Frontier Developments AIM:FDEV, the Cambridge-based video game developer has been having something of a renaissance this year. This wasn’t the case about a year ago, when we reported on the developer shutting down its third-party platform, Frontier Foundry, admitting: “financial performance across the Foundry portfolio has been disappointing, and overall, the business has not delivered Frontier’s expectations of a positive return on investment within the first year of each title.” The company took a GBP13m amortisation hit as a result. Since then things have been a bit downbeat
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Today (7th May) Frontier Developments published a trading update that painted a much sunnier picture. This morning’s announcement comes hot on the heels of an earlier – equally positive – announcement at the start of April.
Construction simulators lead the way
The developer said that the company is performing well with all of its titles performing strongly, with its construction and management simulation titles leading the line underlined with a strong sale promotion on the Steam games platform.
With good Steam revenues, and strong console sales, management announced projected revenue for 2024 of at least GBP85m, ahead of consensus estimates.
The company said: “Frontier’s financial performance for FY24 as measured by Adjusted EBITDA is now anticipated to be better than previously guided, based on a higher gross margin percentage from a greater proportion of own-IP revenue, lower operating costs following the completion of the organisational review, and the gain from the sale of the RollerCoaster Tycoon 3 publishing rights to Atari as announced on 2nd April 2024.”
Frontier Developments still expecting losses
However, one swallow doesn’t make a summer, as Frontier is still expected to make a loss of around GBP5m for the year, despite restructuring its business, but the direction of travel is positive, and even SpaceX took a number of attempts to get going before a successful launch.
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The company’s shares had a tough year, opening the day at 292p they are down 48% from this time last year. However, as Frontier turns its ship around, since the start of the year the AIM-listed company’s shares recovered by 108%. Frontier’s shares have ranged between 95p and 649p over a 52-week period, somewhat overvalued at the top end, but rather undervalued at the bottom, so there is room for further upwards momentum.
Katie Cousins, an analyst at ShoreCap, which has Frontier under coverage said: “Following the good performance during March and April, Frontier Developments now expects to see revenue for FY24F of at least GBP85m, ahead of our previous forecast of GBP83m. This remains within prior guidance of between GBP80 to GBP95m. Furthermore, supported by a favourable own-IP mix and lower operating costs, adjusted EBITDA loss is now expected to be GBP5m or better [Prior ShoreCap estimate was a loss of GBP15m].”
The broker has Frontier as a ‘Buy’ recommendation, and has a discounted cash flow fair value of 330p, 25% ahead of last week’s closing price, and Cousins expects that Frontier will show: “[…] a cautious rebuild in margins and cash as the group returns to more sustainable performance,” noting that a focus on the company’s core expertise – namely construction and management simulation titles – is the right course of action.
With positive trade momentum, will high margins return?
Cousins also noted that Frontier is trading on an EV/Sales of just 1x, and as positive trade momentum continues, it underpins the potential of a break-even adjusted EBITDA potential for FY25F, noting that historically Frontier has achieved a high teens margin and an average EV/EBITDA of around 20x.
Jonny Watts, Frontier’s CEO said in a statement this morning: “We are making strong progress following the reset of our strategy during 2023 and I’d like to thank our people for their support during a difficult period in Frontier’s thirty-year history. We look to the future with renewed confidence.”
That said, AI analyst Bridgewise, which previously had Frontier as a ‘Hold’, has moved to a ‘Sell’. Bridgewise said: “Given Frontier Developments’ recent financial performance, the company’s stock appears to be an unattractive investment choice in the entertainment industry. Frontier Developments’ recent financial results position the company within the bottom 10% of Communication Services firms.”
The firm will provide a further update next month.
