Charles Hoeveler of Norwood Capital Partners presented his in-depth investment thesis on Keywords Studios (UK: KWS) at Best Ideas 2020.

Thesis summary:

Keywords Studios is the “picks and shovels” for the video game content creation industry, featuring low- to mid-teen organic growth for the foreseeable future as both gaming content and content outsourcing continue to grow.

The company has ~20% share of the outsourcing industry, consistently taking market share from smaller competitors due to deep-rooted customer relationships (including 23 of the top 25 global gaming companies), strong service quality, and a unique ability to offer the full menu of content outsourcing services. Keywords’ durable competitive advantage stems from its relative scale (significantly larger than the next competitor and very fragmented long-tail). The company has an attractive, high-ROIC, low-risk long-term consolidation opportunity.

The market quotation declined in 2019 due to a slowdown in M&A and an understandable margin decline as the company invested in opex and capex for future organic growth. The shares are reasonably valued for a long-term 15-20% compounder, at mid-teens forward EBITDA and low-20s forward levered FCF per share.

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About the instructor:

Norwood Capital Partners, LP is a concentrated, fundamental value-based long/short investment fund. Norwood relies on primary research to build a portfolio of dominant businesses trading at a discount to intrinsic value. Norwood is managed by Charles Hoeveler, with 20 years of experience in institutional asset management.