frontier has offered a -29.12% year-to-date return, a -50.4% one-year return and its shares have ranged between 1,066p and 2,702p over a 52-week period. The company has a market capitalisation on GBP514m

Cousins said: “We forecast revenue of GBP138m for FY23F, implying year-on-year growth of 21%  which  is consistent with the group’s guidance of GBP130m to GBP160m and average growth of around 20% per annum across the medium term.”

She continued: “FDEV trades on a Price-to-Earnings Ratio of 24x for FY23F which is a premium to the peer average of 21x, with an expected return of adjusted EPS not back at FY20A levels until FY24F.  The share price has declined below our 1,500p fair value during the past month, and therefore we will seek to consider this following our review of the results. We maintain a ‘Hold’ rating on this stock.”

Jonny Watts, the newly downloaded chief executive for Frontier said: “Based on trading performance to date, the board remains confident of delivering on current analyst expectations for FY23. Over the medium term, the board expects Frontier to continue to grow revenue by around 20% on average per annum, with any annual growth rate variability largely driven by the timing and scale of new releases in each year.”

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