UOB Kay Hian is reiterating its “buy” recommendation on Winking Studios with a higher target price of 38 cents from 35 cents previously.
This comes on the back of the group announcing its 1HFY2024 ended June results, which saw earnings decline by 28.0% y-o-y to US$909,000 ($1.2 million) from US$1.3 million a year ago. This was mainly due to ongoing listing expenses as well as marketing and promotional expenses.
Revenue however saw a 7.1% y-o-y growth to US$15.2 million driven by the group’s art outsourcing and game development segments, which both segments saw a surge in orders. On a constant currency basis, revenue would have gained 10.5% y-o-y.
The Group’s Art Outsourcing segment remained the largest contributor to overall revenue. In 1H2024, revenue from Japan surged nearly three-fold to US$1.5 million, boosting its geographical contribution to 10.1% of total revenue in 1HFY2024 from 3.5% in 1HFY2023, with increased marketing and promotional initiatives with a consequent impact on net margins.
In 1HFY2024, the Group completed the acquisition of two newly acquired art studios, Taipei-based art outsourcing studio On Point Creative and Kuala Lumpur-based Pixelline Production to enhance the Group’s resource base, service offerings and market reach.
Johnny Jan, executive chairman and CEO says: “Combined with our accelerated M&A strategy, we will continue to focus on serving our blue-chip clientele with excellence and dedication by expanding our resources and service offerings in the gaming services industry, particularly in games with online connectivity that currently accounts for majority of our projects.”
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
Analyst says
The way analyst Heidi Mo sees it, earnings was a miss, due to weaker gross margin (-3ppt y-o-y) and net margin (-2.9ppt y-o-y) after the acquisition of two art outsourcing studios.
Due to the expected three-month integration phase for the new acquisitions, several projects were deferred to 2HFY2024, while efficiency was reduced. Higher marketing expenses of US$1 million (+86% y-o-y) was also posted, from more overseas initiatives. Excluding the acquisitions, gross margin was flat y-o-y at 30%.
See also: UOBKH calls Centurion Corp a stock for ‘growth-minded investors’
The group remained in a healthy net cash position of US$13.1 million with zero borrowings, contributed by improved operating cash flow of US$0.9 million (+56% y-o-y).
Winking Studios has a robust pipeline ahead for 2HFY2024, with at least US$10.1 million of indicative bookings by customers as of Aug 13 expected to be fulfilled by end-2024. “We also note that Winking Studios projects have a high online connectivity of 90.5%. This means that the games require regular updates and enhancements, pointing to potential higher and recurring revenue,” says Mo.
On July 9, WKS completed a placement at an issue price of 25 cents/share, a 1% discount to the volume weighted average price of 25.24 cents. For the placement, 108 million new ordinary shares were issued, raising $27 million in gross proceeds and $26.5 million net proceeds. The group was heartened to see strong interest from Acer Incorporated, its existing indirect controlling shareholder, the management team and existing and new investors across Singapore, Malaysia and Taiwan.
The net proceeds will be used to fund future growth plans like strategic acquisitions and dual listings to grow its market share and global customer base. The group had previously showed interest in exploring a dual listing on the AIM market of the London Stock Exchange (LSE). Management expects to benefit from access to a more diverse investor base and additional funding source.
Additionally, the group’s peer, LSE-listed Keywords Studios has reportedly agreed to a US$2.8 billion bid from European private equity firm EQT in July 2024, implying a over 100x PE valuation. “We believe this is positive news for the gaming industry and will allow Winking Studios to improve its trading multiple,” says Mo.
“We roll over our valuation base year to FY2025, where we expect stable earnings post-acquisition integration. Winking Studios is currently trading at a deep 50% discount of 15x FY2025 PE vs peers’ average of 29x, despite its higher net margin and ROE,” says Mo.
As at 10.40 on Aug 26, shares in Winking Studios are trading at 29 cents.
