Against a challenging retail landscape, Game Digital (GMD) delivered a solid sales performance and growth in higher-margin categories over the peak trading period, alongside ongoing cost efficiencies, which continue to counter trading pressures. Momentum in the BELONG roll-out, which accounts for a significant part of our 67p valuation, remains crucial.
Written by
Game Digital |
Resilience over the peak trading period |
Trading update |
Retail |
17 January 2019 |
Share price performance
Business description
Next events
Analysts
Game Digital is a research client of Edison Investment Research Limited |
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Against a challenging retail landscape, Game Digital (GMD) delivered a solid sales performance and growth in higher-margin categories over the peak trading period, alongside ongoing cost efficiencies, which continue to counter trading pressures. Momentum in the BELONG roll-out, which accounts for a significant part of our 67p valuation, remains crucial.
Year end |
Revenue (£m) |
EBITDA (£m) |
PBT* |
EPS* |
DPS |
EV/EBITDA (x) |
P/E |
Yield |
07/17 |
782.9 |
8.0 |
(4.3) |
(3.7) |
1.0 |
N/A |
N/A |
4.3 |
07/18 |
782.3 |
10.1 |
(3.5) |
(3.7) |
0.0 |
N/A |
N/A |
N/A |
07/19e |
778.4 |
12.2 |
(2.2) |
(2.8) |
0.0 |
N/A |
N/A |
N/A |
07/20e |
813.8 |
16.6 |
(1.2) |
(2.1) |
0.0 |
N/A |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Peak trading: Solid sales and margin performance
Despite UK retail market headwinds, GMD delivered a solid performance over the peak seven weeks to 5 January. Group l-f-l sales strengthened to +2%, largely driven by +4.8% l-f-l in Spain, while the UK remained broadly flat. Group sales (GTV) declined by c 0.5% over the peak period and year to date, in line with our expectations for FY19. This reflects the cyclical nature of the games market, with a strong pipeline of new console launches expected in 2020. A cornerstone of GMD’s success is its relationships with the major publishers and exclusive content in the new software releases. Robust demand for this higher-margin content and licensed merchandise and accessories, alongside a disciplined approach to discounting resulted in an improved trading margin over the peak period.
BELONG: Roll-out pace expected to accelerate in H2
Almost a year into GMD’s collaboration with Sports Direct, the roll-out of BELONG remains a key strategic objective for both parties. In the year to date, two arenas have opened and are trading well compared to similar arenas. We continue to assume 20 openings in FY19, significantly weighted towards H2.
Forecasts unchanged, further cost savings targeted
Taking into account the solid UK performance plus robust sales growth in Spain, growth in higher-margin categories and ongoing cost savings over the peak period, we leave our forecasts unchanged. GMD has made significant inroads into its cost transformation programme. FY19 will benefit from annualised cost savings of £6m delivered in H218, in addition to lease renegotiations, payroll and other efficiencies.
Valuation: 190% valuation upside
Our blended peer group (including GameStop and UK specialist interest operators) and DCF valuation of GMD is unchanged at 67p. This represents a c 190% premium to the current share price, which is less than its net cash of 33p per share.
Exhibit 1: Financial summary
Accounts: IFRS, Year-end: July, £m |
|
2015 |
2016 |
2017 |
2018 |
2019e |
2020e |
2021e |
PROFIT AND LOSS STATEMENT |
|
|
|
|
|
|
|
|
Total revenues |
|
866.6 |
821.9 |
782.9 |
782.3 |
778.4 |
813.8 |
828.0 |
Cost of sales |
|
(652.9) |
(612.7) |
(577.8) |
(586.1) |
(577.9) |
(605.7) |
(612.8) |
Gross profit |
|
213.7 |
209.2 |
205.1 |
196.2 |
200.5 |
208.0 |
215.2 |
Other income/(expense) |
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Exceptionals and adjustments |
|
(12.2) |
(12.9) |
(5.7) |
(3.9) |
(9.2) |
(9.2) |
(1.9) |
Depreciation and amortisation |
|
(8.5) |
(10.5) |
(11.0) |
(12.3) |
(13.5) |
(16.5) |
(19.4) |
Reported EBIT |
|
26.2 |
3.0 |
(8.7) |
(6.1) |
(10.5) |
(9.0) |
(3.5) |
Finance income/(expense) |
|
(0.4) |
(1.1) |
(1.3) |
(1.3) |
(0.9) |
(1.4) |
(2.1) |
Exceptionals and adjustments |
|
(3.7) |
(3.8) |
3.9 |
5.3 |
0.0 |
0.0 |
0.0 |
Reported PBT |
|
25.8 |
1.9 |
(10.0) |
(7.4) |
(11.4) |
(10.4) |
(5.6) |
Income tax expense (includes exceptionals) |
|
(4.4) |
1.3 |
(2.1) |
(2.8) |
(2.5) |
(2.5) |
(1.6) |
Reported net income |
|
21.4 |
3.2 |
(12.1) |
(10.2) |
(14.0) |
(12.9) |
(7.2) |
Basic average number of shares, m |
|
168.3 |
168.9 |
169.7 |
170.8 |
172.9 |
172.9 |
172.9 |
Basic EPS (p) |
|
12.7 |
1.9 |
(7.1) |
(6.0) |
(8.1) |
(7.5) |
(4.2) |
Dividend per share (p) |
|
14.7 |
3.4 |
1.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Adjusted EBITDA |
|
46.9 |
26.4 |
8.0 |
10.1 |
12.2 |
16.6 |
17.8 |
Adjusted EBIT |
|
38.4 |
15.9 |
(3.0) |
(2.2) |
(1.3) |
0.2 |
(1.6) |
Adjusted PBT |
|
38.0 |
14.8 |
(4.3) |
(3.5) |
(2.2) |
(1.2) |
(3.7) |
Adjusted diluted EPS, p |
|
18.5 |
10.7 |
(3.7) |
(3.7) |
(2.8) |
(2.1) |
(3.1) |
BALANCE SHEET |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
19.2 |
16.8 |
17.2 |
16.1 |
20.6 |
21.3 |
19.3 |
Goodwill |
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Intangible assets |
|
61.0 |
56.7 |
47.5 |
24.0 |
15.6 |
1.9 |
0.0 |
Other non-current assets |
|
0.2 |
2.2 |
2.5 |
1.7 |
1.7 |
1.7 |
1.7 |
Total non-current assets |
|
80.4 |
75.7 |
67.2 |
41.8 |
37.9 |
24.9 |
21.0 |
Cash and equivalents |
|
63.1 |
48.8 |
47.2 |
58.7 |
64.2 |
73.0 |
81.4 |
Inventories |
|
66.8 |
76.1 |
81.2 |
78.0 |
76.9 |
79.0 |
79.9 |
Trade and other receivables |
|
17.8 |
20.4 |
23.5 |
20.0 |
19.9 |
20.8 |
21.2 |
Other current assets |
|
0.9 |
8.8 |
1.7 |
0.9 |
0.0 |
0.0 |
0.0 |
Total current assets |
|
148.6 |
154.1 |
153.6 |
157.6 |
161.0 |
172.8 |
182.4 |
Non-current loans and borrowings |
|
0.1 |
3.1 |
2.6 |
1.1 |
12.1 |
22.2 |
32.4 |
Other non-current liabilities |
|
5.7 |
4.4 |
2.8 |
1.9 |
1.9 |
1.9 |
1.9 |
Total non-current liabilities |
|
5.8 |
7.5 |
5.4 |
3.0 |
14.0 |
24.1 |
34.3 |
Trade and other payables |
|
93.8 |
90.7 |
101.6 |
96.1 |
93.2 |
97.7 |
98.8 |
Current loans and borrowings |
|
0.0 |
7.2 |
2.0 |
0.8 |
0.0 |
0.0 |
0.0 |
Other current liabilities |
|
3.2 |
1.3 |
2.6 |
1.0 |
1.0 |
1.0 |
1.0 |
Total current liabilities |
|
97.0 |
99.2 |
106.2 |
97.9 |
94.2 |
98.7 |
99.8 |
Equity attributable to company |
|
126.2 |
123.1 |
109.2 |
98.5 |
90.8 |
75.0 |
69.4 |
CASH FLOW STATEMENT |
|
|
|
|
|
|
|
|
Cash from operations (CFO) |
|
44.1 |
3.2 |
9.1 |
7.9 |
9.5 |
17.3 |
17.6 |
Capex |
|
(11.3) |
(13.3) |
(11.6) |
(6.9) |
(17.0) |
(17.2) |
(17.3) |
Acquisitions & disposals net |
|
(12.4) |
(1.5) |
13.3 |
12.5 |
1.9 |
0.0 |
0.0 |
Other investing activities |
|
(0.2) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Cash used in investing activities (CFIA) |
|
(23.9) |
(14.8) |
1.7 |
5.6 |
(15.1) |
(17.2) |
(17.3) |
Net proceeds from issue of shares |
|
0.0 |
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 |
0.0 |
Other financing activities |
|
(37.8) |
(13.9) |
(4.3) |
(1.8) |
(0.9) |
(1.4) |
(2.1) |
Cash from financing activities (CFF) |
|
(39.3) |
(12.4) |
(4.3) |
(1.8) |
(0.9) |
(1.4) |
(2.1) |
Increase/(decrease) in cash and equivalents |
|
(19.1) |
(24.0) |
6.5 |
11.7 |
(6.5) |
(1.3) |
(1.8) |
Currency translation differences and other |
|
(3.1) |
1.0 |
0.6 |
(0.2) |
0.0 |
0.0 |
0.0 |
Cash and equivalents at end of period |
|
63.1 |
40.1 |
47.2 |
58.7 |
52.1 |
50.8 |
49.1 |
Net (debt) cash |
|
63.0 |
38.5 |
42.6 |
56.8 |
52.1 |
50.8 |
49.1 |
Movement in net (debt) cash over period |
|
63.0 |
(24.5) |
4.1 |
14.2 |
(4.7) |
(1.3) |
(1.8) |
Source: Company accounts, Edison Investment Research
|
|
De La Rue continues to pursue a strategy that is transitioning the company to a less capital-intensive operation with a more diverse customer base and revenue streams, incorporating more embedded technology and IP. Underlying progress is apparent although masked by the disposals and the recent loss of the UK passport contract. The strengthening of the balance sheet enables appropriate M&A to augment what we expect to be a resumption of organic sales growth from FY21. The current rating implies scepticism but this should improve as growth prospects are recognised. In the meantime, the healthy dividend yield provides support for investors.