Gear4music (G4M) has fulfilled the strong expectations of its four-month Christmas trading period. Revenue growth of 42% is consistent with H1 and is in line with expectations, both in the UK and faster growing international markets. This means that the online model continues to take share, achieving growth far ahead of consumer fundamentals and building on its market-leading position. We retain our forecast and reiterate our valuation stance, which sees upside based on the rate of development of international markets.
Written by
Gear4music Holdings |
Jingle bells |
January trading statement |
Retail |
5 January 2018 |
Share price performance
Business description
Next events
Analysts
Gear4music Holdings is a research client of Edison Investment Research Limited |
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Gear4music (G4M) has fulfilled the strong expectations of its four-month Christmas trading period. Revenue growth of 42% is consistent with H1 and is in line with expectations, both in the UK and faster growing international markets. This means that the online model continues to take share, achieving growth far ahead of consumer fundamentals and building on its market-leading position. We retain our forecast and reiterate our valuation stance, which sees upside based on the rate of development of international markets.
Year |
Revenue (£m) |
EBITDA |
PBT* |
EPS* |
P/E |
EV/EBITDA |
02/16 |
35.5 |
1.7 |
0.6 |
3.1 |
246.9 |
93.9 |
02/17 |
56.1 |
3.7 |
2.7 |
11.6 |
66.4 |
45.1 |
02/18e |
81.4 |
4.1 |
2.4 |
10.0 |
77.3 |
40.3 |
02/19e |
102.1 |
5.2 |
3.3 |
13.3 |
57.9 |
32.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Pre-Christmas trading on expectation
G4M reports 42% y-o-y growth in total sales for the four months from September to December, its important pre-Christmas sales period. That is reassuringly close to the 44% growth in the first half, with trading in line with expectations. Growth for each of the geographies was also close to H1 levels. The UK (25% vs 30%) continued to provide substantial sales growth, and international sales (69% vs 70%) are powering ahead based on increased capacity and localised delivery options provided by the Swedish and German hubs. Active customer numbers were 38% up at 450,000, and are already 15% higher than at the half year. Website conversion, which is characteristically strong in this period, was up from 3.0% a year ago to 3.3%.
Revenue returns to underlying strong growth
G4M comments that two-year revenue growth of 120% is ahead of the same stage last year at 114%. This looks through the upward blip in September to December 2016 (+55%), which was supported by investment in stock at pre-referendum rates, as well as the upsurge in own-brand products following investment in the wake of the IPO. A year before (September to December 2015) growth had been 38%. The inference is that growth is returning to underlying strong rates.
Forecast unchanged
We commented at the half year that we expected second-half revenue to grow by similar rates to the first. That is the case, and we are not changing our forecast.
Valuation: Pricing market share gains
We reiterate our valuation stance. Short-term P/E and EV/EBITDA multiples remain top of the range of pure-play online retailers. G4M’s current share price implies around six years to reach market share of 6% in mainland Europe. Achieving that one year earlier would imply 1,110p. Alternatively, overlaying a 1% share of the US market developed over the next 10 years would be equivalent to a share price of 967p. The two combined would be equivalent to a share price of 1,274p.
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 |
81,410 |
102,116 |
127,347 |
Cost of Sales |
(26,303) |
(40,983) |
(60,399) |
(74,931) |
(93,328) |
||
Gross Profit |
9,186 |
15,145 |
21,011 |
27,186 |
34,019 |
||
EBITDA |
|
|
1,688 |
3,656 |
4,092 |
5,150 |
6,664 |
Operating profit (before amort. and except). |
|
903 |
2,655 |
2,648 |
3,589 |
4,746 |
|
Amortisation of acquired intangibles |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
(606) |
0 |
0 |
0 |
0 |
||
Share-based payments |
(8) |
(39) |
(64) |
(65) |
(81) |
||
Reported operating profit |
289 |
2,616 |
2,584 |
3,525 |
4,664 |
||
Net Interest |
(283) |
20 |
(288) |
(264) |
(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 |
2,296 |
3,261 |
4,400 |
Reported tax |
(49) |
(322) |
(283) |
(532) |
(717) |
||
Profit After Tax (norm) |
571 |
2,353 |
2,077 |
2,793 |
3,765 |
||
Profit After Tax (reported) |
(43) |
2,314 |
2,012 |
2,729 |
3,683 |
||
Minority interests |
0 |
0 |
0 |
0 |
0 |
||
Discontinued operations |
0 |
0 |
0 |
0 |
0 |
||
Net income (normalised) |
571 |
2,353 |
2,077 |
2,793 |
3,765 |
||
Net income (reported) |
(43) |
2,314 |
2,012 |
2,729 |
3,683 |
||
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 |
17.7 |
Dividend per share (p) |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
46.4 |
58.2 |
45.0 |
25.4 |
24.7 |
||
Gross Margin (%) |
25.9 |
27.0 |
25.8 |
26.6 |
26.7 |
||
EBITDA Margin (%) |
4.8 |
6.5 |
5.0 |
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 |
13,718 |
14,730 |
15,811 |
Intangible Assets |
3,238 |
5,537 |
6,094 |
6,612 |
7,083 |
||
Tangible Assets |
1,239 |
1,565 |
7,623 |
8,119 |
8,728 |
||
Investments & other |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
11,194 |
16,035 |
21,225 |
24,340 |
28,712 |
Stocks |
6,906 |
11,686 |
15,426 |
19,008 |
23,200 |
||
Debtors |
740 |
1,348 |
1,955 |
2,452 |
3,058 |
||
Cash & cash equivalents |
3,548 |
3,001 |
3,844 |
2,880 |
2,454 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(6,022) |
(10,000) |
(10,925) |
(12,970) |
(15,495) |
Creditors |
(5,188) |
(7,379) |
(7,957) |
(9,901) |
(12,329) |
||
Tax and social security |
0 |
0 |
0 |
0 |
3 |
||
Short term borrowings |
(834) |
(2,621) |
(2,969) |
(3,069) |
(3,169) |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(290) |
(1,415) |
(5,988) |
(5,343) |
(4,526) |
Long term borrowings |
(127) |
(24) |
(4,728) |
(4,491) |
(4,141) |
||
Other long term liabilities |
(163) |
(1,391) |
(1,260) |
(851) |
(385) |
||
Net Assets |
|
|
9,359 |
11,722 |
18,029 |
20,758 |
24,502 |
Minority interests |
0 |
0 |
0 |
0 |
3 |
||
Shareholders' equity |
|
|
9,359 |
11,722 |
18,029 |
20,758 |
24,505 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
1,688 |
3,656 |
4,092 |
5,150 |
6,664 |
||
Working capital |
(1,416) |
(3,618) |
(3,769) |
(2,134) |
(2,370) |
||
Exceptional & other |
(607) |
28 |
(64) |
(65) |
(81) |
||
Tax |
0 |
(104) |
(283) |
(532) |
(717) |
||
Net operating cash flow |
|
|
(335) |
(38) |
(25) |
2,419 |
3,496 |
Capex |
(1,509) |
(2,195) |
(7,680) |
(2,573) |
(2,999) |
||
Acquisition: deferred payments |
0 |
0 |
(409) |
(409) |
(409) |
||
Net interest |
(130) |
(47) |
(288) |
(264) |
(264) |
||
Equity financing |
9,535 |
0 |
4,193 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
7,561 |
(2,280) |
(4,208) |
(827) |
(176) |
||
Opening net debt/(cash) |
|
|
4,974 |
(2,587) |
(356) |
3,852 |
4,680 |
FX |
0 |
0 |
0 |
0 |
0 |
||
Other non-cash movements |
0 |
49 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(2,587) |
(356) |
3,852 |
4,680 |
4,856 |
Source: Company accounts, Edison Investment Research
|
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Following the announcement of a transformational contract on 4th December, Windar Photonics issued two announcements later in the month regarding orders related to wind turbine OEMS. Although neither order was of the scale of the earlier transformational contract which was primarily for retrofitting turbines already in the field, they demonstrate the interest OEMs are showing in the technology, which will potentially lead to strong growth in future. We will update our estimates following the pending pre-close trading update.