Frontier Developments’ pull-back gives investors a good entry point, brokers say

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Frontier Developments PLC (LON:FDEV) has “an increasingly busy release pipeline”, Liberum Capital Markets said as it reiterated its ‘buy’ recommendation in the computer games developer.

The broker note came in the wake of Frontier’s announcement that it is to publish a second game based on Games Workshop Group PLC’s (LON:GAW) intellectual property.

It was already developing a game based in the Warhammer universe (think Tolkienesque orcs, only spelt differently to avoid copyright infringement), and now it has signed to develop another computer game, based on the Warhammer 40k (think orks in space).

“The shares are currently discounted vs UK peers having come off by just over 10% in the last couple of weeks since the Elite Dangerous: Odyssey launch on PC, which was met with some negative reviews in response to connectivity and optimisation challenges,” Liberum said ahead of next Friday’s year-end trading update from Frontier.

“With the former issue now largely resolved, the company are working hard on fixing the performance-related problems and will be releasing a roadmap later today to outline expected progress. Overall we see this having little impact on the long-term success of the Elite franchise, which – together with the business’s move to releasing two games per year from FY22 – leaves plenty of long-term upside on the table in our view,” the broker added.

Liberum has a target price of 3,540p for the shares, which currently trade at 2,620p.

Shore Capital also rates the shares a ‘buy’ and says the recent softening of the share price represents a good opportunity to get onboard.

The broker noted that the latest Games Workshop (GW) announcement relates to a game developed externally, whereas the other GW title is being developed in-house.

“Over the near future, we expect the publishing division to build into a material contributor for the group. Frontier Foundry is targeting to release at least three new titles during FY22F and we currently forecast five/six games per year from FY23F, building to c.£17mln of revenue,” Shore said.

The broker said the botched release of the PC version of Elite Dangerous: Odyssey could test the loyalty of the series’ loyal fans but is encouraged that Frontier has publicly addressed this issue and has already begun to release some patches to fix the on-going issues.

“However, given the importance of reputation and also the loyalty of gamers, which can cause long-lasting damage if impacted, we will continue to monitor this situation carefully. We can expect the console version to be released during FY22,” Shore added.

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