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magazineWhy it is worth grappling with Sumo
Video games developer Sumo (SUMO:AIM) looks attractive ahead of maiden AIM results (24 Apr). Positive noises from the Sheffield-based newcomer should be the catalyst for some bullish analyst commentary and potentially lift the stock from recent post-float weakness.
Sumo debuted on AIM in December, having raised £38.45m of fresh funding at 100p, since when the stock has drifted back below the IPO issue price to 93.5p. In our view this represents a good entry point for new investors.
Sumo’s pre-close update (1 Feb) sounded confident – calendar 2017 results will be ‘at least in line with management expectations’ - and the group is geared into growing global demand for creative content.
VIBRANT VIDEO GAMES PLAY
The £143.6m cap’s is growing organically as one of the world’s leading co-developers of AAA-rated gaming titles and its work-for-hire model means it is not exposed to risks associated with the hit driven nature of a games publisher.
Given its scale and creativity, Sumo appears well placed to capitalise on the forecast growth in the video games industry, the biggest entertainment market in the world.
Core business Sumo Digital is a leading developer of AAA-rated video games operating out of studios in England, India and Canada.
Boasting strong ties with major developers and publishers including Microsoft, Sony and IO Interactive, Sumo Digital has provided development services for hits such as OutRun 2, Hitman and Sega & Sonic All-Stars.
Last year, Sumo Digital released its first own intellectual property title, Snake Pass, which has proved a hit albeit this remains a small if developing part of the business.
Shares notes June 2017 acquisition Atomhawk Design has delivered an especially strong performance post acquisition.
A highly complementary addition to Sumo, this visual design expert works with brands including Amazon, Marvel and Sony, projects on its CV including Guardians of the Galaxy and Mortal Kombat.
BOLSTERED BALANCE SHEET
IPO funds have repaid debt, so that Sumo now boasts ‘significant positive cash balances’ to help it invest in organic growth and the acquisitions of premium video game service providers and rival games developers.
Institutional backers include BlackRock and Liontrust, appetite among professional fund managers reflecting Sumo’s merits and the strong performances of sector peers Keywords Studios (KWS:AIM) and Frontier Developments (FDEV:AIM).
Peel Hunt has initiated coverage with a ‘buy’ rating and 125p price target implying 33.7% potential upside. For 2017, the broker awaits confirmation of adjusted pre-tax profit of £7.1m (2016: £2.1m), forecasting hefty increases to £8.9m and £11.7m this year and next.
Important information:
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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.
