Games Workshop Group — Core growth in H124

Games Workshop Group (LSE: GAW)

Last close As at 27/02/2024

GBP96.80

90.00 (0.94%)

Market capitalisation

GBP3,160m

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Research: Consumer

Games Workshop Group — Core growth in H124

Games Workshop Group’s (GAW’s) H124 results demonstrated the strong underlying revenue growth and higher profitability in its core activities that should be expected with the launch of a new edition of its main intellectual property (IP), Warhammer 40K. The share price has drifted down over the last six months, bringing the prospective P/E multiples for FY24 and FY25 of 23.3x and 22.4x back to more recent average multiples.

Russell Pointon

Written by

Russell Pointon

Director, Consumer

Craftworld Eldar_games workshop

Consumer

Games Workshop Group

Core growth in H124

H124 results

Consumer goods

17 January 2024

Price

£99.25

Market cap

£3,270m

Net cash (£m) at 30 November 2023 (excluding lease liabilities of £48.6m)

111.3

Shares in issue

32.9m

Free float

100%

Code

GAW

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.0

0.4

5.2

Rel (local)

1.2

(0.2)

9.5

52-week high/low

11,700p

8,515p

Business description

Games Workshop Group 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

FY24 trading update

June 2024

FY24 results

August 2024

Analysts

Russell Pointon

+44 (0)20 3077 5700

Milo Bussell

+44 (0)20 3077 5700

Games Workshop Group is a research client of Edison Investment Research Limited. Opinions and forecasts represent the Edison Research department’s view.

Games Workshop Group’s (GAW’s) H124 results demonstrated the strong underlying revenue growth and higher profitability in its core activities that should be expected with the launch of a new edition of its main intellectual property (IP), Warhammer 40K. The share price has drifted down over the last six months, bringing the prospective P/E multiples for FY24 and FY25 of 23.3x and 22.4x back to more recent average multiples.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

05/22

414.8

158.1

394.6

235.0

25.2

2.4

05/23

470.8

171.6

411.8

415.0

24.1

4.2

05/24e

511.2

187.3

426.5

425.0

23.3

4.3

05/25e

534.5

194.4

442.2

435.0

22.4

4.4

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

Core growth drives profitability

GAW’s H124 reported revenue growth of c 9% y-o-y includes strong underlying growth for the core of c 14%, offset by a 3% decline due to sterling strength and the already-flagged lower licensing revenue, which is typically quite volatile. The growth provided strong leverage at the gross margin level (+440bp to 70.9%). Greater growth in operating costs than revenue growth, as well as foreign exchange differences, dampened the growth in operating profit to a still very healthy 13% versus H123. The resulting strong free cash generation, which increased relative to revenue, enabled the declaration of dividends of 195p/share in the period, which were topped up by a further 120p/share, taking the year-to-date total to 315p/share versus 295p/share at the same stage last year. The net cash position was £111.3m versus £90.2m at the end of FY23.

FY24 profit estimate unchanged

We have increased our revenue estimates for FY24 and FY25 to reflect higher expected growth for GAW’s core activities; we now forecast 9% y-o-y revenue growth for core, up from 5% previously. This is offset by a reduced forecast for licensing revenue in FY24, with a 100% gross margin, and higher operating costs than previously and therefore our profit before tax estimate for FY24 (and FY25) is unchanged.

Valuation: DCF valuation increases to £117/share

Our DCF-based valuation increases to £117/share, from £112/share previously, to update for the interim results as well as a lower weighted average cost of capital (WACC), which has reduced to 9.3% (from 10% previously) due to the reduction in the UK 10-year bond yield to 3.8% (from 4.3% previously) and a lower UK equity market risk premium of 5.5% (from 5.9% previously) (source: Damodaran). The prospective P/E multiples for FY24 and FY25 of 23.3x and 22.4x are at a premium to the average multiple since FY17 of 19.1x, but in line with more recent average multiples in the low/mid-20s.

Core driving growth and margin

H124 results

GAW’s H124 results demonstrated strong underlying revenue growth, which translated to good improvements in its gross and operating margins versus H123. The recovery in sterling relative to the majority of the currencies in the countries where GAW generates its revenue provided a headwind to revenue and profitability, having been an important tailwind in the prior interim period. We remind readers that there is a currency mismatch between GAW’s revenues and its cost base; 78% of its core revenue was earned overseas in FY23, but a lower proportion of its operating costs are based overseas as the majority of its design and manufacturing costs are in the UK.

Exhibit 1: Summary income statement

£m

FY22

H123

H223

FY23

H124

Total revenue

414.8

226.6

244.2

470.8

247.7

Growth y-o-y (%)

12.2

7.1

20.2

13.5

9.3

Constant currency y-o-y (%)

13.3

0.0

15.9

7.8

12.5

Core revenue

386.8

212.3

233.1

445.4

235.6

Growth y-o-y (%)

9.5

10.9

19.4

15.1

11.0

Constant currency y-o-y (%)

10.8

4.0

15.4

9.6

14.2

Licensing revenue

28.0

14.3

11.1

25.4

12.1

Growth y-o-y (%)

71.8

(28.9)

40.5

(9.3)

(15.4)

Constant currency y-o-y (%)

66.3

(37.3)

35.4

(16.8)

(12.6)

Total gross profit

287.4

150.6

171.0

321.6

175.6

Gross margin (%)

69.3

66.5

70.0

68.3

70.9

Core gross profit

259.4

136.3

159.9

296.2

163.5

Gross margin (%)

67.1

64.2

68.6

66.5

69.4

Licensing gross profit

28.0

14.3

11.1

25.4

12.1

Gross margin (%)

100.0

100.0

100.0

100.0

100.0

Total operating profit

157.1

83.6

86.6

170.2

94.5

Margin (%)

37.9

36.9

35.5

36.2

38.2

Core operating profit

131.7

70.7

77.5

148.2

83.4

Core operating margin

34.0

33.3

33.2

33.3

35.4

Constant currency y-o-y (%)

0.1

(7.5)

8.7

0.2

24.2

Licensing operating profit

25.4

12.9

9.1

22.0

11.1

Licensing margin

90.7

90.2

82.0

86.6

91.7

Constant currency y-o-y (%)

64.0

(40.4)

31.8

(21.7)

(10.9)

Reported profit before tax

156.5

83.6

86.6

170.6

95.2

Tax

(28.1)

(17.1)

(18.8)

(35.9)

(23.8)

Tax rate

18.0

20.5

21.7

21.0

25.0

Reported profit after tax

128.4

66.5

67.8

134.7

71.4

EPS (FD) (p)

390.6

202.3

207.1

409.4

216.3

DPS (p)

235.0

165.0

250.0

415.0

195.0

Source: Games Workshop Group accounts, Edison Investment Research

On a constant currency basis, GAW’s revenue increased by c 12%, with all the growth attributable to its core business (+14%) due to the launch of the tenth edition of Warhammer 40K and other successful products. Licensing revenue, which is typically lumpy, declined by c 13%. The decline in licensing revenue was across the board, ie for the minimum guarantees of the first year of new licences and the revenues from licences that are beyond their first year of revenue generation. The strength of sterling reduced total year-on-year revenue growth by just over three percentage points in H124, whereas in H123 sterling weakness boosted GAW’s revenue by over seven percentage points.

Within core revenue, Retail and Trade produced above average growth rates of 16% at constant currency, both compounding strong growth in H123, while Online’s growth was lower at c 7% y-o-y. Trade growth was fuelled by strong growth in the number of net new accounts (+500 in the period), which took the total at the period end to 7,000. Retail was helped by like-for-like growth in the majority (81%) of the stores and the addition of nine net new stores, the second consecutive six-month period of net store growth following net reductions in stores from the end of FY20 through H123.

Core’s revenue growth in H124 was consistent with management’s expectations, which included an expected slowing from Q1 (14% y-o-y) to Q2 (8%). The strength of GAW’s IP is shown by Core’s H124 revenue of £235.6m being c 26% higher than H121’s £186.8m, the period that included the launch of the previous (ninth) edition of 40K among other new products. Comparing the relative year-on-year growth rates for the ninth and tenth editions of 40K is complicated by the effects of the outbreak of the COVID pandemic from the end of FY20, as well as the fact that GAW’s results in any period include sales from all its IPs.

Exhibit 2: GAW’s core revenue

£m

FY22

H123

H223

FY23

H124

Core revenue

386.8

212.3

233.1

445.4

235.6

Constant currency y-o-y (%)

10.8

4.0

15.4

9.6

14.2

Trade

214.3

120.9

127.1

248.0

136.1

Constant currency y-o-y (%)

12.0

3.4

15.3

9.3

16.0

Retail

87.2

48.7

57.7

106.4

54.7

Constant currency y-o-y (%)

24.6

9.8

23.4

16.9

16.0

Online

85.3

42.7

48.3

91.0

44.8

Constant currency y-o-y (%)

(2.7)

(0.5)

6.4

3.0

6.8

Source: Games Workshop Group accounts, Edison Investment Research

Overall gross profit increased by c 17% y-o-y to £175.6m in H124 from £150.6m in H123. At constant currency, the growth was more significant, at almost 21% y-o-y. In absolute terms, all of the increase was due to the higher gross margin for core, which increased by over five percentage points to 69.4%, demonstrating the typical strong leverage (ie drop through of incremental revenue to gross profit) GAW enjoys in the year of the launches of new editions of its IPs. The year-on-year decline in licensing revenue, which has a much higher gross margin of 100% than core, dampened the overall growth in gross profit, as did currency, which negatively affected it by 4% y-o-y.

The greater year-on-year growth in Core’s operating costs (of 22%) than its reported year-on-year revenue growth of 11% meant that the leverage at the operating margin line was much lower than at the gross profit line; Core’s operating margin increased by 210bp to 35.4% from 33.3% in H123. The most significant increases in operating costs were for staff costs including licensing’s operating margin increasing back to more normal levels (over 90%), following the provision for a licensing receivable in H223.

The continuous climb in the UK corporate tax rate that has taken GAW’s effective tax rate from 18% in FY22 to 25% in H124 has contributed to lower growth in EPS than pre-tax profit.

Through H124, management declared two dividends totalling 195p/share, which represented a strong increase of 18% from the prior interim period’s three declared dividends, totalling 165p/share. The increase reflects the strength in GAW’s free cash generation (see following section). With the publication of the results, management has declared a further, third dividend for the year of 120p/share, which takes the cumulative year-to-date dividends to 315p/share from 295p/share at the same stage in FY23. Recognising the greater scale of the business, management has increased its cash buffer to £75m plus six months’ worth of future tax payments. The cash buffer is used to determine what is truly surplus cash that can be returned to shareholders. Previously the ‘working cash buffer’ was three months’ worth of working capital (c £50m) alongside six months’ worth of future tax payments.

Cash flow and balance sheet

In absolute terms, GAW’s free cash flow pre-interest increased by 23% to £88m in H124 versus H123’s £71.6m. Relative to GAW’s revenue, which grew by 9% y-o-y, its free cash generation also increased. The main contributors to the improved relative cash generation were the higher operating margin, lower cash taxes and lower capex. Working capital intensity was stable versus the prior year, but there were a number of moving parts with some differences to the movements in H123. Inventories and debtors increased, as might be expected with higher sales growth, as did trade creditors due to an increase in advance payments by trade and online customers.

The strong free cash generation meant the period-end cash position increased to c £111m, from c £90m at the end of FY23. The only debt on the balance sheet at the end of November was leases of c £49m, and therefore GAW remains in a net cash position including leases of c £63m.

New forecasts

The changes to our estimates for FY24 and FY25 are shown below:

Exhibit 3: Changes to forecasts

£m

FY23

FY24e new

FY24e old

FY25e new

FY25e old

Change FY24e
(%)

Change FY25e
(%)

Revenue

470.8

511.2

495.8

534.5

518.4

3.1

3.1

Growth y-o-y %

8.6

5.3

4.6

4.6

Reported profit before tax

170.6

186.2

186.2

193.2

193.2

0.0

0.0

Growth y-o-y %

9.2

9.1

3.7

3.8

Source: Games Workshop Group accounts, Edison Investment Research

Our new FY24 revenue forecast includes higher growth for core and lower growth for licensing than previously following the H124 performance, as well as updating for modest changes in exchange rates. We forecast core revenue growth of c 9% y-o-y in FY24 and a decline in licensing revenue of c 5%.

We have increased our core gross margin estimate for FY24 to 68.5% from 68% previously to account for the strong performance in H124, but our estimate for lower licensing revenue (above), which has a gross margin of 100%, and higher operating costs than previously due to greater staff costs, restrict the growth in our estimate for profit before tax.

Valuation

Our DCF-based valuation increases to £117/share from £112/share previously to take account of the changes in estimates, financial position, number of shares and WACC. Our WACC has reduced to 9.3% from 10% previously due to the reduction in the UK 10-year bond yield to 3.8% and a lower UK equity market risk premium of 5.5% from 5.9% (source: Damodaran). The valuation excludes any potential upside from the content that may be produced with Amazon studios.

GAW’s prospective EV/sales multiples (core revenue only as licensing revenue was not disclosed before FY21; the company used to disclose only operating income from licensing) for FY24 and FY25 of 6.5x and 6.3x remain at a premium to the long-term average since FY17 of 4.7x but below the average multiples of more recent years of c 7–9x.

Similarly, the prospective P/E multiples of 23.3x and 22.4x are at a premium to the average multiple since FY17 of 19.1x, but in line with more recent average multiples in the low/mid-20s.

Exhibit 4: EV/core sales multiples (x)

Exhibit 5: P/E multiples (x)

Source: Refinitiv, Edison Investment Research. Note: Priced at 16 January 2024.

Source: Refinitiv, Edison Investment Research. Note: Priced at 16 January 2024.

Exhibit 4: EV/core sales multiples (x)

Source: Refinitiv, Edison Investment Research. Note: Priced at 16 January 2024.

Exhibit 5: P/E multiples (x)

Source: Refinitiv, Edison Investment Research. Note: Priced at 16 January 2024.

Exhibit 6: Financial summary

Year-end May

£'m

2022

2023

2024e

2025e

 

 

 

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

 

 

 

 

 

 

Revenue

 

 

414.8

470.8

511.2

534.5

- Core revenue

 

 

386.8

445.4

487.0

509.3

- Licensing revenue

 

 

28.0

25.4

24.1

25.2

Cost of sales

 

 

(127.4)

(149.2)

(153.4)

(163.0)

Gross profit

 

 

287.4

321.6

357.8

371.5

Operating expenses

 

 

(94.2)

(108.3)

(134.3)

(138.0)

EBITDA

 

 

193.2

213.3

223.4

233.6

Depreciation and amortisation

 

 

(36.1)

(43.1)

(38.6)

(41.0)

Reported operating profit

 

 

157.1

170.2

184.8

192.6

- Core operating profit

 

 

131.7

148.2

162.7

169.4

- Licensing operating profit

 

 

25.4

22.0

22.1

23.2

Finance income/(expense)

 

 

(0.6)

0.4

1.4

0.6

Reported PBT

 

 

156.5

170.6

186.2

193.2

Profit Before Tax (norm)

 

 

158.1

171.6

187.3

194.4

Income tax expense (includes exceptionals)

 

 

(28.1)

(35.9)

(46.6)

(48.3)

Reported net income

 

 

128.4

134.7

139.7

144.9

Adjusted net income (before share-based payments)

 

 

129.7

135.5

140.5

145.8

WASC (m)

 

 

32.813

32.881

32.926

32.949

Average Number of Shares Outstanding (m)

 

 

32.873

32.898

32.943

32.966

Reported EPS (p)

 

 

391.3

409.7

424.2

439.7

Reported diluted EPS (p)

 

 

390.6

409.4

424.0

439.5

EPS - normalised fully diluted (p)

 

 

394.6

411.8

426.5

442.2

DPS (p)

 

 

235.0

415.0

425.0

435.0

Gross margin

 

 

69.3%

68.3%

70.0%

69.5%

EBITDA margin (including licensing income)

 

 

46.6%

45.3%

43.7%

43.7%

Operating margin

 

 

37.9%

36.2%

36.2%

36.0%

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

Property, plant and equipment

 

 

55.0

55.7

57.7

59.4

Right-of-use assets

 

 

48.1

48.9

47.0

45.1

Goodwill

 

 

1.4

1.4

1.4

1.4

Intangible assets

 

 

25.6

21.2

24.7

28.1

Other non-current assets

 

 

37.2

25.6

25.6

25.6

Total non-current assets

 

 

167.3

152.8

156.4

159.6

Cash and equivalents

 

 

71.4

90.2

89.9

87.2

Inventories

 

 

38.4

33.0

33.6

35.6

Trade and other receivables

 

 

39.6

36.3

41.7

43.6

Other current assets

 

 

4.4

14.5

14.5

14.5

Total current assets

 

 

153.8

174.0

179.6

180.8

Trade and other payables

 

 

(33.5)

(37.0)

(45.1)

(47.2)

Borrowings

 

 

0.0

0.0

0.0

0.0

Leases

 

 

(9.2)

(9.9)

(9.9)

(9.9)

Other current liabilities

 

 

(1.9)

(1.3)

(1.3)

(1.3)

Total current liabilities

 

 

(44.6)

(48.2)

(56.3)

(58.4)

Borrowings

 

 

0.0

0.0

0.0

0.0

Leases

 

 

(39.7)

(40.0)

(37.6)

(34.6)

Other non-current liabilities

 

 

(2.1)

(3.0)

(3.0)

(3.0)

Total non-current liabilities

 

 

(41.8)

(43.0)

(40.6)

(37.6)

Net assets

 

 

234.7

235.6

239.0

244.4

 

 

 

 

 

 

 

CASH FLOW STATEMENT

 

 

 

 

 

 

Operating Cash Flow

 

 

157.1

170.2

184.8

192.6

Depreciation and amortisation

 

 

34.8

39.5

38.6

41.0

Impairments

 

 

1.3

3.6

0.0

0.0

Share-based payments

 

 

1.6

1.0

1.1

1.2

Other adjustments

 

 

0.3

(1.2)

0.0

0.0

Movements in working capital

 

 

(35.9)

18.6

2.2

(1.8)

Income taxes paid

 

 

(37.7)

(39.0)

(46.6)

(48.3)

Operating cash flow 2

 

 

121.5

192.7

180.2

184.6

Net capex and intangibles

 

 

(32.3)

(28.3)

(32.2)

(34.1)

Net interest

 

 

0.2

0.3

1.4

0.6

Net proceeds from issue of shares

 

 

1.8

2.6

2.6

2.6

Dividends paid

 

 

(93.5)

(136.5)

(139.9)

(143.3)

Other financing activities

 

 

(11.9)

(11.8)

(12.4)

(13.0)

Net cash flow

 

 

(14.2)

19.0

(0.3)

(2.7)

Opening cash and cash equivalents

 

 

85.2

71.4

90.2

89.9

Currency translation differences and other

 

 

0.4

(0.2)

0.0

0.0

Closing net (debt)/cash

 

 

71.4

90.2

89.9

87.2

Closing net cash including leases

 

 

22.5

40.3

42.3

42.7

Source: Games Workshop Group accounts, Edison Investment Research

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United Kingdom

This document is prepared and provided by Edison 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.

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.

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

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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