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Frontier Developments Plc 24th September 2018 Share in Focus: Frontier Developments Plc Index: FTSE AIM 100 Market cap: £480.39 million Epic: FDEV.L Year high: 1880p Year low: 816p Buy approx.: 1260p Background Frontier Developments is engaged in developing non-game applications and video games for the entertainment sector. The Company's segments include self-published and external publishers. The self-published segment is engaged in sales of the game and digital in-game. The Company has completed work for external publishers, including Screamride and Tales from Deep Space. Its games are developed using its COBRA cross-platform technology, allowing code and resources developed on personal com- puter (PC) to be compiled and run on XBox360, PS3, iPhone operating system (iOS) and Nintendo WiiU. The Company offers Elite Dangerous game on PC, Mac and Xbox One. The Company is engaged in developing games of the strategy/simulation genre, including RollerCoaster Tycoon 3 for PC and Zoo Tycoon for Xbox. The Company also offers Planet Coaster, its self-published franchise. Report 5th September: Videogame developer Frontier Developments saw its shares dip on Wednesday 5th September after a fall in revenue and in- creased investment in research and development cut annual profits. For the year ended 31 May, the company reported reve- nue of £34.2m, down 9% from the previous year, and operating profit of £2.8m, down 64%, as its operating margins shrank from 21.0% to 8.0%. The firm attributed the decline in margins to the release of its 'Elite Dangerous' title on the Playstation 4, as well as lower mar- gin physical disk sales of the game on the Playstation 4 and Xbox One consoles. Research and development expenses of £15.9m, up 25.0%, were mainly due to staff costs and outsourcing relating to the recently released 'Jurassic World Evolution' title. David Braben, chief executive of Frontier, said: "Jurassic World Evolution has achieved our biggest launch to date, and we are now very well positioned with three successful revenue generating franchises." The firm had cash and cash equivalents of £24.4m at 31 May, up from £12.6m at the same point the year before. The shares fell heavily after the update, but have been recovering since: Director dealings On the back of a fall in share price, the Non-Executive Director and Chairman each took advantage of the situation, acquiring almost £300k worth of shares. Our opinion The video games specialist has seen its shares cheapen substantially as investors focus on a temporary pullback in annual sales and profits reported, yet the Cambridge-based publisher potentially has a monster year ahead. Geared into the growth of a booming global games market moving rapidly towards digital download, Frontier excites by an- nouncing for the first time that its fourth franchise will be based on the company’s own unannounced intellectual property (IP) and is now in development, with a release targeted in full year 2020. Backed by Chinese internet-to-interactive entertainment heavyweight Tencent, Frontier has successfully completed a shift to self-publishing games over the last five years. It has launched two successful games franchises, Elite Dangerous and Planet Coaster and, more recently, its third franchise Jurassic World Evolution, in June 2018. During the financial year to 31 May, the ongoing success of Elite Dangerous and Planet Coaster supported the investment in Jurassic World Evolution, which launched successfully alongside the smash hit Jurassic World: Fallen Kingdom at the cinema. Frontier is now aiming to accelerate its games output to achieve one major launch ‘every 12 months or so’. Founder and CEO David Braben says: ‘Franchise four, which is based on our own un-announced IP, is now in full development and targeted for release in full year 2020, and two more new franchises are in earlier stages of development.’ The company is yet to disclose any details on the franchise, including the type of IP, genre or platforms, says Liberum analyst Andrew Bryant. Given the lack of details, we forecast revenues of £20m from franchise IV in full year 2020, in line with Fron- tier’s first two franchise releases. However, depending on community reception, build-up to launch and marketing impact, this figure could change considerably. Broker forecasts Investment bank Jefferies has a favourable view of the business on the basis of Frontier’s ‘progress toward a broader base of AAA games, now launching yearly, generating a more diverse and sustainable profit profile over coming years, backed by a strong balance sheet (before Jurassic World Evolution’s proceeds are banked).’ FinnCap forecasts a leap in adjusted pre-tax profit from £3.9m to £16.5m for the year to May 2019 from forecast sales of £75.3m. Several brokers covering the stock for the last few months have reiterated a BUY recommendation on FDEV, as seen below: Risk Warning Disclaimer Although the author and publisher have made every effort to ensure that the information in this publication was correct at press time, the author and publisher do not assume and hereby disclaim any liability to any par-ty for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause. Investments can go up in value as well as down, so you could get less than you invested. This information does not constitute personal advice and you should speak to your financial advisor before committing to any pension product. Information in this document is for reference use only and its accuracy cannot be guaranteed and is subject to change. .
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