Gear4music’s continued market share gains in the UK, and triple-digit growth in Europe, give line of sight to a significantly larger business with enhanced investment returns. Institutional investors have demonstrated their confidence in the company’s growth strategy with the recent placing, but that has not been sufficient to address a market that continues to focus on higher value based on increasing market share.
Written by
Gear4music Holdings |
European horizons open up |
Placing |
Retail |
5 June 2017 |
Share price performance
Business description
Next events
Analysts
Gear4music Holdings is a research client of Edison Investment Research Limited |
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Gear4music’s continued market share gains in the UK, and triple-digit growth in Europe, give line of sight to a significantly larger business with enhanced investment returns. Institutional investors have demonstrated their confidence in the company’s growth strategy with the recent placing, but that has not been sufficient to address a market that continues to focus on higher value based on increasing market share.
Year |
Revenue (£m) |
EBITDA |
PBT* |
EPS* |
P/E |
EV/EBITDA |
02/16 |
35.5 |
1.7 |
0.6 |
3.1 |
244.3 |
92.9 |
02/17 |
56.1 |
3.7 |
2.7 |
11.6 |
65.7 |
45.0 |
02/18e |
79.7 |
4.1 |
2.4 |
10.0 |
76.4 |
40.2 |
02/19e |
102.1 |
5.1 |
3.3 |
13.3 |
57.3 |
32.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Expansion through European market share gains
G4M is on a path to major expansion. Its success in the UK, applying 21st century retail technology to disrupt a fragmented industry, is giving way to the prospect of a significantly larger presence on the continent. In FY17, European sales grew 124%, and G4M has opened distribution hubs in Sweden and Germany. Separately, it plans a US website, which should provide a platform for own-brand sales there. It is also acquiring a £5.3m freehold, catering for its medium-term head office needs.
Funding for investment opportunities
G4M has funded additional growth opportunities by raising £4.2m before expenses through a placing of 610,000 shares. It plans to invest the proceeds in the IT platform, international expansion, supply chain development, inventory investment, further enhancement of the marketing offering, the fit out of the new UK head office and further development of the German and Scandinavian hubs. The directors also placed 839,000 of their own shares and the CEO, who retains 34.3% of the shares, has undertaken not to sell further shares for one year.
Forecasts materially unchanged
As the placing represents only a 3.5% increase in share capital, there is no material change to our forecasts.
Valuation: Focus on the European opportunity
The placing was oversubscribed at 690p and the share price continues to demonstrate significant investor demand. The market is clearly focusing on the European opportunity. Based on a multiple of 2x sales, typical of pure-play online retailers, the current share price implies only a 2% revenue share of a European musical instrument and equipment market valued at £4.3bn, compared with G4M’s 0.5% share now and its major competitor’s 14% share. In the UK, G4M has already taken a 20% share, growing that at around 5% pa over the last three years. Thus, for G4M to reach a 2% European penetration looks achievable, and any over-achievement would give grounds for future upside.
Exhibit 1: Financial summary
£'000 |
2016 |
2017 |
2018e |
2019e |
2020e |
||
Year end: February |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
35,489 |
56,128 |
79,728 |
102,116 |
127,347 |
Cost of Sales |
(26,303) |
(40,983) |
(58,615) |
(74,875) |
(93,382) |
||
Gross Profit |
9,186 |
15,145 |
21,114 |
27,242 |
33,965 |
||
EBITDA |
|
|
1,688 |
3,650 |
4,092 |
5,133 |
6,649 |
Operating profit (before amort. and except). |
|
903 |
2,655 |
2,648 |
3,590 |
4,747 |
|
Amortisation of acquired intangibles |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
(606) |
0 |
0 |
0 |
0 |
||
Share-based payments |
(8) |
(39) |
(73) |
(66) |
(83) |
||
Reported operating profit |
289 |
2,616 |
2,575 |
3,524 |
4,663 |
||
Net Interest |
(283) |
20 |
(289) |
(265) |
(264) |
||
Joint ventures & associates (post tax) |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
620 |
2,675 |
2,360 |
3,325 |
4,482 |
Profit Before Tax (reported) |
|
|
6 |
2,636 |
2,286 |
3,259 |
4,399 |
Reported tax |
(49) |
(322) |
(283) |
(532) |
(717) |
||
Profit After Tax (norm) |
571 |
2,353 |
2,076 |
2,793 |
3,765 |
||
Profit After Tax (reported) |
(43) |
2,314 |
2,003 |
2,727 |
3,682 |
||
Minority interests |
0 |
0 |
0 |
0 |
0 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
571 |
2,353 |
2,076 |
2,793 |
3,765 |
||
Net income (reported) |
(43) |
2,314 |
2,003 |
2,727 |
3,682 |
||
Basic average number of shares outstanding (m) |
18.2 |
20.2 |
20.7 |
20.9 |
20.9 |
||
EPS - basic normalised (p) |
|
|
3.1 |
11.7 |
10.0 |
13.4 |
18.0 |
EPS - normalised (p) |
|
|
3.1 |
11.6 |
10.0 |
13.3 |
18.0 |
EPS - basic reported (p) |
|
|
(0.2) |
11.5 |
9.7 |
13.1 |
17.6 |
Dividend per share (p) |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
46.4 |
58.2 |
42.0 |
28.1 |
24.7 |
||
Gross Margin (%) |
25.9 |
27.0 |
26.5 |
26.7 |
26.7 |
||
EBITDA Margin (%) |
4.8 |
6.5 |
5.1 |
5.0 |
5.2 |
||
Normalised Operating Margin |
2.5 |
4.7 |
3.3 |
3.5 |
3.7 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
4,477 |
7,102 |
14,067 |
15,124 |
16,255 |
Intangible Assets |
3,238 |
5,537 |
6,432 |
6,971 |
7,465 |
||
Tangible Assets |
1,239 |
1,565 |
7,634 |
8,153 |
8,790 |
||
Investments & other |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
11,194 |
16,035 |
24,687 |
28,821 |
34,099 |
Stocks |
6,906 |
11,686 |
15,060 |
19,068 |
23,307 |
||
Debtors |
740 |
1,348 |
1,915 |
2,452 |
3,058 |
||
Cash & cash equivalents |
3,548 |
3,001 |
7,712 |
7,301 |
7,734 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(6,022) |
(10,000) |
(14,940) |
(18,028) |
(21,511) |
Creditors |
(5,188) |
(7,379) |
(10,722) |
(13,710) |
(17,096) |
||
Tax and social security |
0 |
0 |
0 |
0 |
3 |
||
Short term borrowings |
(834) |
(2,621) |
(4,219) |
(4,319) |
(4,419) |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(290) |
(1,415) |
(4,368) |
(4,154) |
(3,804) |
Long term borrowings |
(127) |
(24) |
(4,278) |
(4,064) |
(3,714) |
||
Other long term liabilities |
(163) |
(1,391) |
(90) |
(90) |
(90) |
||
Net Assets |
|
|
9,359 |
11,722 |
19,445 |
21,763 |
25,039 |
Minority interests |
0 |
0 |
0 |
0 |
3 |
||
Shareholders' equity |
|
|
9,359 |
11,722 |
19,445 |
21,763 |
25,042 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
1,688 |
3,656 |
4,092 |
5,133 |
6,649 |
||
Working capital |
(1,416) |
(3,618) |
(598) |
(1,558) |
(1,459) |
||
Exceptional & other |
(607) |
28 |
(73) |
(66) |
(83) |
||
Tax |
0 |
(104) |
(283) |
(532) |
(717) |
||
Net operating cash flow |
|
|
(335) |
(38) |
3,137 |
2,978 |
4,390 |
Capex |
(1,509) |
(2,195) |
(7,680) |
(2,601) |
(3,034) |
||
Acquisition: deferred payments |
0 |
0 |
(409) |
(409) |
(409) |
||
Net interest |
(130) |
(47) |
(289) |
(265) |
(264) |
||
Equity financing |
9,535 |
0 |
0 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
7,561 |
(2,280) |
(5,240) |
(297) |
683 |
||
Opening net debt/(cash) |
|
|
4,974 |
(2,587) |
(356) |
4,884 |
5,181 |
FX |
0 |
0 |
0 |
0 |
0 |
||
Other non-cash movements |
0 |
49 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(2,587) |
(356) |
4,884 |
5,181 |
4,498 |
Source: Company accounts, Edison Investment Research
|
|
QinetiQ is a business in transformation. It has a new management team, a new campaign based strategy and it is proactively adapting to meet the new defence environment in the UK and US. Solid FY17 numbers saw the first organic revenue growth since 2014, which is encouraging, and management has maintained its expectations for FY18. Underlying momentum is building at the company. Order intake, contract wins and continued organic revenue growth will demonstrate whether or not the new strategy can translate into higher returns.