As outlined in our recent initiation note, ‘On a mission’, Games Workshop Group PLC (LON:GAW) focus on international multi-channel expansion, customer engagement and product innovation, alongside its openness to exploring ways in which to leverage its rich intellectual property (IP) to generate royalty income, is continuing to deliver outstanding results. Strong trading since the half year, and new licensing agreements, lead us to upgrade our FY19 and FY20 earnings forecasts by c 14%.
Trading update: strong performance, special dividend
Games Workshop has delivered a strong trading performance, across all regions and via all sales channels (trade, retail and online) since the H1 results in January. Royalties receivable are also ahead year-on-year, following the signing of new licensing agreements with the major digital games publishers. As a result, the company has stated that it expects pre-tax profit for FY19 to be c £80m. In line with company policy to distribute excess cash, a dividend of 35p has been declared, taking the total dividend this year to £1.55.
Forecasts: 14% upgrade
We upgrade our FY19 and FY20 PBT forecasts by c 14%. We expect trade to remain the dominant channel and anticipate FY19 sales growth of 27%, comparable to that of H1, while retail and online are expected to grow at c 7%. We have raised our FY19 gross margin assumption by 100bp as the company progresses with infrastructure projects (as outlined in our recent initiation note). We leave our conservative assumptions for FY20 sales growth and margin progression unchanged, but increase royalty income by c £2.5m to reflect the recently signed agreements. We believe there may be further opportunities to leverage GAW’s rich IP via its existing relationships with the major publishers.
Valuation: c 10% upside; attractive yield prospects
The shares have risen by c 18% since the upgrade but still trade at a discount to our new DCF valuation of 4,167p, which assumes revenue growth beyond FY20 of 4.2% fading to 2% and a perpetuity EBITDA margin of 39% (FY20e: 37.5%). Our peer group, comprising specialist interest operators and the ‘mainstream’ multinational toy/game companies, suggests a valuation broadly in line with the current share price, of 3,703p, leading to a blended valuation of 3,935p. We forecast FY20 net cash of £49m, underpinning a healthy c 4% yield and scope for further distributions.
Business description
Games Workshop 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.
