Sunday share tips: Keywords Studios, Miton Asset Management

In his ‘Inside the City’ column for the Sunday Times this week, Ben Woods was looking at third-party video game development services provider Keywords Studios, which is the world largest provider of things like visual effects and games testing.

The video gaming industry is big business, with developers needing to spend a lot of cash on people - Woods pointed to blockbuster developer Rockstar Games, which had to employ more than 3,000 people to develop Red Dead Redemption 2.

It paid off for them, selling 17 million copies within eight days of its release, but it was still a significant investment in manpower.

Keywords reckons that this is a symptom of the increasing complexity of video games, believing that as that happens, developers will look to outsource more work, allowing them to scale up rapidly and finish games on schedule.

But that argument hasn’t held water with investors recently, with the firm’s share price dropping 25% in a year to around 1156p.

The entire industry has been disrupted in the last 12 months by online shooter title Fortnite, which has turned the traditional industry structure on its head.

Fortnite is simpler game from a development standpoint compared to many big-spending blockbuster titles, and unlike those other titles it is free to download and play, with developer Epic Games raking in revenue from extra downloadable content.

Activision Blizzard, the American developer behind the massive Call of Duty series and the mobile gaming phenomenon Candy Crush, proved the scale of this disruption in February as it forecast lower-than-expected profits for the first quarter.

But not all market watchers are of the same opinion when it comes to Keywords, with Berenberg analyst Edward James calling doubts over the company’s strategy “ill-founded”, adding that the big developers looked set to continue pouring money into blockbuster titles.

Liberum analyst Alexandre Schmidt went one step further, suggesting the outsourcing part of the industry could grow faster than the video games sector as a whole, with Keywords and its peers gobbling up market share through cross-selling.

And Woods said there were other reasons to give Keywords a look-in too, with Google confirming its entry into the £100bn computer gaming industry this month with its ‘Stadia’ games streaming service.

Google - part of Wall Street giant Alphabet - said it was anticipating a boom in what it called “cloud gaming”, with players streaming games directly from Google’s data centres, rather than the currently favoured distribution methods of downloading a game once, or buying physical media such as discs.

If cloud gaming follows the way of video entertainment and streaming services such as Netflix and Amazon Prime Video, the cost of gaming should fall for end users, with a monthly fee for streaming multiple games likely to be cheaper than the £45-ish it currently costs to buy a new title at retail.

Woods noted that it would also remove the need for a pricey video games console or high-end gaming PC, making playing more affordable in developing countries.

That too could give Keywords a boost, as the company is also a major provider of translation services for the video games industry.

“With Amazon also preparing a push into cloud gaming, Keywords looks like a solid long-term bet,” Ben Woods said.

“Buy.”

Over in the Mail on Sunday, Joanne Hart was looking past the current Brexit mess that is dominating headlines for her ‘Midas’ column, looking at boutique fund management firm Miton.

Hart said this time of year is historically a busy one on the investment calendar, as savers open or top up ISAs to make the most of their tax breaks, but noted that Brexit had changed the landscape this year, with a number of investors finding the uncertainty too much to bear funneling their cash away.

Still, fund managers were working as hard as they could, Hart wrote, describing Miton as being the kind of smaller fund manager that did its level best to remain different from its rivals.

Its shares were currently around 55p, and should head north according to Hart, with the company expanding and forecasting decent dividend growth.

She also said the stock should be firmly on the front foot once the “Brexit clouds” lift, and market sentiment recovers.

Miton was founded in 2001, but very quickly overextended itself and went through some heavy turbulence following the global financial crisis, with new managers being airlifted in to give the company a fresh direction.

Now, Hart described the firm as “well-run and fast-growing”, with a hand-picked selection of “top-performing funds”, lead by a group of “highly-committed” directors and fund managers.

Chief executive David Barron only too the reins two years ago, but boasts nearly four decades of fund management experience, including time spent at JP Morgan, Hambros Bank and Merrill Lynch.

Senior director Gavin Williams, meanwhile, had more than 33 years in the sector under his belt, and was jointly in charge of Miton’s biggest fund, ‘Miton UK Multi Cap Income’, which seeks out some of the City’s most generous dividend payers, and had consistently outperformed its peers, according to Hart.

Williams himself holds nearly 9% of Miton, so was incentivised to success alongside his partner on the Multi Cap fund, Martin Turner, who himself holds 7% of the company.

Hart noted that another top-ranking fund in Miton’s catalogue was European Opportunities, which included the like of Ferrari among its investments, and had also delivered “superior” returns since launch.

That was the perfect exemplar of Miton’s distinctive approach, Hart reckoned, noting that it focussed on selecting stocks with fundamental growth and income prospects, rather than simply following the herd as so many in the City do.

Such an approach was particularly significant in the current climate, with more savers shifting their funds to low-cost passive funds, simply tracking stock market indices.

As a result, a large number of active fund managers had struggled as they attempted to prove to investors that they were worth their fees.

Miton had been drawing in new customers without too much trouble, however, attracting more than £1bn of new money last year, and seeing its assets under management grow 30% to £4.4bn.

Profits rose 34% in 2018 to £9.2m, with the dividend heading up 43% to 2p, as Berron confirmed he would introduce an interim dividend in 2019.

Its outlook was a rosy one, with the company expecting more growth as new investors continue to sign up and it launches new funds, having set up three new funds in the last two years alone, including a small-cap focussed US one and a global infrastructure fund.

There were grounds to be optimistic in the longer-term too, Hart said, explaining that as people grew older, they needed to save more for retirement, with businesses offering active management and proven results likely to attract savers’ cash.

“Miton shares were trading at more than 70p last summer but have fallen back to 55p, amid persistent stock market nervousness,” Hart said,

“The fall is overdone and the stock should recover. Miton pays a decent dividend too. Buy.”