Game Digital (GMD) has posted good sales growth over its first 23 weeks and even better results over the Christmas peak. While sales have been led by hardware, management is confident of covering any mix issue through cost savings, and we retain our forecast. With net cash at 35p, the market is valuing this business at 3.5x FY18e EBITDA, which looks misplaced.
Written by
Game Digital |
Good seasonal trading |
23-week trading update |
Retail |
11 January 2018 |
Share price performance
Business description
Next events
Analysts
|
||||||||||||||||||||||||||||||||||||||||||||||||
Game Digital (GMD) has posted good sales growth over its first 23 weeks and even better results over the Christmas peak. While sales have been led by hardware, management is confident of covering any mix issue through cost savings, and we retain our forecast. With net cash at 35p, the market is valuing this business at 3.5x FY18e EBITDA, which looks misplaced.
Year end |
Revenue (£m) |
EBITDA |
PBT* |
EPS* |
DPS |
P/E |
EV/EBITDA |
Yield |
07/16* |
821.9 |
26.4 |
14.8 |
10.7 |
3.4 |
5.6 |
2.4 |
5.7 |
07/17e |
782.9 |
8.0 |
(4.3) |
(3.7) |
1.0 |
N/A |
5.4 |
1.7 |
07/18e |
793.2 |
12.3 |
0.2 |
0.1 |
0.0 |
648.0 |
3.5 |
N/A |
07/19e |
796.3 |
15.0 |
1.9 |
0.9 |
0.0 |
69.1 |
2.8 |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. *Restated.
Strong headline trading for 23 weeks
Group GTV for the 9.5-week peak trading period (1 November to 6 January) was up by 5.2%, and for the full 23-week period 3.8%. That is a good result in the context of the current retail landscape, and consistent with our forecast GTV growth total for FY18. It also indicates that trading was strong for the period as a whole, as the earlier period averages growth close to 3%, we estimate. Growth was driven by hardware, particularly the Nintendo Switch and the Xbox One X, where GMD has been stocked to satisfy demand throughout the year to date, unlike FY17.
Forecast unchanged despite mix
GMD reports that the mix bias to hardware has a negative margin effect of c 1%. Although new models attract the best hardware margins, these are lower than GMD’s overall margin. The company expects to cover the mix issue through further cost savings. It is extending its existing FY18 cost savings programme of c £4m, and plans additional savings. We retain our forecast.
Experiential progress
The experiential change strategy is on track. BELONG gaming arenas have grown utilisation levels from 21.3% in Q4 last year to 28.2%. There were no redevelopments over the busy Christmas period, but further openings are planned from February. In addition, the latest gaming festival, Insomnia 62, is scheduled for the Easter weekend, to include Call of Duty World League: Birmingham Open, GMD’s largest esports event to date. Insomnia attracts audiences of up to 155,000.
Valuation: 3.5x EBITDA looks wrong
Cash benefited from the £17m (90%) completion proceeds from the November sale of the Multiplay Digital business, which is the main factor in a £24m year-on-year increase in cash to £67m at end December 2017. Net cash at year end plus the full proceeds of Multiplay Digital is 35p per share. On this basis the market values the business at only 3.5x FY18e EBITDA, which we feel is misplaced, even taking into account the execution risks ahead. As we are not changing our forecast, we retain our 80p valuation, which is a blend of DCF, peer comparison and sum-of-the-parts.
Exhibit 1: Financial summary
Accounts: IFRS, Year-end: July, £m |
|
2015 |
2016* |
2017e |
2018e |
2019e |
2020e |
Profit and Loss statement |
|
|
|
|
|
|
|
Total revenues |
|
866.6 |
821.9 |
782.9 |
793.2 |
796.3 |
920.4 |
Cost of sales |
|
(652.9) |
(612.7) |
(577.8) |
(586.8) |
(589.1) |
(691.2) |
Goss profit |
213.7 |
209.2 |
205.1 |
206.4 |
207.2 |
229.2 |
|
Other income/(expense) |
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Exceptionals and adjustments |
|
(12.2) |
(12.9) |
(5.7) |
(9.6) |
(9.6) |
(9.6) |
Depreciation and amortisation |
|
(8.5) |
(10.5) |
(11.0) |
(11.4) |
(12.5) |
(14.6) |
Reported EBIT |
|
26.2 |
3.0 |
(8.7) |
(8.8) |
(7.0) |
8.9 |
Finance income/(expense) |
|
(0.4) |
(1.1) |
(1.3) |
(0.6) |
(0.6) |
(0.8) |
Exceptionals and adjustments |
|
(3.7) |
(3.8) |
3.9 |
7.0 |
0.0 |
0.0 |
Reported PBT |
|
25.8 |
1.9 |
(10.0) |
(2.4) |
(7.7) |
8.1 |
Income tax expense (includes exceptionals) |
|
(4.4) |
1.3 |
(2.1) |
(0.0) |
(0.4) |
(3.9) |
Reported net income |
|
21.4 |
3.2 |
(12.1) |
(2.4) |
(8.1) |
4.2 |
Basic average number of shares, m |
|
168.3 |
168.9 |
169.7 |
170.9 |
170.9 |
170.9 |
Basic EPS, p |
|
12.7 |
1.9 |
(7.1) |
(1.4) |
(4.7) |
2.4 |
Dividend per share, p |
|
14.7 |
3.4 |
1.0 |
0.0 |
0.0 |
4.0 |
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
46.9 |
26.4 |
8.0 |
12.3 |
15.0 |
33.1 |
Adjusted EBIT |
|
38.4 |
15.9 |
(3.0) |
0.8 |
2.6 |
18.5 |
Adjusted PBT |
|
38.0 |
14.8 |
(4.3) |
0.2 |
1.9 |
17.7 |
Adjusted diluted EPS, p |
|
18.5 |
10.7 |
(3.7) |
0.1 |
0.9 |
7.9 |
|
|
|
|
|
|
|
|
Balance sheet |
|
|
|
|
|
|
|
Property, plant and equipment |
19.2 |
16.8 |
17.2 |
21.5 |
30.7 |
38.2 |
|
Goodwill |
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Intangible assets |
|
61.0 |
56.7 |
47.5 |
29.3 |
15.6 |
1.9 |
Other non-current assets |
|
0.2 |
2.2 |
2.5 |
2.5 |
2.5 |
2.5 |
Total non-current assets |
|
80.4 |
75.7 |
67.2 |
53.3 |
48.8 |
42.6 |
Cash and equivalents |
|
63.1 |
48.8 |
47.2 |
66.5 |
68.1 |
77.9 |
Inventories |
|
66.8 |
76.1 |
81.2 |
75.1 |
75.4 |
88.5 |
Trade and other receivables |
|
17.8 |
20.4 |
23.5 |
19.9 |
20.0 |
23.1 |
Other current assets |
|
0.9 |
8.8 |
1.7 |
3.6 |
1.7 |
1.7 |
Total current assets |
|
148.6 |
154.1 |
153.6 |
165.2 |
165.2 |
191.2 |
Non-current loans and borrowings |
|
0.1 |
3.1 |
2.6 |
2.6 |
2.6 |
2.6 |
Other non-current liabilities |
|
5.7 |
4.4 |
2.8 |
2.8 |
2.8 |
2.8 |
Total non-current liabilities |
|
5.8 |
7.5 |
5.4 |
5.4 |
5.4 |
5.4 |
Trade and other payables |
|
93.8 |
90.7 |
101.6 |
89.5 |
89.9 |
105.5 |
Current loans and borrowings |
|
0.0 |
7.2 |
2.0 |
7.7 |
7.7 |
7.7 |
Other current liabilities |
|
3.2 |
1.3 |
2.6 |
2.6 |
2.6 |
2.6 |
Total current liabilities |
|
97.0 |
99.2 |
106.2 |
99.8 |
100.2 |
115.8 |
Equity attributable to company |
|
126.2 |
126.9 |
109.2 |
113.2 |
108.5 |
112.7 |
|
|
|
|
|
|
|
|
Cash flow statement |
|
|
|
|
|
|
|
Cash from operations (CFO) |
|
44.1 |
3.2 |
9.1 |
13.1 |
16.9 |
30.9 |
Capex |
|
(11.3) |
(13.3) |
(11.6) |
(16.0) |
(16.6) |
(16.9) |
Acquisitions & disposals net |
|
(12.4) |
(1.5) |
13.3 |
17.1 |
1.9 |
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) |
1.7 |
1.1 |
(14.7) |
(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) |
(4.3) |
(0.6) |
(0.6) |
(4.2) |
Cash from financing activities (CFF) |
|
(39.3) |
(12.4) |
(4.3) |
(0.6) |
(0.6) |
(4.2) |
Increase/(decrease) in cash and equivalents |
|
(19.1) |
(24.0) |
6.5 |
13.6 |
1.6 |
9.8 |
Currency translation differences and other |
|
(3.1) |
1.0 |
0.6 |
0.0 |
0.0 |
0.0 |
Cash and equivalents at end of period |
|
63.1 |
40.1 |
47.2 |
60.8 |
62.4 |
72.2 |
Net (debt) cash |
|
63.0 |
38.5 |
42.6 |
56.2 |
57.8 |
67.6 |
Movement in net (debt) cash over period |
|
63.0 |
(24.5) |
4.1 |
13.6 |
1.6 |
9.8 |
|
Source: Game Digital accounts, Edison Investment Research. Note: *Restated. |
|||||||
|
|
Research: Energy & Resources
SDX Energy has announced the completion of the KSR-16 well on the Sebou permit in Morocco (SDX 75%) with the well delivering a restricted flow rate of 8.43mmscfd, exceeding management expectations, and the highest flow rate to date from the three successful wells drilled to date. KSR-16 is now on production.