Good seasonal trading

Game Digital 11 January 2018 Update
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Game Digital

Good seasonal trading

23-week trading update

Retail

11 January 2018

Price

60.40p

Market cap

£103m

Net cash* (£m) at end July 2017
*Adjusted for £17.1m completion proceeds of Multiplay Digital disposal

59.7

Shares in issue

170.9m

Free float

25%

Code

GMD

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

11.9

67.8

4.1

Rel (local)

6.9

63.1

(3.4)

52-week high/low

61.5p

19.2p

Business description

Game Digital is the leading omni-channel specialist retailer of video games in the UK and Spain, with 304 stores in the UK, 268 stores in Spain and over 30% market share.

Next events

Interim results

27 March 2018

Analysts

Paul Hickman

+44 (0)20 3681 2501

Neil Shah

+44 (0)20 3077 5715

Game Digital is a research client of Edison Investment Research Limited

Game Digital (GMD) has posted good sales growth over its first 23 weeks and even better results over the Christmas peak. While sales have been led by hardware, management is confident of covering any mix issue through cost savings, and we retain our forecast. With net cash at 35p, the market is valuing this business at 3.5x FY18e EBITDA, which looks misplaced.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

EV/EBITDA
(x)

Yield
(%)

07/16*

821.9

26.4

14.8

10.7

3.4

5.6

2.4

5.7

07/17e

782.9

8.0

(4.3)

(3.7)

1.0

N/A

5.4

1.7

07/18e

793.2

12.3

0.2

0.1

0.0

648.0

3.5

N/A

07/19e

796.3

15.0

1.9

0.9

0.0

69.1

2.8

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. *Restated.

Strong headline trading for 23 weeks

Group GTV for the 9.5-week peak trading period (1 November to 6 January) was up by 5.2%, and for the full 23-week period 3.8%. That is a good result in the context of the current retail landscape, and consistent with our forecast GTV growth total for FY18. It also indicates that trading was strong for the period as a whole, as the earlier period averages growth close to 3%, we estimate. Growth was driven by hardware, particularly the Nintendo Switch and the Xbox One X, where GMD has been stocked to satisfy demand throughout the year to date, unlike FY17.

Forecast unchanged despite mix

GMD reports that the mix bias to hardware has a negative margin effect of c 1%. Although new models attract the best hardware margins, these are lower than GMD’s overall margin. The company expects to cover the mix issue through further cost savings. It is extending its existing FY18 cost savings programme of c £4m, and plans additional savings. We retain our forecast.

Experiential progress

The experiential change strategy is on track. BELONG gaming arenas have grown utilisation levels from 21.3% in Q4 last year to 28.2%. There were no redevelopments over the busy Christmas period, but further openings are planned from February. In addition, the latest gaming festival, Insomnia 62, is scheduled for the Easter weekend, to include Call of Duty World League: Birmingham Open, GMD’s largest esports event to date. Insomnia attracts audiences of up to 155,000.

Valuation: 3.5x EBITDA looks wrong

Cash benefited from the £17m (90%) completion proceeds from the November sale of the Multiplay Digital business, which is the main factor in a £24m year-on-year increase in cash to £67m at end December 2017. Net cash at year end plus the full proceeds of Multiplay Digital is 35p per share. On this basis the market values the business at only 3.5x FY18e EBITDA, which we feel is misplaced, even taking into account the execution risks ahead. As we are not changing our forecast, we retain our 80p valuation, which is a blend of DCF, peer comparison and sum-of-the-parts.

Exhibit 1: Financial summary

Accounts: IFRS, Year-end: July, £m

 

2015

2016*

2017e

2018e

2019e

2020e

Profit and Loss statement

 

 

 

 

 

 

 

Total revenues

 

866.6

821.9

782.9

793.2

796.3

920.4

Cost of sales

 

(652.9)

(612.7)

(577.8)

(586.8)

(589.1)

(691.2)

Goss profit

213.7

209.2

205.1

206.4

207.2

229.2

Other income/(expense)

 

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals and adjustments

 

(12.2)

(12.9)

(5.7)

(9.6)

(9.6)

(9.6)

Depreciation and amortisation

 

(8.5)

(10.5)

(11.0)

(11.4)

(12.5)

(14.6)

Reported EBIT

 

26.2

3.0

(8.7)

(8.8)

(7.0)

8.9

Finance income/(expense)

 

(0.4)

(1.1)

(1.3)

(0.6)

(0.6)

(0.8)

Exceptionals and adjustments

 

(3.7)

(3.8)

3.9

7.0

0.0

0.0

Reported PBT

 

25.8

1.9

(10.0)

(2.4)

(7.7)

8.1

Income tax expense (includes exceptionals)

 

(4.4)

1.3

(2.1)

(0.0)

(0.4)

(3.9)

Reported net income

 

21.4

3.2

(12.1)

(2.4)

(8.1)

4.2

Basic average number of shares, m

 

168.3

168.9

169.7

170.9

170.9

170.9

Basic EPS, p

 

12.7

1.9

(7.1)

(1.4)

(4.7)

2.4

Dividend per share, p

 

14.7

3.4

1.0

0.0

0.0

4.0

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

46.9

26.4

8.0

12.3

15.0

33.1

Adjusted EBIT

 

38.4

15.9

(3.0)

0.8

2.6

18.5

Adjusted PBT

 

38.0

14.8

(4.3)

0.2

1.9

17.7

Adjusted diluted EPS, p

 

18.5

10.7

(3.7)

0.1

0.9

7.9

 

 

 

 

 

 

 

 

Balance sheet

 

 

 

 

 

 

 

Property, plant and equipment

19.2

16.8

17.2

21.5

30.7

38.2

Goodwill

 

0.0

0.0

0.0

0.0

0.0

0.0

Intangible assets

 

61.0

56.7

47.5

29.3

15.6

1.9

Other non-current assets

 

0.2

2.2

2.5

2.5

2.5

2.5

Total non-current assets

 

80.4

75.7

67.2

53.3

48.8

42.6

Cash and equivalents

 

63.1

48.8

47.2

66.5

68.1

77.9

Inventories

 

66.8

76.1

81.2

75.1

75.4

88.5

Trade and other receivables

 

17.8

20.4

23.5

19.9

20.0

23.1

Other current assets

 

0.9

8.8

1.7

3.6

1.7

1.7

Total current assets

 

148.6

154.1

153.6

165.2

165.2

191.2

Non-current loans and borrowings

 

0.1

3.1

2.6

2.6

2.6

2.6

Other non-current liabilities

 

5.7

4.4

2.8

2.8

2.8

2.8

Total non-current liabilities

 

5.8

7.5

5.4

5.4

5.4

5.4

Trade and other payables

 

93.8

90.7

101.6

89.5

89.9

105.5

Current loans and borrowings

 

0.0

7.2

2.0

7.7

7.7

7.7

Other current liabilities

 

3.2

1.3

2.6

2.6

2.6

2.6

Total current liabilities

 

97.0

99.2

106.2

99.8

100.2

115.8

Equity attributable to company

 

126.2

126.9

109.2

113.2

108.5

112.7

 

 

 

 

 

 

 

 

Cash flow statement

 

 

 

 

 

 

 

Cash from operations (CFO)

 

44.1

3.2

9.1

13.1

16.9

30.9

Capex

 

(11.3)

(13.3)

(11.6)

(16.0)

(16.6)

(16.9)

Acquisitions & disposals net

 

(12.4)

(1.5)

13.3

17.1

1.9

0.0

Other investing activities

 

(0.2)

0.0

0.0

0.0

0.0

0.0

Cash used in investing activities (CFIA)

 

(23.9)

(14.8)

1.7

1.1

(14.7)

(16.9)

Net proceeds from issue of shares

 

0.0

0.0

0.0

0.0

0.0

0.0

Movements in debt

 

(1.5)

1.5

0.0

0.0

0.0

0.0

Other financing activities

 

(37.8)

(13.9)

(4.3)

(0.6)

(0.6)

(4.2)

Cash from financing activities (CFF)

 

(39.3)

(12.4)

(4.3)

(0.6)

(0.6)

(4.2)

Increase/(decrease) in cash and equivalents

 

(19.1)

(24.0)

6.5

13.6

1.6

9.8

Currency translation differences and other

 

(3.1)

1.0

0.6

0.0

0.0

0.0

Cash and equivalents at end of period

 

63.1

40.1

47.2

60.8

62.4

72.2

Net (debt) cash

 

63.0

38.5

42.6

56.2

57.8

67.6

Movement in net (debt) cash over period

 

63.0

(24.5)

4.1

13.6

1.6

9.8

Source: Game Digital accounts, Edison Investment Research. Note: *Restated.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Game Digital and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Game Digital and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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