Archived article
Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
magazineFrontier Developments has further to fly
Independent video games creator Frontier Developments’ (FDEV:AIM) earnings upgrade cycle has further to travel, in our opinion.
While the video games industry has lumpy earnings linked to hardware and software release cycles, Frontier’s tie-up with Chinese internet giant Tencent and an exciting third games franchise could send earnings rocketing higher.
Tencent takes an interest
Founded in 1994 by CEO and 45.6% shareholder David Braben, co-author of the seminal Elite game, Cambridge-based Frontier’s first game franchise, space epic Elite Dangerous, is performing well.
In a seismic development, China-based internet and interactive entertainment titan Tencent has taken (28 Jul) a 9% stake in Frontier. This transformational tie-up will ‘accelerate and improve’ Frontier’s access to the growing Chinese market, already proving fertile ground for its second franchise, Planet Coaster.
Tencent is the market leader in China’s online games industry and the operator of a premium PC games distribution platform, ‘WeGame’. It has invested £17.7m in Frontier, subscribing for new shares at 523.2p.
Frontier will use these funds to accelerate the scale-up of existing operations and franchises. If Frontier’s games prove a big hit in China, its muscular new shareholder Tencent could up its stake or even potentially launch a full bid in time.
FinnCap analyst Harold Evans believes ‘this latest investment by Tencent speaks volumes about how highly Frontier is regarded in the industry’, and also ‘provides compelling validation of Frontier’s strategy and ability to execute’.
Momentum play
Armed with a plump cash pile, Frontier Developments also has a third franchise waiting in the wings which could prove its biggest hit yet.
Based on ‘an enduring Hollywood movie IP of global renown’ in the words of Braben, the game is scheduled for release in calendar 2018.
We believe the release of further details about the project later this year will act as an additional catalyst for Frontier’s soaring share price which is already up 120% this year to 650p.
FinnCap has a 690p price target. It forecasts £29.8m in sales for the year to 31 May 2018, rising to £57m a year later. Pre-tax profit is forecast to be £0.9m in 2018 and £14.8m in 2019.
Important information:
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
