Games Workshop's growth potential offsets chunky rating

Games Workshop (GAW) hiked its full-year dividend as chief executive Kevin Rountree pointed to “the highest level of sales and the most profit we have generated since flotation 29 years ago”. The miniature maker’s solid revenue and profit growth certainly supported a confident approach to the return of capital, albeit trading was in line with expectations which meant a flat share price performance on the day.

Revenue performance improved significantly in the second half of the year, and sales were up across the board apart from in the small licensing channel. The uplift was helped by price growth, with miniature prices raised by an average of 6 per cent in the period and a 3 per cent increase implemented across other product lines.   

The company's high return on capital employed (ROCE) moved in the right direction in the year, rising from 118 per cent to 133 per cent in the core business. But core operating margin was down by 70 basis points, impacted by wage increases and investments. 

Elsewhere, there was a brief update on contract negotiations with Amazon (US:AMZN) over film and television show plans. Investors will have to be satisfied for now with management’s comment that “within normal legal constraints we have nothing more we can add and we will update you accordingly”. If a deal comes to fruition, we expect Games Workshop’s revenues to benefit materially. 

Panmure Gordon analyst Alex Chatterton argued in a research note that the company can continue to grow its core revenues by around 10 per cent each year. He pointed to “further growth in North America and further expansion into Asia” as long-term opportunities for the business.

The shares are not cheap when set against the wider UK equity market. They trade on a consensus 26 times forward earnings, according to FactSet, just above the five-year average. But with Games Workshop, accounting for its performance and future opportunities, we think the rating at current levels is worth it. Buy.   

Last IC View: Buy, 8,670p, 10 Jan 2023