On Tuesday, Games Workshop Group released their half-year results and they smash all expectations (in my opinion).
Apart from record sales. Their pre-tax profit of £38.8m is greater than their full-year earnings of £38.4m in 2017!
Investors are excited and maybe wondering if the company is able to achieve £1bn in market valuation or £31 per share.
At the moment, it is hovering around £800m.
So, can it reach £1bn?
This all depends on the sustainability of Games Workshop Group business model and its ability to maintain their new normal, regarding sales.
But first, we need a quick look at the company’s historical financial performance.
To put GAW’s sales and valuation are unprecedented.
Before 2017’s results came out, the highest revenue achieved was back in 2004 (£151m), when the Lord of the Rings franchise captured the fans imagination of Tolkien’s fantasy work.
Then there was the fallow period, as sales fell to £109m in 2007.
The prequel of the Lord of the Rings came back in 2011 or 2012, which helped to lift sales.
Now, we are witnessing an upsurge in sales (likely to surpass £200m) and record profit.
Also, market valuation of £800m is a record, whereas before it was struggling to peak above £250m-£300m.
Will the fundamentals of Games Workshop break the £1bn valuation level?
This depends on the future sales and earnings you have in mind.
For the student of history who remember that prior to releasing their 2017’s results PER was 33 times. After the results, it fell to 15 times. Currently, the market is valuing last year’s EPS at PER of 26 times.
With brokers upgrading the company’s sales and pre-tax profit to £206.6m and £65m from £195.4m and £55m in 2018, this is looking possible.
The £65m pre-tax profit for 2018 means a net profit of £52m or forward-PE of 15 times.
But I think brokers are conservative in their forecast.
In the last three years, second-half sales are important to GAW and contribute on average 53.7% making H2 2018 of £126.4m, taking annual sales to £235.4m.
The forecast annual sales of £206.6m mean H2 sales of £98.1m or 47.5% weighting.
On a pre-tax profit basis, the average H2 weighting is 62.9%. Using that figure, it would give H2 2018 profit of £65.8m and annual pre-tax profit of £104.6m.
The forecast annual pre-tax profit of £65m means H2 pre-tax profit of £26.2m or 40.3% weighting.
Whether the forecast is true or not, we outside investors don’t really know because we don’t have information on how much “high-profit margins” products are sold vs. “low-profit margins products” and so forth.
But to play devil advocate, and say the calculation I put forward is true.
Therefore, it means a net profit of £83m or 9.51 times forward-PER, way below the 15 times PER. In fact, to achieve 15 times PER, GAW must have a valuation close to £1.245bn or £38.42 per share.
My fantasy calculations are shown below.
Sometimes a company can make their interim results look better than it should be.
Remember the record pre-tax profit of £38.8m is greater than the annual pre-tax profit of £38.4m achieved last year. Well, this was done on sales of £108m vs. 2017’s annual sales of £158m.
Meaning GAW manages to achieve 36% pre-tax profit margin vs. 2017’s pre-tax profit margin of 24%, a 12% increase.
From my forecast, pre-tax profit margin will rise again to 44.4% vs. the brokers 31.6%.
Instead of using my “optimistic” sales and pre-tax profit forecast, I will assume this:
Using brokers sales forecast of £206.6m, but using Games Workshop pre-tax profit margin of 36% would give a pre-tax profit of £74.4m.
It will leave the company with a £59.6m net profit or 13.1 times PER.
So, on a 15 times basis, it would give GAW’s valuation of £900m or £27.78 per share.
Or, you feel the brokers are less optimistic on sales, then using my sales forecast of £235.4m, but keeping the margin at 36% gives PBT of £84.7m, giving a net profit of £67m or 11.8 times PER.
So, on a 15 times basis, it gives GAW a valuation of £1bn or £31 per share.
Another big share price supporter is the dividend per share increase. In the past four years, dividend per share is as follows:
The forecast for 2018 is 120p per share or a forward-yield of 5%. But for shareholders who bought at £5 per share, it represents an income yield of 24%, although we must take into account the 3% inflation of last year.
Those who bought the stock when it is trading around £2 per share per share in 2010 will see a forward-yield of 60%. Whether this is worth your income would depend on the size of your investment. Here are some calculations below:
-£1,000 investment will give you £600;
-£10,000 would earn you £6,000;
-£100,000 would earn you £60,000 in dividends per year.
But, in any case, we need to account for inflation unless your wage increase has covered this.
Can Games Workshop Group keep the momentum up?
Brokers are less optimistic in 2019 with sales falling to £199.4m and pre-tax profit falling to £55m.
Turn the pre-tax profit into net profit gives you £44m or 18 months forward-PER of 18 times.
I may have to agree with this analysis because unless Games Workshop produces the next hit it will struggle to maintain sales and earnings.
This happened in the Lord of the Rings Trilogy when it rode the coattails of the successful movie franchise before sales fell.
The same could happen here with Warhammer.
If everyone bought the product, fewer customers will buy tomorrow. This is the same dilemma with electronics manufacturers such as Apple and Samsung. It must churn out new products to maintain or grow sales.
Over the next three to four months, GAW shares could rise further and might break the £1bn valuation level or £31 per share. Afterwards, I believe earnings would plateau, as it struggles to grow its success further.
With 2019, profit is likely to fall to £44m and we could see a slight “de-rating” of the GAW shares to 12 times because it has lost its growth lacklustre. And a market valuation of £528 or £16.29 per share.
All this depends on management outlook for the company and on their actions, particularly stock activity.
For me, the risk is on the downward around the period it releases their 2018 annual results because earnings are unsustainable at these levels.
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The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability. I don’t hold the company’s shares unless stated.