Temple-nest-highres

Marching on up

Games Workshop Group 17 April 2019 Update
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Games Workshop Group

Marching on up

Trading update

Consumer goods

17 April 2019

Price

3,974p

Market cap

£1bn

Net cash (£m) at 30 November 2018

25.3

Shares in issue

32.6m

Free float

95%

Code

GAW

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

32.3

26.2

64.2

Rel (local)

28.3

16.2

59.3

52-week high/low

4015p

2390p

Business description

Games Workshop is a leading international specialist designer, manufacturer and multi-channel retailer of miniatures, scenery, artwork and fiction for tabletop miniature games set in its fantasy Warhammer worlds.

Next events

Pre-close update

June 2019

Full-year results

July 2019

Analysts

Kate Heseltine

+44 (0)20 3077 5700

Russell Pointon

+44 (0)20 3077 5700

Games Workshop Group is a research client of Edison Investment Research Limited

As outlined in our recent initiation note, ‘On a mission’, Games Workshop’s (GAW) focus on international multi-channel expansion, customer engagement and product innovation, alongside its openness to exploring ways in which to leverage its rich intellectual property (IP) to generate royalty income, is continuing to deliver outstanding results. Strong trading since the half year, and new licensing agreements, lead us to upgrade our FY19 and FY20 earnings forecasts by c 14%.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

05/17

158.1

38.4

95.1

74

41.8

1.9

05/18

221.3**

74.3

184.3

126

21.6

3.2

05/19e

255.3

80.8

198.6

155

20.0

3.9

05/20e

266.2

84.4

207.7

162

19.1

4.1

Note: *PBT and EPS are normalised, excluding exceptional items. **Restated at H119 to reflect IFRS 15: Revenue from contracts with customers.

Trading update: strong performance, special dividend

Games Workshop has delivered a strong trading performance, across all regions and via all sales channels (trade, retail and online) since the H1 results in January. Royalties receivable are also ahead year-on-year, following the signing of new licensing agreements with the major digital games publishers. As a result, the company has stated that it expects pre-tax profit for FY19 to be c £80m. In line with company policy to distribute excess cash, a dividend of 35p has been declared, taking the total dividend this year to £1.55.

Forecasts: 14% upgrade

We upgrade our FY19 and FY20 PBT forecasts by c 14%. We expect trade to remain the dominant channel and anticipate FY19 sales growth of 27%, comparable to that of H1, while retail and online are expected to grow at c 7%. We have raised our FY19 gross margin assumption by 100bp as the company progresses with infrastructure projects (as outlined in our recent initiation note). We leave our conservative assumptions for FY20 sales growth and margin progression unchanged, but increase royalty income by c £2.5m to reflect the recently signed agreements. We believe there may be further opportunities to leverage GAW’s rich IP via its existing relationships with the major publishers.

Valuation: c 10% upside; attractive yield prospects

The shares have risen by c 18% since the upgrade but still trade at a discount to our new DCF valuation of 4,167p, which assumes revenue growth beyond FY20 of 4.2% fading to 2% and a perpetuity EBITDA margin of 39% (FY20e: 37.5%). Our peer group, comprising specialist interest operators and the ‘mainstream’ multinational toy/game companies, suggests a valuation broadly in line with the current share price, of 3,703p, leading to a blended valuation of 3,935p. We forecast FY20 net cash of £49m, underpinning a healthy c 4% yield and scope for further distributions.

Exhibit 1: Financial summary

Accounts: IFRS, year-end: May, £000s

 

2015

2016

2017

2018

2019e

2020e

INCOME STATEMENT

 

 

 

 

 

 

 

 

Total revenues

 

 

119,132

118,069

158,114

221,304*

255,291

266,213

Cost of sales

 

 

(36,988)

(37,438)

(43,691)

(64,219)

(81,740)

(82,575)

Gross profit

 

 

82,144

80,631

114,423

157,085

173,551

183,638

Gross profit margin

 

 

69.0%

68.3%

72.4%

71.0%

68.0%

69.0%

SG&A (expenses)

 

 

(67,207)

(69,710)

(83,591)

(92,383)

(103,478)

(109,954)

Other income/(expense)

 

 

1,498

5,939

7,491

9,617

10,579

10,579

Exceptionals and adjustments

 

 

42

0

0

0

0

0

Reported EBIT

 

 

16,477

16,860

38,323

74,319

80,651

84,263

Report EBIT margin

 

 

13.8%

14.3%

24.2%

33.6%

31.6%

31.7%

Finance income/(expense)

 

 

108

88

80

(49)

127

184

Reported PBT

 

 

16,585

16,948

38,403

74,270

80,778

84,447

Income tax expense (includes exceptionals)

 

 

(4,328)

(3,452)

(7,856)

(14,815)

(16,113)

(16,845)

Reported net income

 

 

12,257

13,496

30,547

59,455

64,665

67,602

Basic average number of shares, m

 

 

31,975

32,093

32,126

32,258

32,553

32,553

Basic EPS (p)

 

 

38.3

42.1

95.1

184.3

198.6

207.7

Adjusted EBITDA

 

 

27,516

27,250

48,547

86,482

94,267

99,711

Adjusted EBIT

 

 

16,435

16,860

38,323

74,319

80,651

84,263

Adjusted PBT

 

 

16,543

16,948

38,403

74,270

80,778

84,447

Adjusted EPS (p)

 

 

38

42

95

184

199

208

Adjusted diluted EPS (p)

 

 

38

42

94

182

197

206

BALANCE SHEET

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

22,719

22,621

22,132

30,072

35,554

37,021

Goodwill

 

 

1,433

1,433

1,433

1,433

1,433

1,433

Intangible assets

 

 

8,262

10,501

12,917

14,195

16,097

15,682

Other non-current assets

 

 

4,816

4,148

6,480

7,113

7,113

7,113

Total non-current assets

 

 

37,230

38,703

42,962

52,813

60,197

61,249

Cash and equivalents

 

 

12,561

11,775

17,910

28,545

34,051

48,729

Inventories

 

 

7,625

8,540

12,421

20,159

24,770

23,593

Trade and other receivables

 

 

9,425

10,120

12,976

16,169

18,652

19,450

Other current assets

 

 

600

725

596

457

457

457

Total current assets

 

 

30,211

31,160

43,903

65,330

77,929

92,229

Other non-current liabilities

 

 

822

1,109

989

1,204

1,204

1,204

Total non-current liabilities

 

 

822

1,109

989

1,204

1,204

1,204

Trade and other payables

 

 

13,131

12,844

16,515

20,298

25,836

26,100

Other current liabilities

 

 

1,963

2,747

6,529

8,519

8,519

8,519

Total current liabilities

 

 

15,094

15,591

23,044

28,817

34,355

34,619

Equity attributable to company

 

 

51,525

53,163

62,832

88,122

102,567

117,655

CASH FLOW STATEMENT

 

 

 

 

 

 

 

 

EBIT

 

 

16,477

16,860

38,323

74,319

80,651

84,263

Depreciation and amortisation

 

 

11,114

10,457

11,016

12,155

13,616

15,448

Share based payments

 

 

232

193

160

204

300

300

Other adjustments

 

 

33

28

111

40

0

0

Movements in working capital

 

 

(2,277)

(756)

(240)

(4,386)

(1,556)

643

Interest paid/received

 

 

114

83

83

(39)

127

184

Income taxes paid

 

 

(2,305)

(2,552)

(5,482)

(12,227)

(16,113)

(16,845)

Cash from operations (CFO)

 

 

23,388

24,313

43,971

70,066

77,025

83,993

Capex

 

 

(12,348)

(12,663)

(12,844)

(21,580)

(21,000)

(16,500)

FCF

 

 

11,040

11,650

31,127

48,486

56,025

67,493

Cash used in investing activities (CFIA)

 

 

(12,348)

(12,663)

(12,844)

(21,580)

(21,000)

(16,500)

Net proceeds from issue of shares

 

 

738

304

81

982

0

0

Dividends paid

 

 

(16,601)

(12,837)

(23,801)

(38,701)

(50,519)

(52,814)

Other financing activities

 

 

0

0

(1,901)

0

0

0

Cash from financing activities (CFF)

 

 

(15,863)

(12,533)

(25,621)

(37,719)

(50,519)

(52,814)

Increase/(decrease) in cash and equivalents

 

 

(4,823)

(883)

5,506

10,767

5,506

14,679

Cash and equivalents at end of period

 

 

12,561

11,775

17,910

28,545

34,051

48,729

Net (debt)/cash

 

 

12,561

11,775

17,910

28,545

34,051

48,729

Movement in net (debt)/cash over period

 

 

(4,823)

(786)

6,135

10,635

5,506

14,679

Source: Games Workshop; Edison Investment Research. Note: *Restated at H119 to reflect IFRS 15: Revenue from contracts with customers.

General disclaimer and copyright

This report has been commissioned by Games Workshop Group and prepared and issued by Edison, in consideration of a fee payable by Games Workshop Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

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New Zealand

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. 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 (i.e. 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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Games Workshop Group and prepared and issued by Edison, in consideration of a fee payable by Games Workshop Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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