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Research: Consumer
Games Workshop Group’s (GAW’s) record H123 results included strong revenue recovery in Retail as COVID-19 restrictions eased, foreign exchange gains, offset by some negative effects, specifically from Russia and China, and flat sales in the key North American market. The lower reported profit reflects the well-known external cost pressures and investment to support future revenue growth, partially offset by good cost control. Our profit estimates are unchanged but we increase our dividend estimate. The recent strong share price performance takes the prospective FY23e multiple (23.9x) to between its recent long-run average (17.2x) and peak multiples (over 30x).
Games Workshop Group |
Core revenue growth offsets licensing decline |
H123 results |
Consumer goods |
12 January 2023 |
Share price performance
Business description
Next events
Analysts
Games Workshop Group is a research client of Edison Investment Research Limited |
Games Workshop Group’s (GAW’s) record H123 results included strong revenue recovery in Retail as COVID-19 restrictions eased, foreign exchange gains, offset by some negative effects, specifically from Russia and China, and flat sales in the key North American market. The lower reported profit reflects the well-known external cost pressures and investment to support future revenue growth, partially offset by good cost control. Our profit estimates are unchanged but we increase our dividend estimate. The recent strong share price performance takes the prospective FY23e multiple (23.9x) to between its recent long-run average (17.2x) and peak multiples (over 30x).
Year |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
05/21 |
369.6 |
150.9 |
370.5 |
235.0 |
25.2 |
2.5 |
05/22 |
414.8 |
156.5 |
390.6 |
235.0 |
23.9 |
2.5 |
05/23e |
447.0 |
160.4 |
389.6 |
320.0 |
23.9 |
3.4 |
05/24e |
461.1 |
169.2 |
384.5 |
320.0 |
24.3 |
3.4 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
H123: Forex benefit, cost inflation and investment
Reported H123 revenue of £226.6m (+7% y-o-y) and PBT of £83.6m (-5% y-o-y) compare with figures provided in the December 2022 trading update of ‘not less than’ £224m and £83m, respectively. Practically all of the revenue growth was due to foreign exchange gains, with growth in core revenue (constant currency +4% yo-y) being offset by lower licensing revenue (constant currency -37%) against a tough comparative from H122. Profits declined due to external cost inflation and ongoing internal investment. A significant improvement in cash flow generation, mainly due to more favourable working capital, has provided handsome rewards for shareholders; a fourth dividend, 130p/share, for the year has been declared, with the results taking the cumulative total for the year to 295p/share.
Profit estimates unchanged
We upgraded our revenue estimates for FY23 and FY24 following the December 2022 trading update, but held our profit estimates. We further upgrade our FY23 revenue estimates to reflect better growth in core revenue in H123, continued sterling weakness and a minor reduction to licensing revenue, but retain our profit estimates. External cost pressures, such as freight and materials, are easing, as is the benefit from sterling weakness. Our forecasts include a higher corporation tax charge (increases to 25% from 19% in April 2023).
Valuation: Recent re-rating
The share price has performed well since the start of Q322 as the wider market has recovered, and with a notable boost provided by the announcement of an agreement in principle with Amazon to develop film and television content. The prospective FY23e P/E multiple of 23.9x is above the post FY17 average multiple, but below peak multiples of over 30x. Our discounted cash flow (DCF)-based valuation has increased to £102/share (£100/share previously).
H123 results: Retail recovery, forex gains, cost inflation
On a reported basis, GAW’s revenue grew by c 7% to £226.6m, while operating profit declined by c 6% to £83.6m, and PBT declined by c 5% to £83.6m. There were quite divergent trends in the key reported revenue lines, and the previously flagged external cost inflation and investment to support future growth negatively affected profitability.
The new release indicates that management was aiming for a slightly better out-turn than reported, which was affected by lower growth in North America than expected, albeit its revenue was flat in constant currency and had a tough comparative. Also, management highlights that new IT systems and other projects are taking longer to complete and at higher cost than expected.
Exhibit 1: Summary financials
£m |
H122 |
H222 |
FY22 |
H123 |
Revenue |
211.6 |
203.2 |
414.8 |
226.6 |
Constant currency growth y-o-y |
6.4% |
N/D |
13.3% |
0.0% |
Core revenue |
191.5 |
195.3 |
386.8 |
212.3 |
Constant currency growth y-o-y |
6.4% |
N/D |
10.8% |
4.0% |
- Trade |
108.1 |
106.2 |
214.3 |
120.9 |
Constant currency growth y-o-y |
8.5% |
N/D |
12.0% |
3.4% |
- Retail |
41.9 |
45.3 |
87.2 |
48.7 |
Constant currency growth y-o-y |
17.3% |
N/D |
24.6% |
9.8% |
- Online |
41.5 |
43.8 |
85.3 |
42.7 |
Constant currency growth y-o-y |
(7.0%) |
N/D |
(2.7%) |
(0.5%) |
Licensing revenue |
20.1 |
7.9 |
28.0 |
14.3 |
Constant currency growth y-o-y |
N/D |
N/D |
66.3% |
(37.3%) |
Gross profit |
151.4 |
136.0 |
287.4 |
150.6 |
Gross margin |
71.6% |
66.9% |
69.3% |
66.5% |
Core gross profit |
131.3 |
128.1 |
259.4 |
136.3 |
Gross margin |
68.6% |
65.6% |
67.1% |
64.2% |
Licensing gross profit |
20.1 |
7.9 |
28.0 |
14.3 |
Gross margin |
100.0% |
100.0% |
100.0% |
100.0% |
Operating income |
88.5 |
68.6 |
157.1 |
83.6 |
Margin |
41.8% |
33.8% |
37.9% |
36.9% |
Constant currency growth y-o-y |
2.4% |
0.0% |
6.5% |
(14.5%) |
Core operating income |
69.7 |
62 |
131.7 |
70.7 |
Margin |
36.4% |
31.7% |
34.0% |
33.3% |
Constant currency growth y-o-y |
N/D |
N/D |
N/D |
(7.5%) |
Licensing operating income |
18.8 |
6.6 |
25.4 |
12.9 |
Margin |
93.5% |
83.5% |
90.7% |
90.2% |
Constant currency growth y-o-y |
N/D |
N/D |
64.0% |
(40.4%) |
Source: Games Workshop, Edison Investment Research
With around three-quarters of revenue earned overseas, GAW was a key beneficiary of sterling weakness, particularly against the US dollar, which appreciated by c 14% from an average of $/£1.37 in H122 to $/£1.18 in H123. At a current exchange rate of $/£1.22 it remains supportive for FY23 results, given the average exchange rate for the prior year was $/£1.34.
Excluding all currency gains, total revenue was flat versus the prior year. This included steady core revenue growth of 4%, following 6% growth in the comparative period, while licensing revenue declined by c 37% against a very tough comparative from H122 when the reported revenue of £20.1m was higher than GAW had reported in any prior full financial year. The average retail recommended price increase for core during H122 was broadly the same as last year. This is typically c 3%, implying small underlying volume growth for core revenue.
Within core revenue, GAW’s most significant revenue stream, Trade, grew by c 3% at constant currency so that reported revenue was £120.9m. Growth was helped by the addition of new accounts, but was negatively affected by slowing order rates in North America and the bedding in of new processes and systems in Memphis which affected distribution; reduced sales in China (£1m) due to COVID-19, albeit not as bad as management forecast; and the loss of sales in Russia (£2m in H123). Management is optimistic about performance improving in North America as the integration issues fade.
Retail continued its strong recovery as COVID-19 restrictions continued to ease, with c 10% constant currency growth in H123, following 17% in H122. To indicate the scale of the recovery, Retail’s revenue of £48.7m is ahead of any prior set of interim results (prior peak of £45.8m in H120), albeit there is some currency benefit in these figures of £2.7m versus the prior interim period. By geography, management highlights particular strength in the UK, with record sales, while North America was flat on a constant currency basis given a tough comparative.
At constant currency, Online revenue declined marginally, by 0.5%, to £42.7m, likely reflecting channel switching as customers have more options to purchase as COVID-19 restrictions reduce.
As licensing revenue has a gross margin of 100%, the total reported gross margin (66.5% in H123 versus 71.6% in H122) is significantly affected by the relative performance of licensing and core revenue given the latter’s gross margin is much lower, at 64.1% in H123. Management highlights a number of external cost pressures (materials and carriage costs) and internal investment (headcount and facilities) to support future revenue growth that have affected core gross margin, which declined by 450bp from 68.6% in H122. These represented 410bp of the core gross margin decline at constant currency (material costs 1.9%, carriage costs 1.2%, staff costs 0.5%, new facilities 0.5%) and there was a higher inventory provision, 0.4% of core sales, taking the total gross margin decline from these items to 450bp. The former should fade as a negative influence on gross margin as external cost inflation eases, but management continues to invest for the long term in staff and facilities.
The decline in core’s gross margin was mitigated by lower operating expenses relative to revenue during the period, restricting the core operating margin decline to 310bp, ie reducing to 33.3% from 36.4% in H122. This was helped by a lower relative profit share scheme charge, the lower cost was equivalent to 150bp of core revenue.
Balance sheet and cash flow
A significant improvement in operating cash flow, coupled with lower investment in fixed and intangible assets, led to a very healthy increase in free cash flow in the period, all on an absolute basis and relative to revenue.
Operating cash flow increased by £25.7m y-o-y to £86.4m in H123, which reflects a combination of lower reported operating profit offset by a marked positive £29.9m swing in working capital investment from an outflow in H122 to an inflow of £1.5m in H123. Working capital has been helped by a reduction in core investment and higher licensing inflows. The resulting free cash flow before interest of £71.6m (£45.2m H122) has been used to fund dividend payments of £54.2m in the period. With the results release management has declared a further dividend of 130p/share, taking the year-to-date total, including the three dividends previously declared, to 295p/share, already well ahead of the 235p/share declared in both FY21 and FY22, and our prior forecast for FY23 of 235p/share.
At the period end, the closing cash balance of £85.2m increased versus the end-FY22 position of £71.4m, but was below the £88.6m reported at the end of H122. The period-end leases of £49.5m reduce the net cash position including leases to £35.7m.
Amazon: Content development opportunity
In December 2022, GAW announced it had reached an agreement in principle with Amazon to develop GAW’s intellectual property into film and television productions and for Games Workshop to grant associated merchandising rights. Historically, GAW has focused on animation, therefore the content in the potential deal would likely be very different to that. At the time, management indicated it makes no change to forecasts for the current financial year.
There was no further detail in the interim results press release about the potential deal.
Forecasts: Profit estimates unchanged
We increase our revenue estimates for FY23 by just under 2% to £447m, from £439m previously, but retain our prior profit estimates for FY23 and FY24.
The upgrade to revenue reflects the slightly better out-turn for core revenue in H123 results and implies lower core revenue growth for the remainder of the year (c 6%) as the benefit from sterling weakness reduces. Our estimate for licensing revenue reduces modestly to £28.6m from £29.2m previously.
We include a higher corporate tax rate in FY23, recognising the increase in the standard corporate tax rate to 25% from April 2023.
Valuation: Recent re-rating
The share price has performed well since the start of the October as the wider stock market has recovered, and particularly so since the announcement of the agreement in principle with Amazon.
At £93.25, the P/E multiple for FY23e using our new estimates has increased to 23.9x, which is well above the average since FY17 of 17.2x, but well below the peak multiples of over 30x in FY20 and FY21.
Our DCF-based valuation increases to £102 (£100 previously) to reflect the H123 net cash position.
Exhibit 2: Financial summary
Year-end May |
£m |
|
2019 |
2020 |
2021 |
2021R |
2022 |
2023e |
2024e |
|
|
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
INCOME STATEMENT |
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
256.6 |
269.7 |
353.2 |
369.6 |
414.8 |
447.0 |
461.1 |
- Core revenue |
|
|
256.6 |
269.7 |
353.2 |
353.2 |
386.8 |
418.5 |
430.5 |
- Licensing revenue |
|
|
0.0 |
0.0 |
0.0 |
16.3 |
28.0 |
28.6 |
30.7 |
Cost of sales |
|
|
(83.3) |
(89.1) |
(96.3) |
(96.4) |
(127.4) |
(146.5) |
(139.9) |
Gross profit |
|
|
173.3 |
180.6 |
256.9 |
273.2 |
287.4 |
300.6 |
321.2 |
SG&A (expenses) |
|
|
(103.4) |
(107.4) |
(121.5) |
(121.5) |
(130.3) |
(136.7) |
(146.9) |
Other operating income/(expense) |
|
|
11.4 |
16.8 |
16.3 |
15.0 |
25.4 |
25.8 |
27.6 |
EBITDA (excl royalties) |
|
|
85.7 |
98.8 |
162.0 |
163.3 |
167.8 |
170.7 |
183.5 |
EBITDA |
|
|
97.1 |
115.6 |
178.3 |
178.3 |
193.2 |
196.5 |
211.1 |
Depreciation and amortisation |
|
|
(15.9) |
(25.6) |
(26.6) |
(26.6) |
(36.1) |
(35.4) |
(39.8) |
Operating profit (before royalties and exceptionals) |
|
|
69.8 |
73.2 |
135.4 |
136.7 |
131.7 |
135.3 |
143.7 |
Licensing |
|
|
11.4 |
16.8 |
16.3 |
15.0 |
25.4 |
25.8 |
27.6 |
Reported operating profit |
|
|
81.2 |
90.0 |
151.7 |
151.7 |
157.1 |
161.1 |
171.3 |
Finance income/(expense) |
|
|
0.1 |
(0.6) |
(0.8) |
(0.8) |
(0.6) |
(0.7) |
(2.0) |
Reported PBT |
|
|
81.3 |
89.4 |
150.9 |
150.9 |
156.5 |
160.4 |
169.2 |
Income tax expense (includes exceptionals) |
|
|
(15.5) |
(18.1) |
(28.9) |
(28.9) |
(28.1) |
(32.1) |
(42.3) |
Adjusted net income |
|
|
65.8 |
71.3 |
122.0 |
122.0 |
128.4 |
128.3 |
126.9 |
Reported net income |
|
|
65.8 |
71.3 |
122.0 |
122.0 |
128.4 |
128.3 |
126.9 |
WASC (m) |
|
|
32.438 |
32.602 |
32.733 |
32.733 |
32.813 |
32.875 |
32.944 |
Diluted average number of shares (m) |
|
|
32.785 |
32.736 |
32.927 |
32.927 |
32.873 |
32.935 |
33.004 |
Reported EPS (p) |
|
|
202.9 |
218.7 |
372.7 |
372.7 |
391.3 |
390.3 |
385.2 |
Reported diluted EPS (p) |
|
|
200.8 |
217.8 |
370.5 |
370.5 |
390.6 |
389.6 |
384.5 |
Adjusted diluted EPS (p) |
|
|
200.8 |
217.8 |
370.5 |
370.5 |
390.6 |
389.6 |
384.5 |
DPS (p) |
|
|
155.0 |
145.0 |
235.0 |
235.0 |
235.0 |
320.0 |
320.0 |
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
67.5% |
67.0% |
72.7% |
73.9% |
69.3% |
67.2% |
69.7% |
EBITDA margin (excl royalties) |
|
|
33.4% |
36.6% |
45.9% |
44.2% |
40.5% |
38.2% |
39.8% |
EBITDA margin (incl royalties) |
|
|
37.8% |
42.9% |
50.5% |
48.2% |
46.6% |
43.9% |
45.8% |
Operating margin |
|
|
31.6% |
33.4% |
43.0% |
41.0% |
37.9% |
36.0% |
37.1% |
BALANCE SHEET |
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
35.3 |
42.0 |
49.8 |
49.8 |
55.0 |
57.4 |
59.2 |
Right-of-use assets |
|
|
|
31.9 |
46.0 |
46.0 |
48.1 |
46.9 |
45.7 |
Goodwill |
|
|
1.4 |
1.4 |
1.4 |
1.4 |
1.4 |
1.4 |
1.4 |
Intangible assets |
|
|
16.0 |
17.6 |
23.7 |
23.7 |
25.6 |
30.8 |
33.8 |
Other non-current assets |
|
|
11.7 |
16.4 |
16.4 |
16.4 |
37.2 |
37.2 |
37.2 |
Total non-current assets |
|
|
64.4 |
109.3 |
137.3 |
137.3 |
167.3 |
173.7 |
177.2 |
Cash and equivalents |
|
|
29.4 |
52.9 |
85.2 |
85.2 |
71.4 |
75.6 |
92.5 |
Inventories |
|
|
24.2 |
20.7 |
27.5 |
27.5 |
38.4 |
52.8 |
51.4 |
Trade and other receivables |
|
|
18.8 |
19.6 |
30.6 |
30.6 |
39.6 |
45.8 |
47.2 |
Other current assets |
|
|
0.8 |
0.2 |
1.1 |
1.1 |
4.4 |
4.4 |
4.4 |
Total current assets |
|
|
73.2 |
93.4 |
144.4 |
144.4 |
153.8 |
178.6 |
195.5 |
Trade and other payables |
|
|
(19.2) |
(30.3) |
(35.4) |
(35.4) |
(33.5) |
(42.3) |
(42.5) |
Borrowings |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Leases |
|
|
0.0 |
(8.3) |
(8.6) |
(8.6) |
(9.2) |
(9.2) |
(9.2) |
Other current liabilities |
|
|
(10.1) |
(4.5) |
(0.7) |
(0.7) |
(1.9) |
(1.9) |
(1.9) |
Total current liabilities |
|
|
(29.3) |
(43.1) |
(44.7) |
(44.7) |
(44.6) |
(53.4) |
(53.6) |
Borrowings |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Leases |
|
|
0.0 |
(23.8) |
(38.4) |
(38.4) |
(39.7) |
(37.2) |
(34.1) |
Other non-current liabilities |
|
|
(1.9) |
(2.1) |
(2.3) |
(2.3) |
(2.1) |
(2.1) |
(2.1) |
Total non-current liabilities |
|
|
(1.9) |
(25.9) |
(40.7) |
(40.7) |
(41.8) |
(39.3) |
(36.2) |
Net assets |
|
|
106.5 |
133.7 |
196.3 |
196.3 |
234.7 |
259.6 |
283.0 |
CASH FLOW STATEMENT |
|
|
|
|
|
|
|
|
|
EBIT |
|
|
81.2 |
90.0 |
151.7 |
151.7 |
157.1 |
161.1 |
171.3 |
Depreciation and amortisation |
|
|
15.9 |
25.0 |
26.2 |
26.2 |
34.8 |
35.4 |
39.8 |
Impairments |
|
|
0.0 |
0.6 |
0.4 |
0.4 |
1.3 |
0.0 |
0.0 |
Share-based payments |
|
|
0.3 |
0.5 |
1.2 |
1.2 |
1.6 |
1.8 |
1.9 |
Other adjustments |
|
|
0.3 |
0.3 |
0.1 |
0.1 |
0.3 |
0.0 |
0.0 |
Movements in working capital |
|
|
(9.0) |
10.8 |
(14.8) |
(14.8) |
(35.9) |
(11.8) |
0.1 |
Income taxes paid |
|
|
(16.3) |
(22.7) |
(32.1) |
(32.1) |
(37.7) |
(32.1) |
(42.3) |
Operating cash flow |
|
|
72.5 |
104.5 |
132.7 |
132.7 |
121.5 |
154.4 |
170.8 |
Net capex and intangibles |
|
|
(22.5) |
(24.6) |
(30.0) |
(30.0) |
(32.3) |
(31.8) |
(33.4) |
Net interest |
|
|
0.1 |
0.1 |
0.2 |
0.2 |
0.2 |
(0.7) |
(2.0) |
Net proceeds from issue of shares |
|
|
0.7 |
0.8 |
1.4 |
1.4 |
1.8 |
0.0 |
0.0 |
Dividends paid |
|
|
(50.3) |
(47.3) |
(60.5) |
(60.5) |
(93.5) |
(105.2) |
(105.4) |
Other financing activities |
|
|
0.0 |
(10.3) |
(10.9) |
(10.9) |
(11.9) |
(12.5) |
(13.1) |
Net cash flow |
|
|
0.5 |
23.2 |
32.9 |
32.9 |
(14.2) |
4.2 |
16.9 |
Opening cash and cash equivalents |
|
|
28.5 |
29.4 |
52.9 |
85.2 |
85.2 |
71.4 |
75.6 |
Currency translation differences and other |
|
|
0.3 |
0.3 |
(0.6) |
(0.6) |
0.4 |
0.0 |
0.0 |
Closing cash and cash equivalents |
|
|
29.4 |
52.9 |
85.2 |
117.5 |
71.4 |
75.6 |
92.5 |
Closing net cash (including leases) |
|
|
29.4 |
20.8 |
38.2 |
38.2 |
22.5 |
29.2 |
49.2 |
Source: Company accounts, Games Workshop Group |
|
|
Research: Healthcare
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