Sumo Group Analyst Q&A: Core business and Pipeworks acquisition could both outperform (LON:SUMO)

Sumo Group plc (LON:SUMO) is the topic of conversation when Zeus Capital’s Technology Analyst Bob Liao caught up with DirectorsTalk for an exclusive interview.

Q1: Sumo Group have released a full year trading update this week, what were your key takeaways from the statement?

A1: The headline number, first of all, was very strong so EBITDA for the group is expected to be £16.0 million and that’s at least 8% above our estimate of £14.8 million so very strong performance for the full year of 2020.

What gives us additional confidence is that it was from a very broad base so the strength came from the acquired business, Pipeworks, as well as the existing business, it came through in terms of development revenue as well as royalty revenue. It was strength at the top line as well as at the EBITDA line and in terms of cash generation as well.

So, I think very broad based is how I would characterise the earning so that should give investors considerable confidence.

Q2: The company, as you mentioned, recently acquired US-based game code developer called Pipeworks. How has that actually progressed?

A2: It’s performed ahead of expectations as well and this lines up the business for potential earnings outperformance.

We have in our forecast very conservative estimate for the acquisition that assumes no earn-out in terms of their level of performance. If it is the case that they actually do performance and earn a full-earn out perhaps, then we estimate that the EBIDTA for the whole group could rise by 13% which would obviously be a huge benefit. Now, they’ll be some dilution associated with that but even that, we’re looking at an effective accretion in the earnings of about 6%.

So, I think overall, the acquisition is going well and might even drive the performance for the group as a whole.

Q3: Sumo Group seems to have had a strong finish to 2020, what is your outlook for 2021?

A3: 2021 looks like it’s very well positioned, the company ended 2020 with a strong base and they are ahead in terms of their resourcing so the number in the headcount is ahead of where they thought they would be and that’s usually the primary driver of growth.

So, they’re starting off ahead and if you look at what the expectation is that’s built into numbers, it’s about 24% growth in EBITDA that’s expected in 2021 and that, we think, should be readily achievable.

The company generally does grow its headcount by 20-25% and they’re already slightly ahead of schedule on that. In addition to that, the company does get additional margin enhancement through additional scale. So, the company’s got a gross margin above 40% and so most of the growth in top line should drop to the bottom line.

So, we think there’s a good likelihood that that core business, that existing business, could also outperform in addition to the acquisition. Overall, I think on both fronts, the group is well, well positioned for 2021.

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