UOB Kay Hian (UOBKH) has initiated coverage on Acer-backed game art outsourcing company Winking Studios with a “buy” call and a target price of S$0.35.

Given a booming game art outsourcing industry and the group’s international brand recognition, analyst Heidi Mo expects the group to experience revenue growth at 8.8 per cent three-year compound annual growth rate (CAGR), as well as 9.4 per cent three-year CAGR for core earnings for 2024 to 2026.

She said that the group, supported by a healthy operating cash flow and Acer Gaming’s strong backing, will also continue to achieve inorganic growth via acquisitions.

The brokerage, in an Apr 4 report, pegged the S$0.35 target at 17 times its FY2024 earnings estimates, a “conservative” valuation as it implies a 35 per cent discount compared with its peers’ average.

Mo noted that the stock is “severely undervalued”, given that the counter’s closing price of S$0.265 on Apr 4 implied an adjusted valuation of 13 times the 2024 earnings forecasts, a “significant” discount of 50 per cent to its peers’ average.

“We think the market has overlooked Winking Studios’ strong performance to date and upcoming growth prospects,” said Mo, noting that its core earnings more than doubled in 2023 compared with 2020, representing a three-year CAGR of 35.4 per cent. She also emphasised that the group outperforms its peers with higher net margins. 

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“With new customers being onboarded, the integration of On Point Creative, and strong backing from Acer Gaming, we have a positive outlook on Winking Studios’ performance.”

Mo highlighted that while the group’s allocated initial public offering (IPO) proceeds have been utilised for the acquisition of art outsourcing service provider On Point Creative, she believes its strong operating cash flow should support future mergers and acquisitions opportunities.

Winking Studios’ operating cash flow grew from US$1.8 million in 2020 to around US$3.4 million in 2023. Upon excluding IPO expenses of about US$2 million, actual operating cash flow tripled to US$5.4 million in 2023.

The analyst also noted strong support from the group’s majority stakeholder Acer Gaming, which on Mar 24 raised its deemed interest in Winking Studios to 59.6 per cent.

On Feb 25, Winking Studios posted a 15.5 per cent drop in net profit for second half year ended Dec 31, 2023, to US$453,000, despite a 15 per cent rise in revenue. This was due to higher sales cost, as well as distribution and marketing expenses led by more aggressive market expansion strategies.

Shares of Winking Studios : WKS 0% were trading down 3.8 per cent, or S$0.01, at S$0.25 as at 10.29 am on Monday (Apr 8).