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Team17 and Frontier upgraded as broker sees video game sector buying opportunity

Video game developers Team17 Group PLC (LON:TM17) and Frontier Developments PLC (LON:FDEV) have been upgraded by analysts at Shore Capital, who said any de-rating of share prices in the industry as lockdown restrictions were eased offered “an opportunity to build exposure” to what they said was a “fast-moving industry”.

In a note on Wednesday, the broker upgraded Team17 to ‘hold’ from ‘sell’ with a fair value of 720p and Frontier to ‘buy’ from ‘hold’ with a fair value of 3,100p, saying that the coronavirus (COVID-19) pandemic had “provided a positive spotlight for the industry” and accelerated underlying trends, therefore they expected to see a “continuation of demand for content across all platforms” once the pandemic subsided.

“We believe there will also be a bigger push towards digital sales, driven by the release of more post-launch content and updates, and developments in mobile, which is all fully digital”, ShoreCap said, adding that firms able to achieve high customer engagement with players acquired during the pandemic “will be the most successful” as gameplay activity normalises post-COVID.

ShoreCap also said it expected mergers and acquisitions (M&A) in the space to continue, with a focus likely to be on “gathering more [intellectual property] and resources, including staff”.

“The companies we cover are all net cash positive and appear in a healthy position to participate in M&A or spend on new licencing agreements when appropriate. Additionally, we believe the strength of the industry will not have gone unnoticed from adjacent industries, therefore we may see more collaboration e.g. within outsourcing capabilities or advertising opportunities”, the broker said.

Aside from the upgrades on Team17 and Frontier, ShoreCap’s analysts also retained ‘buy’ ratings on video game development services firms Keywords Studios PLC (LON:KWS), with a fair value of 3,100p, and on Sumo Group PLC (LON:SUMO), with a fair value of 400p.

“We believe there is more to come from the video games sector, and therefore look towards any material share price de-rating, due to a rotation into COVID recovery plays, as an opportunity to build exposure to this fast-moving industry”, the broker added.

Shares in Team17 rose 0.6% to 700p in mid-morning trading, while Frontier climbed 1.5% to 2,640p, Keywords jumped 1.3% to 2,602p, and Sumo was up 3.3% at 310p.

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