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Game Workshop's potential not just fantasy

Even if fantasy gaming in miniature worlds doesn't float your boat, don't dismiss Games Workshop. Its recovery looks set to be real enough.
October 30, 2014

"We've had a really good year. If your measure of 'good' is the current financial year's numbers, you may not agree. But if your measure is the long-term survivability of a great cash-generating business that still has a lot of potential growth, then you will agree." So said Tom Kirkby, chairman and acting chief executive of Games Workshop (GAW), when results for 2013-14 were announced in July. The lacklustre figures he referred to did indeed mask a robust company, as the poor trading stemmed from disruptive restructuring. But now, with the changes nearly complete, Games Workshop is in better shape and operates from a leaner cost base. That means a return to sales growth should translate into materially higher profits. Heaps of cash and a substantial prospective dividend yield are an added bonus. But the shares have yet to bounce back fully, offering investors a chance to get into the game.

IC TIP: Buy at 555p
Tip style
Speculative
Risk rating
Medium
Timescale
Long Term
Bull points
  • Restructuring nearly completed
  • Cost base cut
  • Focus on sales growth
  • Cash rich and dividends set to resume
Bear points
  • Currency headwinds
  • Needs a new chief executive

Games Workshop is a vertically-integrated business, designing, manufacturing and distributing its products in the UK and overseas, through retail outlets called 'hobby centres', third parties and the internet. Loyal customers collect miniatures, paint them and use them to play games in the fantasy worlds created by Games Workshop.

 

 

As for the restructuring, it involved two stages. The first was switching from a multi-man to a one-man-per-store model. That involved staff changes, new sites, lease negotiations and reduced trading hours, which caused disruption and dampened sales. However, the changes reduced costs and should improve return on capital.

The second stage saw the company's sales structure reorganised from a country-based system to a centralised model, which involved culling numerous middle managers. This stage is nearing completion and will improve efficiency and reduce costs by £2m a year. True, it has come with short-term headwinds, including £4.5m of exceptional costs, but it should lead to long-term gains. All of this leaves Games Workshop better positioned and able to focus on sales growth.

GAMES WORKSHOP (GAW)
ORD PRICE:555pMARKET VALUE:£177m
TOUCH:542-555p12-MONTH HIGH:790pLOW: 471p
FORWARD DIVIDEND YIELD:8.1%FORWARD PE RATIO:11
NET ASSET VALUE:174pNET CASH:£17.6m

Year to 1 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201213119.546.663
201313521.451.258
201412416.936.0nil
2015*12820.045.635
2016*13523.052.545
% change+5+15+15+29

Normal market size: 750

Matched bargain trading

Beta: -0.1

*Peel Hunt forecasts

There are still challenges, though. There will be more internal disruption as the restructuring finishes, and the company still needs to find a new chief executive (Mr Kirkby is stepping down in January, although remaining as chairman). Performance is also exposed to sterling's exchange rate against the US dollar and the euro, given the group's operations in North America and continental Europe.

Still, the benefits appear to outweigh the drawbacks. The results of the restructuring have so far been encouraging - sales in the fourth quarter of the last financial year were up on the equivalent period, while costs came down. Management expects the business will now be able to grow sales by single-digit percentages. That will be helped by the opening of around 20 new hobby centres this year, compared with two last year.

Add to that a materially lower cost base, and it's easy to see why profit is expected to improve, permitting a resumption in dividend payments - it is management policy to return all surplus cash to shareholders. Based on forecasts from broker Peel Hunt, the company's City adviser, the shares have a prospective yield of 6.3 per cent for 2014-15. Armed with £17.6m of cash, no debt, a strong balance sheet, a forward PE ratio of 12, falling to below 11 times 2015-16's forecast earnings, is hardly expensive (see table).