Games Workshop Group — Encouraging trading in H123

Games Workshop Group (LSE: GAW)

Currency in GBP

Last close As at 03/02/2023

GBP94.70

230.00 (2.49%)

Market capitalisation

GBP3,041m

Research: Consumer

Games Workshop Group — Encouraging trading in H123

Games Workshop’s (GAW’s) H123 trading update indicates an encouraging start to the year, with reported revenue and operating profit representing more than half of our full year estimate. With around three-quarters of revenue earned overseas, GAW is a beneficiary of sterling’s weakness, notably versus the US dollar, which alone, we estimate, contributed c 6% to GAW’s core revenue growth in H123. Although sterling has recently strengthened, at current exchange rates it continues to provide good support for the remainder of the year. We upgrade our FY23 and FY24 revenue estimates by c 2% due to favourable exchange rates, but maintain our prior profit estimates. Our discounted cash flow-based valuation of £100/share is unchanged ahead of publication of H123 results.

Russell Pointon

Written by

Russell Pointon

Director, Consumer

Consumer

Games Workshop Group

Encouraging trading in H123

H123 trading update

Consumer goods

8 December 2022

Price

7,295p

Market cap

£2,393m

Net cash (£m) at 31 May 2022 (excluding lease liabilities)

71.4

Shares in issue

32.8m

Free float

99%

Code

GAW

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

14.0

0.8

(25.3)

Rel (local)

11.2

(2.1)

(23.7)

52-week high/low

10,090p

5,690p

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

H123 results

10 January 2023

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

Games Workshop’s (GAW’s) H123 trading update indicates an encouraging start to the year, with reported revenue and operating profit representing more than half of our full year estimate. With around three-quarters of revenue earned overseas, GAW is a beneficiary of sterling’s weakness, notably versus the US dollar, which alone, we estimate, contributed c 6% to GAW’s core revenue growth in H123. Although sterling has recently strengthened, at current exchange rates it continues to provide good support for the remainder of the year. We upgrade our FY23 and FY24 revenue estimates by c 2% due to favourable exchange rates, but maintain our prior profit estimates. Our discounted cash flow-based valuation of £100/share is unchanged ahead of publication of H123 results.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

05/21

369.6

150.9

370.5

235.0

19.7

3.2

05/22

414.8

156.5

390.6

235.0

18.7

3.2

05/23e

439.2

160.4

399.7

235.0

18.3

3.2

05/24e

461.1

169.2

384.6

250.0

19.0

3.4

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

H123: Revenue growth, cost inflation and investment

Total group revenue grew by at least 6% to ‘not less than £224m’ (H122: c £212m), while operating profit and profit before tax both declined by at most 6% to ‘not less than’ £83m (H122: £88.5m and £88.2m, respectively). Within total revenue there are quite divergent trends. Core revenue grew by at least 10% to ‘not less than £210m’ (H122: £192m), helped by weak sterling, while licensing, which is typically quite lumpy, declined by 30% to c £14m (H122: £20.1m) due to a tough comparative when there were a number of significant licensing deals signed. Total revenue growth is relatively consistent between Q1 and Q2, but licensing revenue was higher in absolute terms in Q2 (£11m) than Q1 (£3m). The core operating margin compression (we estimate more than 33% vs 36.3% in H122) indicates ongoing inflationary cost pressures, albeit the pressures appear lower than experienced in H122 (margin of 31.8%). While continuing to make good progress, management is rewarding staff with a profit share of £1,500 per employee and shareholders have seen very good cash returns through dividends of 165p/share so far in FY23.

Revenue estimates upgraded, profit estimates stable

We upgrade our revenue estimates for FY23 (by 2% to £439m) and FY24 (by 2% to £461m) but maintain our profit estimates, reflecting H123 trading and weak sterling.

Valuation: Rebound in valuation

The recent rebound in the share price has increased GAW’s prospective FY23 and FY24 P/E multiples to 18.3x and 19.0x (higher corporation tax rate), respectively, a modest premium to the average multiple since 2017 of 17.2x, but below recent high multiples (mid-20s+).

Exhibit 1: 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

439.2

461.1

- Core revenue

 

 

256.6

269.7

353.2

353.2

386.8

410.0

430.4

- Licensing revenue

 

 

0.0

0.0

0.0

16.3

28.0

29.2

30.7

Cost of sales

 

 

(83.3)

(89.1)

(96.3)

(96.4)

(127.4)

(139.6)

(139.9)

Gross profit

 

 

173.3

180.6

256.9

273.2

287.4

299.6

321.2

SG&A (expenses)

 

 

(103.4)

(107.4)

(121.5)

(121.5)

(130.3)

(135.5)

(146.9)

Other operating income/(expense)

 

 

11.4

16.8

16.3

15.0

25.4

26.3

27.6

EBITDA (excl royalties)

 

 

85.7

98.8

162.0

163.3

167.8

170.2

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

134.9

143.7

Licensing

 

 

11.4

16.8

16.3

15.0

25.4

26.3

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)

(28.8)

(42.3)

Adjusted net income

 

 

65.8

71.3

122.0

122.0

128.4

131.6

126.9

Reported net income

 

 

65.8

71.3

122.0

122.0

128.4

131.6

126.9

WASC (m)

 

 

32.438

32.602

32.733

32.733

32.813

32.872

32.936

Diluted average number of shares (m)

 

 

32.785

32.736

32.927

32.927

32.873

32.932

32.996

Reported EPS (p)

 

 

202.9

218.7

372.7

372.7

391.3

400.4

385.3

Reported diluted EPS (p)

 

 

200.8

217.8

370.5

370.5

390.6

399.7

384.6

Adjusted diluted EPS (p)

 

 

200.8

217.8

370.5

370.5

390.6

399.7

384.6

DPS (p)

 

 

155.0

145.0

235.0

235.0

235.0

235.0

250.0

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

67.5%

67.0%

72.7%

73.9%

69.3%

68.2%

69.7%

EBITDA margin (excl royalties)

 

 

33.4%

36.6%

45.9%

44.2%

40.5%

38.8%

39.8%

EBITDA margin (incl royalties)

 

 

37.8%

42.9%

50.5%

48.2%

46.6%

44.7%

45.8%

Operating margin

 

 

31.6%

33.4%

43.0%

41.0%

37.9%

36.7%

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

108.5

146.8

Inventories

 

 

24.2

20.7

27.5

27.5

38.4

50.9

51.4

Trade and other receivables

 

 

18.8

19.6

30.6

30.6

39.6

45.0

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

208.7

249.9

Trade and other payables

 

 

(19.2)

(30.3)

(35.4)

(35.4)

(33.5)

(41.1)

(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)

(52.2)

(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

290.8

337.4

 

 

 

 

 

 

 

 

 

 

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)

(10.2)

(1.4)

Income taxes paid

 

 

(16.3)

(22.7)

(32.1)

(32.1)

(37.7)

(28.8)

(42.3)

Operating cash flow

 

 

72.5

104.5

132.7

132.7

121.5

159.3

169.3

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)

(77.2)

(82.3)

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)

37.1

38.4

Opening cash and cash equivalents

 

 

28.5

29.4

52.9

85.2

85.2

71.4

108.5

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

108.5

146.8

Closing net cash (including leases)

 

 

29.4

20.8

38.2

38.2

22.5

62.1

103.6

Source: GAW, Edison Investment Research. Note: R is restated for change in disclosure re licensing revenue and gross profit.

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 £60,000 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 research department of Edison 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 2022 Edison Investment Research Limited (Edison).

Australia

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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

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.

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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

1185 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

1185 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 £60,000 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 research department of Edison 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 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

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.

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

1185 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

1185 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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In Molecure’s recent R&D day presentation, management highlighted the progress of OATD-01 and OATD-02 as the company prepares to begin important clinical trials for sarcoidosis and solid tumours, respectively, in 2023. Details from the presentation show Molecure is planning to maximise the potential of both assets, in our view. Pre-clinical animal model data for OATD-01 suggest it could have potential use in non-alcoholic steatohepatitis (NASH), a fibrotic disease with unmet needs, however we note that animal data is not generalisable to humans. Further, the trial design for the upcoming Phase I study for OATD-02 confirms the company will target cancers where immune checkpoint inhibitors (ICIs) have had limited success, an area where we believe OATD-02/ICI combinations could have an impact. In our view, this is supportive of Molecure’s development strategy as the company approaches key trial initiations in 2023.

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