Games Workshop Group — Strong revenue growth and royalties income

Games Workshop Group (LSE: GAW)

Currency in GBP

Last close As at 26/01/2023

GBP91.45

−185.00 (−1.98%)

Market capitalisation

GBP3,070m

Research: Consumer

Games Workshop Group — Strong revenue growth and royalties income

Games Workshop Group’s (GAW’s) trading update for the year ending May 2022 indicates ongoing good demand following the standout performance of the prior year. The lower profitability (profit before tax margin) for FY22 versus FY21 reflects the already-flagged economy-wide inflationary cost pressures and internal investment, offset by a notable improvement in royalties income (£28m versus £16.3m FY21). The royalties income was the highest ever generated by the company, indicating the success it is having in leveraging its intellectual property. We trim our FY22 and FY23 profit before tax (PBT) estimates by c 2%. The prospective P/E multiple of 15.9x is below recent average multiples (17.2x FY17-21).

Russell Pointon

Written by

Russell Pointon

Director, Consumer

Consumer

Games Workshop Group

Strong revenue growth and royalties income

FY22 trading update

Consumer goods

16 June 2022

Price

6,220p

Market cap

£2,043m

Net cash (£m) at 28 November 2021 (excluding lease liabilities)

88.6

Shares in issue

32.8m

Free float

100

Code

GAW

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(12.4)

(8.8)

(45.1)

Rel (local)

(10.5)

(9.1)

(44.1)

52-week high/low

12,220p

6,090p

Business description

Games Workshop Group 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

FY22 results

26 July 2022

Analysts

Russell Pointon

+44 (0)20 3077 5700

Sara Welford

+44 (0)20 3077 5700

Games Workshop Group is a research client of Edison Investment Research Limited

Games Workshop Group’s (GAW’s) trading update for the year ending May 2022 indicates ongoing good demand following the standout performance of the prior year. The lower profitability (profit before tax margin) for FY22 versus FY21 reflects the already-flagged economy-wide inflationary cost pressures and internal investment, offset by a notable improvement in royalties income (£28m versus £16.3m FY21). The royalties income was the highest ever generated by the company, indicating the success it is having in leveraging its intellectual property. We trim our FY22 and FY23 profit before tax (PBT) estimates by c 2%. The prospective P/E multiple of 15.9x is below recent average multiples (17.2x FY17-21).

Year end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

05/20

269.7

89.4

217.8

145.0

28.6

2.3

05/21

353.2

150.9

370.5

235.0

16.8

3.8

05/22e

385.5

155.7

380.4

235.0

16.4

3.8

05/23e

407.3

160.5

390.9

275.0

15.9

4.4

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

FY22: Strong revenue growth, royalties income

GAW’s FY22 revenue will be not less than £385m and PBT not less than £155m, higher revenue but marginally lower PBT than our prior estimates of £377.8m and £158.2m, respectively. The quoted £385m revenue implies a strong increase in the year-on-year growth rate to at least c 16% in H222 from c 3% in H122, against a much tougher comparative (+37% H221) than that for H122 (26% H121), indicating improving demand through the year. Using the quoted PBT of £155m and royalties income implies total cost growth of c 18% for the full year, including a lower staff profit share vs FY21, versus c 19% at the interim stage. In the first half, management flagged cost pressures from freight and input costs as well as investment in headcount and costs per head in order to support future growth. Dividends declared of 235p/share in FY22 were the same as FY21.

FY22 and FY23 PBT estimates trimmed

Ahead of the publication of full financial results we trim our PBT estimates for FY22 towards the indicated figure, and for FY23 by 2% to £160.5m (£163.5m previously). The FY23 estimate reflects the slightly lower FY22 base, a reduced assumption for gross margin (68% from 69% previously) and higher royalties income (£20m from £17m previously). We note the recent weakness in sterling versus the US dollar (current spot U$1.21/£ versus FY22 average U$1.35/£, source: Refinitiv) represents a potential tailwind for GAW’s revenue in FY23 but also a potential headwind for GAW’s costs.

Valuation: Below recent average P/E multiple

The share price has been weak due to general concerns about the outlook for consumer-facing companies given rising inflation and interest rates. On reduced estimates, the FY23 P/E of 15.9x is a discount to the average since FY17 of 17.2x, and the prospective dividend yield for FY23 is 4.4%.

Exhibit 1: Financial summary

Year-end May

£m

 

2015

2016

2017

2018

2019

2020

2021

2022e

2023e

 

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

119.1

118.1

158.1

221.3

256.6

269.7

353.2

385.5

407.3

Cost of sales

 

 

(37.0)

(37.4)

(43.7)

(64.2)

(83.3)

(89.1)

(96.3)

(123.4)

(130.3)

Gross profit

 

 

82.1

80.6

114.4

157.1

173.3

180.6

256.9

262.2

276.9

SG&A (expenses)

 

 

(67.2)

(69.7)

(83.6)

(92.4)

(103.4)

(107.4)

(121.5)

(133.8)

(135.8)

Other operating income/(expense)

 

 

1.5

5.9

7.5

9.6

11.4

16.8

16.3

28.0

20.0

EBITDA (excl royalties)

 

 

26.0

21.3

41.8

76.8

85.7

98.8

162.0

155.5

169.6

EBITDA

 

 

27.5

27.3

49.3

86.5

97.1

115.6

178.3

183.5

189.6

Depreciation and amortisation

 

 

(11.1)

(10.4)

(11.0)

(12.1)

(15.9)

(25.6)

(26.6)

(27.2)

(28.5)

Operating profit (before royalties and exceptionals)

 

14.9

10.9

30.8

64.7

69.8

73.2

135.4

128.4

141.1

Reported operating profit

 

 

16.5

16.9

38.3

74.3

81.2

90.0

151.7

156.4

161.1

Finance income/(expense)

 

 

0.1

0.1

0.1

(0.0)

0.1

(0.6)

(0.8)

(0.7)

(0.7)

Reported PBT

 

 

16.6

16.9

38.4

74.3

81.3

89.4

150.9

155.7

160.5

Income tax expense (includes exceptionals)

 

 

(4.3)

(3.5)

(7.9)

(14.8)

(15.5)

(18.1)

(28.9)

(30.0)

(31.0)

Adjusted net income

 

 

12.2

13.5

30.5

59.5

65.8

71.3

122.0

125.6

129.5

Reported net income

 

 

12.3

13.5

30.5

59.5

65.8

71.3

122.0

125.6

129.5

WASC (m)

 

 

31.975

32.093

32.126

32.258

32.438

32.602

32.733

32.827

32.928

Diluted average number of shares (m)

 

 

32.025

32.150

32.325

32.732

32.785

32.736

32.927

33.021

33.122

Reported EPS (p)

 

 

38.3

42.1

95.1

184.3

202.9

218.7

372.7

382.6

393.2

Reported diluted EPS (p)

 

 

38.3

42.0

94.5

181.6

200.8

217.8

370.5

380.4

390.9

Adjusted diluted EPS (p)

 

 

38.1

42.0

94.5

181.6

200.8

217.8

370.5

380.4

390.9

DPS (p)

 

 

52.0

40.0

74.0

126.0

155.0

145.0

235.0

235.0

275.0

Gross margin

 

 

69.0%

68.3%

72.4%

71.0%

67.5%

67.0%

72.7%

68.0%

68.0%

EBITDA margin (excl royalties)

 

 

21.8%

18.1%

26.5%

34.7%

33.4%

36.6%

45.9%

40.3%

41.6%

EBITDA margin (incl royalties)

 

 

23.1%

23.1%

31.2%

39.1%

37.8%

42.9%

50.5%

47.6%

46.6%

Operating margin (before royalties and exceptionals)

 

 

12.5%

9.2%

19.5%

29.2%

27.2%

27.1%

38.3%

33.3%

34.7%

BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

22.7

22.6

22.1

30.1

35.3

42.0

49.8

58.7

67.6

Right-of-use assets

 

 

 

 

 

 

 

31.9

46.0

45.0

44.0

Goodwill

 

 

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

Intangible assets

 

 

8.3

10.5

12.9

14.2

16.0

17.6

23.7

30.0

35.8

Other non-current assets

 

 

4.8

4.1

6.5

7.8

11.7

16.4

16.4

16.4

16.4

Total non-current assets

 

 

37.2

38.7

43.0

53.5

64.4

109.3

137.3

151.5

165.2

Cash and equivalents

 

 

12.6

11.8

17.9

28.5

29.4

52.9

85.2

116.2

138.8

Inventories

 

 

7.6

8.5

12.4

20.2

24.2

20.7

27.5

35.2

37.2

Trade and other receivables

 

 

9.4

10.1

13.0

15.5

18.8

19.6

30.6

33.4

35.3

Other current assets

 

 

0.6

0.7

0.6

0.5

0.8

0.2

1.1

1.1

1.1

Total current assets

 

 

30.2

31.2

43.9

64.7

73.2

93.4

144.4

185.9

212.4

Trade and other payables

 

 

(13.1)

(12.8)

(16.5)

(20.3)

(19.2)

(30.3)

(35.4)

(42.9)

(44.3)

Borrowings

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Leases

 

 

0.0

0.0

0.0

0.0

0.0

(8.3)

(8.6)

(8.6)

(8.6)

Other current liabilities

 

 

(2.0)

(2.7)

(6.5)

(7.3)

(10.1)

(4.5)

(0.7)

(0.7)

(0.7)

Total current liabilities

 

 

(15.1)

(15.6)

(23.0)

(27.6)

(29.3)

(43.1)

(44.7)

(52.2)

(53.6)

Borrowings

 

 

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Leases

 

 

0.0

0.0

0.0

0.0

0.0

(23.8)

(38.4)

(37.0)

(35.6)

Other non-current liabilities

 

 

(0.8)

(1.1)

(1.0)

(1.2)

(1.9)

(2.1)

(2.3)

(2.3)

(2.3)

Total non-current liabilities

 

 

(0.8)

(1.1)

(1.0)

(1.2)

(1.9)

(25.9)

(40.7)

(39.3)

(37.9)

Net assets

 

 

51.5

53.2

62.8

89.3

106.5

133.7

196.3

246.0

286.1

CASH FLOW STATEMENT

 

 

 

 

 

 

 

 

 

 

 

EBIT

 

 

16.5

16.9

38.3

74.3

81.2

90.0

151.7

156.4

161.1

Depreciation and amortisation

 

 

11.1

10.4

10.2

12.2

15.9

25.0

26.2

27.2

28.5

Impairments

 

 

0.0

0.0

0.8

(0.0)

0.0

0.6

0.4

0.0

0.0

Share-based payments

 

 

0.2

0.2

0.2

0.2

0.3

0.5

1.2

1.2

1.2

Other adjustments

 

 

0.1

0.1

0.1

0.1

0.3

0.3

0.1

0.0

0.0

Movements in working capital

 

 

(2.3)

(0.8)

(0.2)

(4.4)

(9.0)

10.8

(14.8)

(3.1)

(2.4)

Income taxes paid

 

 

(2.3)

(2.6)

(5.5)

(12.2)

(16.3)

(22.7)

(32.1)

(30.0)

(31.0)

Operating cash flow

 

 

23.3

24.2

43.9

70.1

72.5

104.5

132.7

151.6

157.4

Net capex and intangibles

 

 

(12.3)

(12.7)

(12.8)

(21.6)

(22.5)

(24.6)

(30.0)

(31.4)

(32.2)

Net interest

 

 

0.1

0.1

0.1

(0.0)

0.1

0.1

0.2

(0.7)

(0.7)

Net proceeds from issue of shares

 

 

0.7

0.3

0.1

0.9

0.7

0.8

1.4

0.0

0.0

Dividends paid

 

 

(16.6)

(12.8)

(23.8)

(38.7)

(50.3)

(47.3)

(60.5)

(77.1)

(90.6)

Other financing activities

 

 

0.0

0.0

(1.9)

0.0

0.0

(10.3)

(10.9)

(11.4)

(11.4)

Net cash flow

 

 

(4.8)

(0.9)

5.5

10.7

0.5

23.2

32.9

31.0

22.6

Opening cash and cash equivalents

 

 

17.6

12.6

11.8

17.9

28.5

29.4

52.9

85.2

116.2

Currency translation differences and other

 

 

(0.2)

0.1

0.6

(0.1)

0.3

0.3

(0.6)

0.0

0.0

Closing cash and cash equivalents

 

 

12.6

11.8

17.9

28.5

29.4

52.9

85.2

116.2

138.8

Closing net cash (including leases)

 

 

12.6

11.8

17.9

28.5

29.4

20.8

38.2

70.6

94.6

Source: Games Workshop, Edison Investment Research


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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.

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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

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To fulfil the ongoing strong market demand for its high-performance wood products, Accsys aims to expand its total processing capacity from 60,000m3 currently to 200,000m3 by 2025, with 60,000m3 coming on stream in the next three months. Construction delays in Arnhem and working capital needs were the main reasons for the €19m capital rise on 25 May 2022. We have updated our model and raised our revenue estimates, mainly to include the effect of higher pricing, but have lowered our profitability forecast by 14–22%, partly to reflect the mix effect of significantly higher revenue from by-product acetic acid sales.

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