Frontier Developments Share Discussion Threads

[parob] 24/9/2024 13:27

I have noticed some decent sized trades going through since the TR1. 40K for eg earlier. Wonder if Viking are still buying.

[caveater] 24/9/2024 11:52

Picked up a little bit this morning

[juliemara] 23/9/2024 10:30

Appears it's found another cliff to fall off!

[mirabeau] 20/9/2024 19:24

Are recovery prospects at video games developer Frontier Developments FDEV

0.61%
coming together, or is this investment still highly speculative?

Viking Global Investors thinks now is the time to buy at around 245p; its Viking Capital subsidiary has in recent months accumulated a 5% stake in this £97 million company. It does, however, manage £44 billion equivalent, so may prefer a few higher-risk/reward plays as part of diversification in pursuit of capital growth.

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Yesterday, it was announced that this stake had increased implicitly from 1.9% last July, hence appears to be a verdict on Frontier’s annual results to 31 May, declared last Friday. Mind that in July and at end-August respectively, Arcadian Asset Management trimmed its stake modestly to 2.6% and Invesco to 5.6%.

I examined Frontier last November at 147p after a 96% share price fall, intrigued as to whether a “mean” or average performance rate for the business could exist – somewhere in between the exceptional demand for games during Covid lockdowns and its aftermath.

The stock chart shows a classic boom/bust pattern around Covid. Frontier floated at 127p in mid-2013 it peaked above 3,300p then ceded nearly all of it:

At 147p I sought more evidence so rated the shares a “hold”. The price did ease to a 130p range in this year’s first quarter after revenue fell, then losses increased at January’s interim results to 30 November. But an “in line” trading update on 2 April was enough to trigger a run from 140p to 225p, although it’s unclear whether insiders sensed what was in store, as a more bullish update on 7 May saw this rally continue to 300p.

It has been a good example of whether to take your cue mainly from the chart – anticipating some extent of mean-reversion upwards – or insist on proof in numbers, especially profit. Frontier guided expectations for adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) upwards last May.

Perhaps a more important call is whether the business overall is now on the cusp. This stock has been in a sideways-volatile trend since May - it was down to 230p earlier this month and it slipped 3% to 247p yesterday compared with rises elsewhere in response to the US interest rate cut.

A tale of two financial half-years, and better prospects

Annual results to 31 May showed revenue disappointingly down 15% to £89 million, although a £97 million market value implies a modest price/sales ratio of 1.1x at 245p currently – such that if costs are better managed and return on investment kicks in, the PS ratio should be roughly 1.5x at least.

The narrative cites under-performing game launches in the first half, partly offset by a strong back catalogue performance of “creative management simulation” games mimicking real-life situations. CMS outperformance persisted into the second half, meaning the annual revenue fall was ahead of expectations.

A carrot is dangled by way of the strongest-ever release of games set to launch over the next three years. Among the titles, Planet Coaster 2 is due to launch this autumn, hence scope for useful news from reviews, leading to user numbers; then a third Jurassic World game in the May 2026 year and a further (as yet unannounced game) in 2027. Unless more are under wraps, that implies reliance on several proving hits.

Alongside better revenue prospects, management says it has cut annual operating costs by 20%, albeit they’re yet to manifest given the annual income statement shows sales and marketing costs down only 3% to £11.6 million and administrative expenses also by 3% to £13.7 million. Implicitly, they mean “run-rate̶1;.

The biggest cost element is £68 million research and development expenses, the same as the May 2023 year, although it’s unclear whether that is included (I rather doubt) in boasting 20%-lower costs. Sometimes, intellectual property development companies do go through investment phases that lead to harvesting, but in games there seems an element of “running to stand still” – always needing to prepare a next big release. See the material element of annual capital expenditure persisting in Frontier’s eight-year table below.

But combine these two broad elements – potentially improving sales against lower costs – and there is scope for quite an inflection point. The table shows £18 million net profit achieved on similar £89 million revenue in the May 2019 year; the little difference between operating and net profits in the trend over years implies benefits from tax credits linked to R&D.

This company has achieved reported operating margins over 20% in four of the past years from 2016:

Radical cash flow elements, albeit potentially reducing PE

The May 2024 annual results highlight cash up 4% to £29.5 million, although referencing the cash flow statement, cash generated from operations halved to £22 million.

After this and on the investing side, investment in new titles eased 30% to £29 million, and on the financing side £9 million tax was received. There was also no repeat of £3 million share purchases for an employee trust in 2023, nor a £1.3 million loan repayment. There were, hence, some significant dynamics within the slight rise in cash held, and the outcome could have been different than a pleasing rise.

It is speculative but, yes, there are grounds to believe Frontier can mean-revert its performance – the chief uncertainty being, to what degree?

Consensus anticipates a small normalised loss for the current financial year and only £1 million net profit in 2026. Unless R&D costs continue to weigh heavily, I sense this is probably cautious guidance from the company to its broker, and there is scope to outperform.

While the May 2026 price/earnings (PE) multiple is 80x based on projected earnings per share (EPS) of 3.1p, eventual mean-reversion towards EPS more like 20p would imply a PE of 12x.

A case for intangible value

A “price-to-book” ratio under 1.3x (book value of 195p) along with 1.1x price/sales, seems another indicator how, if management has an astute grip, the return on assets can be raised.

Looking back to 2016, for example, a share price around 200p compared with net asset value near 67p a share, hence a 3x ratio. Frontier made only £1.4 million net profit that year; the premium correctly anticipated the advance to £18 million in respect of May 2019 (before Covid lockdown sales manifested).

While 56% of net assets comprise mainly intangibles also goodwill, you can expect this for an intellectual property type business.

Warren Buffett has argued – primarily regarding newspapers – that intangible values are integral to modern business valuation. Implicitly, such a view included brand loyalty to Apple Inc AAPL

1.17%
, which (through success) became Berkshire Hathaway Inc Class B BRK.B

1.05%
’s biggest holding.

Obviously, the more rapid turnover in video games does not have a general loyalty factor to the extent of The Washington Post or Apple advancing the iPhone brand. Frontier wrote down its “other intangible assets” by 37% to £35.7 million over the last financial year due to amortisation and impairment.

So, there is a case for intangible value albeit lacking longevity.

A ‘good’ start to the new financial year

While a top management might strictly be positioned now to quantify the first quarter, Frontier cites “ongoing strength with the CMS-led back catalogue, with Planet Zoo and Jurassic World Evolution 2 again the star performers.

There is a “fear of missing out” aspect to my conclusion, after awaiting more proof last November and ending up missing a two-thirds re-rating to the current price, or more than doubling to over 300p since May. But there seem decent odds that the business at least is on a rising trend once again.

Frontier is speculative, yet Viking’s stake-building affirms my sense that the shares are a Buy.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

[grahamytrain] 20/9/2024 08:48

Pity the market ain’t seeing it that way……. yet???

[mr euro] 19/9/2024 11:30

We have an edge when it comes to small caps and generally are ahead of the game. Interesting to see Viking are the first to catch on to this.

Have to say Viking are smart cookies.

The ride is about to get exciting, should be a fun year!

[parob] 19/9/2024 09:53

All the indicators looking good including this one:Looks like the velocity of new followers and wishlisters has also picked up. $FDEVhTTps://x.com/fintech_dev/status/1834877827797168454?s=46&t=_ybVnpe01AP_F1Pw0JqKTg

[mortal1ty] 19/9/2024 09:40

You can bet that they wouldn't get involved unless they saw 100%+ upside.

These international fund managers won't mess about with micro-cap unless they think its compelling.

[parob] 19/9/2024 08:41

New TR1 holdings RNS.Viking capital of Toronto over 5%.Great to see institutions seeing value at these prices and hope they continue buying.It's exactly want you want to see as the share price increases.

[mortal1ty] 18/9/2024 10:04

FDEV and Team17 got dragged down by the Ubisoft Star Wars Outlaws debacle. That game looks so bad. Some of the YouTube video on it are hilarious. Not to mention the wokeness of it.

Anyway, Team17 results look very good, and the initial feedback from the community on PC2 is incredibly positive. I mean, gushing with praise. Only negative I have heard is on the UI in PC.



So hopefully back to £3 as you say.

[parob] 18/9/2024 09:27

Decent volume and move up yesterday. My recent top ups now in profit too :)Perhaps the market is starting to price in a successful PC2. All the signs look encouraging so far. Loads of sellers were flushed out on the high volume day on the 11th Sept so this stock can move up more freely now imo. I'm hoping we can climb back to the 300p ish level then a bullish trading update to take us through. Next target would then be 500p. Fingers crossed :)

[grahamytrain] 16/9/2024 14:27

The market don’t seem impressed, doh!

[parob] 15/9/2024 10:57

Some prominent gamers and games publications have been given the opportunity of an early preview of PC2 since announcing the launch date a couple of days ago. There are stacks of reviews online and everyone seems pretty impressed.

Here’s one examples:

I just played my most anticipated PS5 game of the year — and now I’m even more hyped



Fingers crossed sales match the online hype and Frontier is able to deliver above currents forecasts in the market. We could see an incredible re-rate if so imo.

[grahamytrain] 14/9/2024 22:14

This will recover, very soon.

[parob] 13/9/2024 07:32

13 hours ago.It keeps climbing, currently #21hTTps://x.com/fintech_dev/status/1834294545200173374?s=46&t=_ybVnpe01AP_F1Pw0JqKTg

[parob] 13/9/2024 07:30

14 hours agoPlanet Coaster 2 is now available for pre-order, with a release date set for November 6th. It's already made its way to #31 on the global top sellers list. Exciting to see how this one progresses! $FDEVhTTps://x.com/fintech_dev/status/1834278773187031297?s=46&t=_ybVnpe01AP_F1Pw0JqKTg

[parob] 13/9/2024 07:27

Coverage in mainstream press:Planet Coaster 2 hands-on preview – build your own adventure parkhTTps://metro.co.uk/2024/09/12/planet-coaster-2-hands-on-preview-build-adventure-park-21595328/

[mortal1ty] 13/9/2024 07:09

The community seems happy. Literally got everything they asked for.

Drop tracks.
Switch tracks.
Dark rides.
Customisable rides.
Better pathing tools.

Lazy rivers.
Water slides.

It just needs to run without bugs and lag.

[walkerdixon] 13/9/2024 07:00

Comments across all social media platforms seem very positive about the new trailer, they just need the game to launch the game without too many bugs/issues now and they could really be onto a winner

[mortal1ty] 12/9/2024 17:15

Its got everything going for it. Just need people to buy it.

Planet Coaster 1 sold c. 800k units in its first year and that was just on PC. I'm hoping the genre is still very much alive.

[mr euro] 12/9/2024 16:00

Reading the comments make me happy.

They have really nailed the GTM, marketing and quality of life of PC2.

£40 is a good price point too.

I can't remember the analyst estimates for sales of PC2, I think it was something like 250-300k units. You can a 0 to that over the life cycle of the game IMHO (minimum). Add DLC's and that's a lot of revenue.

[walkerdixon] 12/9/2024 15:30

Planet Coaster 2 release date 6th November, they've just put this out