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Sumo Group focus on quality acquisitions says Zeus Capital

Sumo Group plc (LON:SUMO) provided a solid update, stating that trading was “comfortably in line with market expectations”. Sumo plans to accelerate acquisitions since recruitment is expected to “remain challenging for some time”. We believe the change is marginal and see acquisitions well supported by Sumo’s disciplined acquisition criteria, proven integration process and balanced earnout structures. Sumo remains focused on delivering earnings accretive acquisitions. We make no changes to forecasts and continue to highlight Sumo’s low valuation multiples relative to peers.

Acquisitions v organic recruitment: Growth through acquisitions adds assets such as such as technologies, brands, customer contracts and relationships, in addition to staff. We see future acquisitions well supported by Sumo’s proven integration process and the implementation of earnouts that align the target’s interests and incentives with Sumo’s.

Continue to expect quality and value: The additional emphasis on Sumo to complete acquisitions is unlikely to increase cost or risk, in our view. The management team remains disciplined and focused on quality, accretive acquisitions and checks and balances remain in place to ensure good value is achieved. In addition, the company continues to focus on earnouts to ensure all interests and incentives are aligned. Sumo remains focused on delivering earnings accretion in its acquisitions.

Tweak to growth strategy: We understand the anticipated acceleration in acquisition activity is marginal and not expected to require any additional investment in corporate development or acquisition integration resources. We make no changes to forecasts, which we provide overleaf. Shares continue to trade at a sharp (28%) discount to peers (15x v 20x EV/ 2021 EBITDA).

Other operational updates: The company has “continued to perform well” since its last update in April and has a strong pipeline. Video gaming activity continues to benefit from lockdown. The company’s most recent game launch, Little Orpheus, received “very positive feedback” in Apple Arcade. Operationally, staff are working “very effectively” from home, with only minor disruption and with “similar productivity”, in most cases. While Sumo Group has no plans to reopen its studios in the near-term, it is exploring options on how and when to do so. 

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