Year end on track, the journey continues

Game Digital 23 August 2017 Update
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Game Digital

Year end on track, the journey continues

Pre-close update

Retail

23 August 2017

Price

24.6p

Market cap

£42m

Net cash (£m) at end July 2017

47

Shares in issue

170.9m

Free float

55%

Code

GMD

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.9)

(43.6)

(64.7)

Rel (local)

(7.2)

(42.8)

(67.5)

52-week high/low

77p

19p

Business description

Game Digital is the leading omni-channel specialist retailer of video games in the UK and Spain, with 311 stores in the UK, 270 stores in Spain and over 30% market share.

Next events

Final results

October 2017

bvc

bv

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) is ending FY17 on revised expectations after demand for the Nintendo Switch caused a short-term hiatus, which we believe masks positive market developments. Refining its medium-term transition strategy, GMD is to exit its B2B web hosting operation. The market values GMD’s business at less than zero, but we keep our 83p share valuation.

Year end

Revenue (£m)

EBITDA

(£m)

PBT*

(£m)

EPS*

(p)

DPS

(p)

P/E

(x)

EV/EBITDA

(x)

Yield

(%)

07/15

866.6

46.9

38.0

18.5

14.7

1.3

N/A

59.8

07/16

822.5

28.0

16.4

8.8

3.4

2.8

7.9

13.9

07/17e

780.3

8.0

(4.0)

(1.8)

1.0

N/A

N/A

4.1

07/18e

789.9

13.4

0.9

0.4

0.0

64.2

N/A

N/A

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

Year finishes in line with revised expectations

On 30 June 2017, GMD advised the market that as a result of supply shortages of the successful Nintendo Switch, launched in March, second-half trading would be below expectations. Six weeks later, trading is in line with revised expectations. Cost savings of £5m have been realised, although costs are slightly higher than our forecast, which we reduce by £0.4m for FY17 only. Cash generation has been strong, with year-end net cash of £47m beating our forecast of £45m.

Switch success positive for the market

With global sales forecast by Nintendo of c 10m units in its first year, the Switch is approaching the market significance of the Xbox One. That raises the market profile of Nintendo, which is traditionally No. 3 to Microsoft and Sony. An intensification of competition should be positive for the UK games market and GMD in particular.

Strategy of cycle independence is intact…

In our April initiation we set out GMD’s strategy of transitioning from an exclusively high street retailer to independence from the traditional gaming cycle. This involves developing relationships with its interest group, including experiential services such as BELONG gaming arenas and the Insomnia gaming conference with over 50,000 attendees. Execution of the strategy will take until FY20 and necessarily carries significant execution risks which we reflect in our valuation.

…with review of options for Multiplay Digital

In line with its strategic focus, GMD has decided to maximise shareholder value for its game server hosting business, Multiplay Digital, which provides capacity-related solutions for games developers and publishers. We comment further overleaf.

Valuation: Market valuation less than zero

We note that GMD’s current market capitalisation of £42m is below net cash of £47m (27p per share), ascribing a negative value to the business. Our valuation is a blend of three metrics: DCF, peer comparison, and sum-of-the-parts. We are not materially changing forecasts, with no change to our valuation of 83p per share.

Server hosting business: Review of strategic options

In the light of the early success of GMD’s esports activities, including the first 18 BELONG retail concepts, management has made the decision to maximise shareholder value in respect of Multiplay’s Digital division.

Multiplay, which was acquired in March 2015, comprises the Digital division with its multiplayer game server-hosting technology, and the Events and Esports activities which include major gaming and esports events and the BELONG concept. While the Digital business is relatively small from a revenue perspective, given it is a tech business delivering c 100% revenue growth in a growth market, its potential value should not be understated. By way of reference, GMD paid a total consideration of £20m for Multiplay in 2015, which was c 4 times its total sales of c £4.5m, split approximately equally between the two divisions. In FY17, Multiplay will deliver total sales of £11.6m, of which £4.5m is from Digital.

Exhibit 1: Financial summary

Accounts: IFRS, Yr end: July, GBP: Millions

 

2015A

2016A

2017E

2018E

2019E

2020E

Profit and Loss statement

 

 

 

 

 

 

 

Total revenues

 

866.6

822.5

780.3

789.9

800.9

1,007.1

Cost of sales

 

(652.9)

(612.7)

(582.4)

(586.6)

(589.0)

(763.6)

Other income/(expense)

 

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals and adjustments

 

(12.2)

(11.5)

(4.7)

(9.1)

(9.1)

(9.1)

Depreciation and amortisation

 

(8.5)

(10.5)

(11.0)

(11.9)

(13.0)

(15.1)

Reported EBIT

 

29.9

8.4

(12.1)

(7.7)

(2.4)

22.4

Finance income/(expense)

 

(0.4)

(1.1)

(1.0)

(0.6)

(0.6)

(0.8)

Exceptionals and adjustments

 

(3.7)

(2.4)

4.4

0.0

0.0

0.0

Reported PBT

 

29.5

7.3

(13.1)

(8.2)

(3.0)

21.6

Income tax expense (includes exceptionals)

 

(4.4)

(1.3)

1.0

(0.2)

(1.3)

(6.8)

Reported net income

 

25.1

6.0

(12.1)

(8.4)

(4.3)

14.9

Basic average number of shares, m

 

168.3

168.9

170.9

170.9

170.9

170.9

Basic EPS, p

 

12.7

3.3

(5.1)

(5.0)

(3.3)

4.8

Dividend per share, p

 

14.7

3.4

1.0

0.0

0.0

4.0

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

46.9

28.0

8.0

13.4

19.7

46.6

Adjusted EBIT

 

38.4

17.5

(3.0)

1.4

6.7

31.5

Adjusted PBT

 

38.0

16.4

(4.0)

0.9

6.1

30.7

Adjusted diluted EPS, p

 

18.5

8.8

(1.8)

0.4

2.8

13.8

 

 

 

 

 

 

 

 

Balance sheet

 

 

 

 

 

 

 

Goodwill

 

0.0

0.0

0.0

0.0

0.0

0.0

Intangible assets

 

61.0

56.7

43.0

29.3

15.6

1.9

Other non-current assets

 

0.2

2.2

2.2

2.2

2.2

2.2

Total non-current assets

 

80.4

75.7

68.0

63.0

57.5

50.2

Cash and equivalents

 

63.1

48.8

57.3

54.3

56.6

69.0

Inventories

 

66.8

76.1

73.1

73.7

74.0

95.9

Trade and other receivables

 

17.8

20.4

19.6

19.8

20.1

25.3

Other current assets

 

0.9

0.7

0.7

0.7

0.7

0.7

Total current assets

 

148.6

153.1

150.7

148.4

151.4

190.9

Non-current loans and borrowings

 

0.1

3.1

3.1

3.1

3.1

3.1

Other non-current liabilities

 

5.7

4.4

1.9

1.9

1.9

1.9

Total non-current liabilities

 

5.8

7.5

5.0

5.0

5.0

5.0

Trade and other payables

 

93.8

85.9

82.5

83.1

83.5

108.2

Current loans and borrowings

 

0.0

7.2

7.2

7.2

7.2

7.2

Other current liabilities

 

3.2

1.3

1.3

1.3

1.3

1.3

Total current liabilities

 

97.0

94.4

91.0

91.6

92.0

116.7

Non-controlling interest

 

0.0

0.0

0.0

0.0

0.0

0.0

 

 

 

 

 

 

 

 

Cashflow statement

 

 

 

 

 

 

 

Cash from operations (CFO)

 

44.1

6.2

13.3

13.5

19.6

33.6

Capex

 

(11.3)

(13.3)

(12.4)

(16.0)

(16.6)

(16.9)

Acquisitions & disposals net

 

(12.4)

(1.5)

13.3

0.0

0.0

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)

0.9

(16.0)

(16.6)

(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)

(5.7)

(0.6)

(0.6)

(4.2)

Cash from financing activities (CFF)

 

(39.3)

(12.4)

(5.7)

(0.6)

(0.6)

(4.2)

Increase/(decrease) in cash and equivalents

 

(19.1)

(21.0)

8.5

(3.0)

2.4

12.4

Currency translation differences and other

 

(3.1)

1.0

0.0

0.0

0.0

0.0

Cash and equivalents at end of period

 

63.1

43.1

51.6

48.6

50.9

63.3

Net (debt) cash

 

63.0

38.5

47.0

44.0

46.3

58.7

Movement in net (debt) cash over period

 

63.0

(24.5)

8.5

(3.0)

2.4

12.4

Source: GMD accounts, Edison Investment Research

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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

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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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2017. “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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