Berenberg downgrades Frontier Developments to 'hold', slashes target price

Frontier Developments released a major profit warning on Monday, with its growth and margin outlook heavily impaired, coupled with several operating challenges and growing macro headwinds.

Berenberg said that while Frontier's first-half sales of £57.0m in 2023, up roughly 16% year-on-year, were broadly in line with expectations, a very weak December trading performance had resulted in "a major cut to guidance". As a result, Frontier lowered its FY sales guidance to "not less than £100.0m" - down from £135.0m and a 2% reported underlying earnings margin.

The German bank also noted that after a mixed performance of the eight titles published by Frontier's Foundry offering, the unit is now under review.

"Given that we believe the core issue has been game selection and target market analysis, we believe Frontier will re-align Foundry to focus on its core genres only. Foundry will not publish any titles in FY 2024, and we remove it from any revenue projections in FY 2025 onwards also until a firmer pipeline is announced," said Berenberg.

"Frontier trades on 24x enterprise value/earnings before interest and tax and 29x price-to-earnings for year ending May 2024, falling to 16x and 18x in full-year 2025," added Berenberg.

Reporting by Iain Gilbert at Sharecast.com