Frontier Developments – set to become a major player in a booming sector
Way back in 1982 a young man called David Braben started to work in the games business, at that time he was co-authoring his Elite game.
Twelve years later he set up a company called Frontier Developments (LON:FDEV) with the aim of building up an innovative games business, initially on a ‘work-for-hire’ basis.
The company went public in July 2013.
Today he has nearly 500 people working with him, having subsequently created a portfolio of games that have attracted millions of players.
The Cambridge-based company has developed its own cross-platform technology called ‘Cobra’, which now powers up games for Microsoft, Konami, Atari and Amazon.
Frontier uses its proprietary game development technology to create innovative games, currently focusing on videogame consoles and personal computers.
Its ground-breaking game franchises have achieved both commercial and critical success, including BAFTA nominations for its Elite Dangerous and Planet Coaster titles.
Planet Zoo, Jurassic World – Evolution, Kinectimals, Zoo Tycoon, Lostwinds, Rollercoaster Tycoon 3, Disneyland Adventures, Lostwinds: Winter of the Melodias, Screamride and Tales from Deep Space are amongst the many others.
On 5 November the company will be launching its Planet Zoo game, which will have authentic living animals and new game features.
The company describes its latest game as follows: “Simulation runs wild in the ultimate zoo sim, featuring authentic living animals who think, feel and explore the world you create around them. Experience a globe-trotting campaign or let your imagination run wild in the freedom of Sandbox mode. Create unique habitats and vast landscapes, make big decisions and meaningful choices, and nurture your animals as you construct and manage the world’s wildest zoos. Build and manage a truly modern zoo where animal welfare and conservation comes first.”
I don’t play computer games, watching the market is enough for me, however I can understand the potential excitement that thousands, hundreds of thousands and potentially millions of game players will have with Frontier’s major addition to its titles.
For me this really is another world – however, I do understand its financial ramifications and in the games business they can be absolutely massive.
The team of developers are working flat out on multiple other projects which are in various stages of development.
The company’s approach is to develop and launch a game with the full intention of supporting it over many years, in order to stimulate its target audience over the long term, thereby delivering sustainable multi-year revenue and earnings.
Since the company’s transition to self-publishing it has launched three successful franchises, sold over 8m base game units, and generated over £200m of revenue.
The company is now scaling up to deliver one major launch a year.
In addition to its core model of developing and publishing its own games, it is now partnering with other high-quality developers to bring more games to market through its Frontier Publishing initiative.
Its first such deal was announced in June, with Haemimont Games, who are well-known in the games sector for the Tropico series, Victor Vran and Surviving Mars. In doing this deal Frontier is actually funding both development and marketing.
The last trading year to end May showed some staggering returns. Revenue was up 162% to £89.7m and its profits were up nearly six times at £19.66m. Net cash balances were £35.3m, up from £24.1m.
Analysts expect that the current year revenue will fall back to about £70m, with pre-tax profits easing back, after that wonderful return previously, to some £12m, worth 25p in earnings per share.
Going forward the year to end May 2021 is already seeing brokers estimates of £86m of sales and £18m of pre-tax profits, worth 40p per share in earnings.
Valued at £363m this company’s biggest shareholder is David Braben, with 36.5% of the 38.74m shares.
Other large holders include the Chinese based Tencent Holdings (8.7%), Oppenheimer Funds (7.7%), Swedbank Robur (7.2%), Lansdowne Partners (5.4%), Hargreaves Lansdown (1.25%), Herald Investment Management (1.02%) and Unicorn Asset Management (1.00%).
Did you know that last year the global music business was worth $19bn in sales? That the global film box office was $42bn and that games were the biggest entertainment sector at $148bn.
Estimates suggest that the games sector will be some $174bn by 2021.
Frontier Developments really is a growth player in a high growth sector, its potential is very substantial, as too could its share price be in response to growing profits, but it is very dependent upon success of its launches – so it can be a ‘lumpy’ business.
Even so its shares, now trading at around the 990p level, will reflect that potential.
The company’s AGM is due later next month, which will be getting very close to the launch date of its Planet Zoo title. At that meeting I would expect a positive statement to help to boost the share price.
The shares touched £18 in May of last year and I do expect them to be back up there again in the next year or so.
In the meantime, I am comfortable setting a Target Price of £15.