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Games Workshop licensing fees smooths supply chain issues

Rising costs have hit profits but licensing fees for its strengthening IP provide encouragement
Games Workshop licensing fees smooths supply chain issues
  • Gross margins fall 6 percentage points
  • Royalties received on intellectual property (IP) more than doubled

Games Workshop (GAW), the owner of the extremely popular Warhammer IP, has been walking a valuation tight rope. The success of the franchise, together with regular returns of surplus cash to shareholders, saw the group trading at lofty multiples. However, when supply chain issues kicked in, the market was quick to re-evaluate. In the second half of last year it lost around 25 per cent of its value, yet there are silver linings evident in solid half-year results that suggest it could recover quickly when commercial disruptions ease.

Revenue was up slightly compared with last year, but the issue is that profit before tax fell 3.7 per cent because of rising costs of shipping and wage inflation. Input and carriage costs rose £5.6m while staff costs jumped £3m due to an increase in both salaries and headcount. Management was keen to point out that once these costs – plus foreign exchange movement – are stripped out, profits are broadly in line with last year's record numbers.

While wages rarely do anything other than keep increasing, shipping costs may normalise soon. With shipping costs stripped out, gross margin would have fallen just three percentage points to 73 per cent, rather than the reported six percentage point drop.

These issues are largely operational problems beyond the control of management. The real value for Games Workshop is in the popularity of its Warhammer IP and there are lots of metrics to suggest this is doing just fine. Warhammer-community.com users were up 15 per cent across all territories while The Age of Sigmar launch in July was “the best fantasy launch to date by a considerable margin”.

Royalties received on its IP more than doubled in the period to £20.1m and a number of major video games are due to be released in 2022. The pandemic has accelerated demand for gaming and if the 2022 releases are successful, then it should lead to a further increase in royalties. It has also increased its licensing team with additional personnel in North America, Japan and China.

FactSet consensus is for free cash flow to rise to £161.5m by 2023, giving it an impressive 2023 free cash flow yield of 5 per cent.

Any retail business that can continue to generate record sales despite a global pandemic deserves our attention, particularly given the regular capital returns. This dip is a good time to buy.

Last IC View: Buy, 11,377p, 27 July 2021

GAMES WORKSHOP (GAW)  
ORD PRICE:9,728pMARKET VALUE:£3.2bn
TOUCH:9,715-9,730p12-MONTH HIGH:12,310pLOW: 8,810p
DIVIDEND YIELD:2.6%PE RATIO:27
NET ASSET VALUE:712pNET CASH:£41m
Half-year to 28 NovTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
202018791.622680.0
202119288.2217100
% change+3-4-4+25
Ex-div:20 Jan   
Payment:25 Feb   
The board has declared a (post period-end) dividend of 65p payable through surplus cash on 25 Feb. Dividends of 40p and 25p were declared and paid in the six months to 28 November 2021. A further dividend of 35p was declared on 18 November 2021 and was paid on 5 January 2022.