Sumo Group (LON:SUMO) has released a positive pre-close statement this morning, confirming results for the year ended 2019 will be “at least in line with market expectations”, echoing the statement made at the same time last year. 2020E forecasts looked to be underpinned with a number of new contracts won towards the end of 2019. We leave our forecasts unchanged as a result of this announcement. We remain comfortable with Sumo’s investment case with the Group continuing to see good levels of demand with earnings visibility for FY20 at 41% at the time of the interim result looking further underpinned by this morning’s announcement. At last nights close Sumo trades on an FY20 PE of 26.7x falling to 23.2x in FY21 which represents a discount of c.23% to its peer group average.
- Trading update: Sumo has confirmed results for 2019E will be “at least in line” with market expectations. The group has seen another period of productive trading in 2019, a year in which the group increased headcount by 174 to 766 people, ensuring they have sufficient resource to meet earnings forecasts in 2020E and beyond. The group also completed the acquisition of Red Kite Games, opened new studios in Leamington Spa and Warrington and relocated the Red Kite Games studio from Huddersfield to central Leeds. Net cash of £12.9m is c.£1.0m lower than our expectation and is a result of the timing of milestone payments that were contracted to be paid in January, (c.£0.6m of this was received on the first day of trading in 2020). We leave our forecasts unchanged as a result of this announcement.
- Investment case: We remain comfortable with the Sumo investment case and see this morning’s update as further evidence of the group’s ability to consistently deliver shareholder returns. The group is well positioned to capitalise on positive market trends forecast to continue in 2020E. Sumo is well positioned to act as a consolidator in a highly fragmented market to further supplement its organic growth opportunity. Sumo’s track record since IPO 24 months ago has been solid, meeting or exceeding forecasts laid out at the time of our initiation in both 2018 and 2019. Five studios have been added to the Group since IPO and the group now operates globally from 10 studios across the UK, India and Canada. We believe the strength of the group’s relationships with its blue-chip customer base and management’s ability to efficiently allocate resource, ensuring high levels of utilisation are maintained are key strengths of the business and will continue to deliver shareholder value.
- Valuation: At last night’s close Sumo Group trades on an FY20 PE of 26.7x falling to 23.2x in FY21 which represents a discount of c.23% to its peer group average.
