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British gaming: My top UK shares for 2021

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British gaming is currently in a sweet spot for investors considering UK shares, in my opinion. It’s been an excellent year for gaming companies. Already benefiting from its growing industry, UK game producers saw their fortunes accelerate when millions across the world were given stay-at-home orders.

I previously wrote about my top 3 UK shares in the gaming sector, picking Codemasters (LSE: CDM) as my number one choice. It seems I wasn’t the only one. This week Codemasters agreed to a £945m takeover bid from US games maker Electronics Arts, withdrawing its previous recommendation from Take-Two Interactive Software.

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Take-Two had offered a bid of 120p per share in cash and 365p in Take-Two shares, but Electronic Arts made a significantly higher offer of 604p in cash. Codemasters saw its share price jump 23% on Monday with investors excited about a potential bidding war that could drive the price higher.

I think the price of Codemasters shares is now too high to be in my list of top picks. Thankfully, there are several other good quality gaming companies that I’d invest in.

Gaming: UK shares I’d consider

I also like Sheffield-based Sumo Group (LSE: SUMO). Like at Codemasters, trading has been strong at Sumo Group in 2020. In September, it reported that in the six months to 30 June its revenue jumped by 26% and pre-tax profits doubled. CEO Carl Cavers sounded positive, highlighting strong visibility of the business development pipeline and further opportunities for strong growth.

Sumo is growing its business partly through acquisitions. In recent months, Sumo completed the acquisition of Pipeworks Inc, and earlier in the year, it said that it added “new client relationships” by acquiring Lab42.

Sumo turned profitable in recent years and is currently experiencing a period of strong earnings growth. Like several games developers in this growing sector, Sumo achieves a double-digit profit margin and nearly a 13% return on capital. I also like that it has a healthy balance sheet with growing net cash.

Strong visibility

Like Sumo, another quality game developer with strong visibility of future growth is Frontier Developments (LSE: FDEV). Since I last wrote about Frontier in August, its share price is now 30% higher. So is it too late to buy these quality UK shares now? No, I don’t think so – on the contrary, I reckon it’s an excellent time to buy.

This founder-led UK developer operates a successful “launch and nurture” strategy. It builds on its strengths by creating genre-leading games. Once launched, Frontier nurtures its games by partaking in community engagement and additional content. It’s a model that has worked well for Frontier, and which it intends to continue.

Frontier showed strong business momentum over the past year. It achieved its largest PC launch to date with Planet Zoo, which was a major new game release in FY20. It also agreed major IP licences with Formula 1® and Games Workshop.

Looking forward, the roadmap for the coming year is strong with several major games releases confirmed. I am very tempted to add these quality UK shares to my Stocks and Shares ISA.

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Harshil Patel owns shares in Games Workshop. The Motley Fool UK owns shares of and has recommended Take-Two Interactive. The Motley Fool UK has recommended Electronic Arts and Frontier Developments. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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