Demand for the expertise of video games services provider Sumo Group (LON: SUMO) remains high with the current year forecast practically underpinned by work that is already contracted.
The UK games market is worth £7bn a year, up 30% in 2020, and there is increasing need for creative talent. The global games market is expected to be valued at $196bn this year.
In 2020, revenues increased from £49m to £68.9m, while underlying pre-tax profit improved from £12.6m to £14.8m. There were contributions from acquisitions, but there was also organic revenue growth of 24%.
Sumo’s development teams adapted to working from home due to Covid-19 lockdowns, although there was a larger than normal level of holiday pay accrual affecting margins, and capacity remains the main potential constraint in the sector.
The contribution from the company’s own IP was lower this year, but it will potentially be lumpy, and the investment put into IP will show through in a couple of years. A new publishing label, Secret Mode, has been set up. This company has responsibility for publishing Sumo’s own games and could also publish games from independent developers.
Profit is converted into cash. This has been used to help finance acquisitions. Net cash was £6.8m at the end of 2020.
Acquisitions and recruitment increased the number of employees from 766 to 1,043 last year. Utilisation rates were above 90% in the UK and US. In India, the utilisation rate fell to 79.3%.
The recent acquisition of PixelAnt provides Sumo with a development base in Poland. This will enable the company to recruit developers in the surrounding area, thereby increasing the pool of available talent. This will make it easier to increase the number of group developers by the 300 that some analysts believe is required for the current level of contracted and near-contracted work.
Further acquisitions are likely, and studios could be set up in new locations. Training new staff is also important.
Sumo has only acquired services businesses up until now. However, having set up Secret Mode, it may turn its attention to video game publishers.
Sumo Digital has 85% of forecast revenues, while Pipeworks, the US business acquired last year, has 50% covered. That equates to around three-quarters of forecast 2021 group revenues of around £107m. Forecast pre-tax profit is £19m.
Sumo has shown that it can grow substantially and, as long as it can hire the developers it requires, it will continue to grow sharply. The services business provides steady growth, while the development operations will be volatile but could provide added acceleration to profit.
The share price has recovered most of its early 2021 losses, so at 351p it is not far off the all-time high. The prospective multiple of 42, falling to 34 in 2022, appears high but Sumo has consistently shown that organic growth is significant and the prospects warrant a high rating.