Sign up to our newsletter for daily updates and breaking news Sign up here! Thank you for subscribing See our privacy notice Invalid Email

Having last week delivered another extremely positive update to the market, Cambridge based Frontier Developments looks well set to further continue on its growth trajectory.

In a catch up call earlier this week with Chief Operating Officer David Walsh it is clear the Frontier board continues to be delighted with not only the recent performance but, the prospects ahead.

“Were clearly very pleased with how things are progressing, both with Elite Dangerous and Planet Coaster that have performed well and continue to do so.

In terms of Elite Dangerous, it has been particularly busy for the team of late as Walsh pointed out that this week ushered in the launch on PS4.

That, should mark yet another significant milestone for the company in its self- publishing journey and it should prove interesting to see just what transpires in terms of numbers for the epic space game as it moves forward.

In terms of the business model which is now delivering such tangible returns, Walsh says, “the new digital distribution landscape that is with us has created a vastly different environment that ideally serves for multi year revenues”.

And those numbers, which although difficult to pin point with any certainty are nevertheless beginning to take on an ever more positive shape with momentum building as the gaming franchises scale up.

Last year, Frontier's revenue hit £21.4m with £37.3m now firmly on the cards for the year to be delivered rising to an estimated £62.9m by full year 2019 according to Broker Numis.

Although the same Broker envisages a pause to £30m on revenues for next year, this is largely in keeping with the model and is short term cautionary as a result of such a strong full year 2017 along with a noted increased investment spend.

The beauty and strength of Frontier's business though is demonstrated by its ability to both develop and fund further games from its own resources whilst retaining a healthy net cash balance and further driving profitability.

Following last weeks market update the 2017 numbers are expected to deliver a pre-tax profit of £7.3m whilst net cash should stand at a very healthy £12.6m.

Looking ahead to the remainder of the year, holders or watchers of the shares will be eagerly awaiting news on the forthcoming third game that is being adapted from a world renowned Hollywood movie which has already attracted widespread interest across the gaming industry.

As expected, Walsh remains tight lipped on this front, other than to say, “people will get to know more at the end of summer, when all will become clear”.

We currently have some 75-100 people actually working on the third franchise, although those numbers will obviously drop off from when the game is launched.”

However, if such a suggestion implies that heads may then be in for something of a lull at Frontier, such thoughts can be quickly dispelled.

Walsh tells me that they are still actively recruiting, the headcount now set to move beyond the current 330, which has already been boosted by the company taking on highly experienced and seasoned people that became available when Sony's Gorilla gaming studios in Cambridge closed.

“That worked out really well for both us and them and it is helping with our goal of further expansion and a scaling up”.

Despite now having two successful games under its belt and the much anticipated third coming soon, Walsh talks of plenty of other ideas in the pipeline, where he says Frontier now has a great template to take forward in order to exploit a number of gaps they have identified in the market.

And the new HQ is also coming along rather well, looking every bit as impressive as artist impressions, with progress on track for a year end completion and the full team moving in early next year.

As for the shares, the chart makes for pleasant reading, rising from 95p when I first spoke with the company back in 2013 soon after listing, to a current £4.68p.

Whilst that valuation with a market cap of £150m may deter some and for others signal a time to take profit, those looking to the longer term may prefer to stay on board for the journey.

As the days when games purely reliant on near term disk sales and short term popularity are gone, the advent of a migration to on line downloads and upgrades ensures freshness and longevity that provides for more sustainable and predictable sales and profits.

In its note from last week, Numis suggests that a prudent assumption is that the forthcoming new game will sell at least 1 million copies in its first 12 months given the very strong association with an existing and world renowned brand and as a result, there is clearly potential for significant upside to this figure.

Without knowing just what the initial price will be set for this game, it is difficult to suggest accurate numbers.

However, if we take a fairly standard gaming industry price then the prudent number suggested by Numis would generate circa £35m sales in that first year.

Numis is now forecasting 2019 numbers of £62.9m revenue and pre-tax profit of £12.8m.

This suggests that the EPS figure of 19.5p points to a PER of 24, although if FinnCap, which also covers the stock with a more upbeat 35.4p EPS is applied, then the forward PER drops to 13.

The reality may of course go on to prove to be somewhere in between these numbers, which if near the mark on a conventional basis suggest Frontier's shares remain attractive, despite the recent strong run, particularly given the expected net cash pile of £15m and the continued franchise growth.