MIDAS SHARE TIPS: Games maker Sumo Group is going super-Sonic

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Video games used to be considered the preserve of teenage boys, dodging homework and family in favour of action-packed fantasy on an X-box or PlayStation. But the industry has changed dramatically since the early days.

Today, the worldwide market for video games is valued at more than £90billion, it is growing at around 8 per cent a year and the average age for ‘gamers’ is 35. 

Games have become more sophisticated and more diverse and, as enthusiasts grow older, they are happy to spend more money on their hobby, particularly for premium games.

Fast mover: Sumo’s stars include hedgehog Sonic in Team Sonic Racing

Fast mover: Sumo’s stars include hedgehog Sonic in Team Sonic Racing

Fast mover: Sumo’s stars include hedgehog Sonic in Team Sonic Racing

Sumo Group is ideally placed to take advantage of this trend. The company floated on Aim last year, the shares are 164p and they should increase materially in value over the next few years.

Based in Sheffield, Sumo works with some of the world’s biggest publishers of video games, including Microsoft, Sony and Sega. 

Sometimes, Sumo produces a game from scratch for these customers – creating the story, the artwork, the code to make the whole thing work and various ancillary services. 

Sometimes, Sumo works with publishers on particular aspects of a game, such as design or ensuring it can be played on a range of devices.

Games vary widely – from Team Sonic Racing, involving Sonic the go-kart racing hedgehog, to Little Big Planet, a puzzle-based game.

In every case, Sumo is deeply involved with games’ development, so it has developed close relationships with customers, often dating back a decade or more. The group also concentrates on the premium end of the market, so-called AAA games, which cost millions and can take years to produce.

Crucially too, Sumo is paid as games are developed, often receiving monthly instalments for ongoing work.

The company was founded in 2003 by chief executive Carl Cavers and three colleagues, two of whom remain with the business to this day. All four had been in the video games industry for many years and realised there was a gap in the market for a professional firm that could provide high-quality, reliable creative and technical services to the biggest companies in the sector.

Sumo grew steadily and was bought by a US business in 2007. However, Cavers and his co-founders bought the company back in 2014. Since then it has expanded fast, with revenues rising from £16million back then to £28million last year, while profits more than doubled to £7.5million.

The company now has studios in Nottingham, Newcastle and Brighton, as well as Sheffield, and there are offices in Vancouver, Canada, and Poon, in India.

Sumo’s first few months on the stock market have been encouraging and first-half figures, released on Tuesday, should show robust growth. Brokers predict sales of £37million and profits of £9million for the full year, with further increases next year.

Changes in the video games industry are likely to drive further growth in the firm. Until recently, players could only buy physical discs. 

Now, increasingly, they purchase digital games which can be updated or extended online. This makes them more exciting for players but also gives companies such as Sumo more opportunities to add new features – and make more money.

Sumo’s customers have recently begun to offer the group royalties as well, which could deliver sizeable extra revenues, if games prove successful.

Encouragingly, 22 per cent of the shares are held by directors and employees, so more than 150 of the group’s 540-strong workforce are invested in the business.

Midas Verdict: Sumo is a well-run business, with loyal customers and high profit margins in a fast-growing market. Most of its staff are based in South Yorkshire, which has developed a reputation for creativity and innovation in the video gaming world. At 164p, the shares are a buy.

 



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