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Games Workshop worth a roll of the dice

Weathering the Covid-19 crisis well so far, the miniature wargames maker is tapping into its wealth of intellectual property to boost royalty payments
July 16, 2020

Games Workshop (GAW) designs, manufactures and distributes miniature figurines used for tabletop wargames. Underpinned by its Warhammer mythologies and an ecosystem of interconnected products, the group commands a leading position in a niche market.

IC TIP: Buy at 8,110p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

Economic moat

High returns and margins

Fund manager favourite

Burgeoning royalties

Bear points

Covid-19 disruption

Potential dividend cut

Having listed in 1994, the shares plodded along for over two decades before taking off in 2016. The momentum coincided with the arrival of Kevin Rountree as chief executive in 2015. Following a five-year restructuring to cut costs, the original Warhammer franchise was rebooted as Warhammer Age of Sigmar, new pricing was introduced and warhammer-community.com was launched to improve customer engagement. Kickstarting growth and reflecting operational gearing (profit highly sensitive to rising turnover), the operating profit margin (excluding royalties) advanced from 9.2 per cent in 2016 to 27.2 per cent in 2019. At the same time, return on capital employed (ROCE) improved from 8.2 per cent to 50 per cent.

Games Workshop is a popular choice among fund managers and the number two holding of the CFP SDL Free Spirit Fund (GB00BYYQC271), the top performing UK equity income fund over both one and three years. Manager Andrew Vaughan likes the economic moat of its intellectual property (IP). “IP can generate revenues for many years to come and turn a business into a wonderful compounding machine,” says Mr Vaughan. “Games Workshop’s proprietary content and registered trademarks provide a defendable barrier against competition.”

Licensing its IP to third parties generated £11.4m of royalties in 2019, translating to £10.6m of operating profit. Royalties are guided to increase to £16m for the year ending 31 May. While currently a small part of the earnings picture, this should evolve as the group looks to work with “big, value-adding partners”. It recently inked a deal with Frontier Developments (FDEV) to produce a real-time strategy video game based on Warhammer Age of Sigmar and the first release is due in 2023. A television series based on its Eisenhorn novels is also in the works and could entice a major streaming platform such as Netflix (US:NFLX).

Covid-19 shuttered global operations in March. But after advising in April that pre-tax profits for the year to 31 May were likely to fall from £81m to “no less than £70m”, with 306 of its 532 branches reopened by mid-June and a “better than expected” recovery, it revised guidance sharply higher to “no less than £85m”. On that basis, we’re not expecting any major surprises in its full-year numbers at the end of the month. What's more, with the shadow of Covid making brokers reticent to upgrade 2021 forecasts, there could be further noteworthy upward revisions should demand remain resilient. Excluding lease liabilities, Games Workshop had £50m of net cash in June and hasn’t held any long or short-term borrowings since 2009. There’s been no word on the dividend and its policy is to only distribute “truly surplus” cash.

Social distancing could impede retail store and trade outlet operations in the current financial year, but online channels should benefit from pent-up demand. In early July, pre-orders of the latest edition of Warhammer 40,000 sold out on Games Workshop’s website in a single weekend.

GAMES WORKSHOP (GAW)   
ORD PRICE:8,110pMARKET VALUE:£2.6bn  
TOUCH:8,103-8,117p12-MONTH HIGH:8,635pLOW:3,564p
FORWARD DIVIDEND YIELD:NILFORWARD PE RATIO:52  
NET ASSET VALUE:372pNET CASH:£4.5m*  
Year to 2 JunTurnover (£m)Pre-tax profit (£m)*Earnings per share (p)**Dividend per share (p) 
201715838.49580 
201822074.2182120 
201925781.2198155 
2020**25085.0206145 
2021**24865.3157nil 
 -1-23-24- 
Beta:1.2    
*Includes lease liabilities of £28.4m
**Peel Hunt forecasts, adjusted PTP, EPS figures