Codemasters – placing offers a buying opportunity

A buying opportunity has arisen in award-winning British video game developer and publisher Codemasters, writes Mark Watson-Mitchell.

I have to admit that I do not play video games, but that does not stop me realising that the market for these products is absolutely massive.

Developers of video games have become real cult stocks over the years. So too have the games that they publish and when a ‘house’ becomes well known and well followed their next new offering is snapped up very quickly.

The award-winning British video game developer and publisher Codemasters (LON:CDM) came to the AIM market just a year ago and in the last year has launched four new games.

Its speciality is high quality racing games, boasting such titles as: DiRT; GRID; Micro Machines; ONRUSH; and the Formula 1 series. Its back catalogue continues to expand as new titles are released, and all are income generators.

Over the years, leading developers, like Codemasters, create massive followings amongst gamers. So much so that the company is working flat out on creating and developing and then updating and improving its new AAA rated games.

The sophisticated technology used in such creations requires even better internet- based facilities, like streaming platforms and PlayStation consoles.

This Warwickshire located company is one of the most recognised British game developers and its successful record goes back some 30 years. The Group currently employs 511 people across three locations in the UK and one in Kuala Lumpur, Malaysia, which is a dedicated art studio.

The Group has built up a high-quality portfolio of licensed and owned IP. It has its own proprietary technology. It also has a very good and long-term relationship with Formula One. Furthermore, it has established relationships with the key platform providers and more relationships are being developed.

Importantly, it can boast a loyal gamer community which helps to de-risk the launch of new games. It also has almost predictable earnings from its established franchises.

The Group considers it has the advantage of very favourable market dynamics, reckoning that the outlook for the global gaming industry is highly positive, with industry experts predicting further significant growth going forward.

Codemasters expects its future growth to be driven by three main factors: improved technology, including faster and even more reliable online networks and the potential introduction of new consoles from Sony and Microsoft; investments by large companies building new streaming platforms, such as Google with their service, Stadia, which enables the Group to create content for up to two billion players who are no longer tied to individual consoles; and finally, the continued growth of competitive gaming both through participation in bigger esports competitions and viewership of content on platforms such as Twitch and YouTube.

The racing genre has its clear place within today’s video gaming industry and will play an equally important part within those expected growth areas. The company declares that it is very well positioned to benefit from these growth factors due to its focus, flexibility across platforms and reputation within the very well-defined racing category.

Many market and investment observers worry that the group’s ongoing relationship with F1 is too important to Codemasters’ business and the licence agreement with Formula One World Championship Limited is a key asset of the group.

There is a risk that if the group was to fail to release a game pursuant to the terms of the F1 licence, or if the owners of F1, Liberty Media, were to decide not to renew the license for the 2022 Formula One World Championship onwards, it would be detrimental to the group’s business and could delay the implementation of its strategy.

However, the company responds by stating that as a result of the early negotiation of the F1 licence with Liberty Media, it may be able to mitigate some of those risks as it ought to be aware of such non-renewal up to two years prior to the expiry of the current licence. The group could therefore focus its attention on assembling a team to make a different franchise or title during this period.


Codemasters is already a leader in what it does; however, its goal is to be the world’s premier racing game brand. The racing market will continue to be a strong gaming segment, built on its consistent popularity over the last 40 years and the global understanding of car culture and racing.

Codemasters’ proven expertise in this category along with its existing franchises, reduces forecasting risk, and every new release adds further capabilities to its proprietary technology and a stronger understanding of its player base.

The mobile gaming market is rapidly expanding globally due to the accessibility and performance of smartphones. Codemasters believes it has the potential to capitalise on this opportunity.

In the digital services market, the Group is committed to delivering additional post-launch content and services (Games as a Service) to increase the engagement, retention and monetisation of its games. Sensibly, the aim is to become less dependent on expensive new releases and secure more predictable, recurring and profitable revenues, while improving games experience and meeting its gamers demands.

Going forward, the strategy of the company is to strengthen its overall leadership position in racing games; to grow its audience; to increase its average revenue per user; to raise the competitive barriers to entry; and then to look at future acquisition opportunities.

For the year to end March 2019 the Group had a revenue of £71.2m upon which its adjusted EBITDA was £18.7m. Its pre-tax profits of £2.9m compared with a £1.5m loss previously. Earnings were a mere 3p per share.

For the current year estimates are for £82m of sales and £13m pre-tax, worth 10.5p in earnings. Next year some £91m of sales could produce £16m pre-tax, worth nearly 13p in earnings per share. For 2022 revenue of £97m and profits of £20m could help to shove earnings up to almost 15p.

Last Friday Reliance Big Entertainment from Hong Kong halved their holding by placing 20m shares at 220p each. That was a sensible market move and it gives fresh buyers a cheaper opportunity to get into the shares.

This is a very profitable and established business with strong upward momentum and its shares at 225p look capable of going through its 278p previous high.